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Which Is Better – Term Life or Whole Life Insurance!

Many people grapple with the question of whether a Term Life or Whole Life insurance plan is more superior. While all insurance plans serve to offer protection, the manner in which they do differ and it is impossible to rank them all in order of superiority.

Hence, the correct question to ask ourselves is this – What do I want out of my insurance plan?

Let us first understand the key differences between these two types of insurance plans with the help of the table below:

Term Life Plan Whole Life Plan
Objective
  • Purely protection + nothing else.
  • Protection + some investment.
For how long will I be protected?
  • Depending on the plan.
  • Either by term (e.g. 5, 15, 25, 30 years) or by age (e.g. 60, 65, 75, 99 years old)
  • Typically the entire life or up to age 99.
Where does my money go?
  • Insurer takes 100% of your premiums in exchange for a promise to pay you a fixed sum of money upon death.
  • Insurer takes X% of your premiums in exchange for a promise to pay you a fixed sum of money upon death.
  • The remaining 1-X% of your premiums are invested by the insurer in funds* to help you grow your money.
*You are typically allowed a choice of investment funds in an Investment-Linked Policy (ILP), whereas the insurer makes the decision for Participating Policies.
How does this affect my protection coverage?
  • Insurers do not take any investment risks and hence can offer a greater coverage for the same premium vis-à-vis a Whole Life Plan.
  • So for every dollar you pay, you likely get more coverage (sum insured amount).
  • Since a portion of your premium goes into investments, the insurers will naturally only be able to offer a smaller coverage for the same premium vis-à-vis a Term Life Plan.
  • So for every dollar you pay, you likely get lesser coverage (sum insured amount).
Wouldn't the investments also provide monetary relief at end of life?
  • Not applicable since there is no investment component.
  • Yes your policy has a cash value and most Participating Policies guarantee a fixed rate on which this cash value grows.
  • The rate however usually pales in comparison to direct investment funds, unit trusts or fixed deposits.
 

While different insurers might offer slight variations to their plans, the main considerations when deciding between a typical Term Life and Whole Life insurance plan lies with whether there is an intention to utilise them as a financial-savings tool, or if the priority is purely protection.

A Whole Life plan, with its investment component, technically doubles up as a savings plan but it is likely that a separate investment portfolio will yield better returns. Note however that discipline is required in managing such investment portfolios, unlike in a Whole Life plan where you may opt for the insurer to manage those investments.

On the other hand, if protection is the only priority, a Term Life plan will offer the most value for each dollar of premium. It is however important to choose the length of term carefully as you may have to renew the policy at a much higher premium should you outlive the initial term.

By SAFRA Insurance Panel


Important Notes:

  • This article and illustration table highlights only key differences of a typical Term Life and Whole Life insurance plan and serves only as a point of reference for discussion purposes.
  • SAFRA does not provide insurance advisory and neither should this article be treated as one.
  • It is important to speak with a qualified adviser to understand more about the insurance plans before deciding on their suitability for your insurance and financial needs.
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