The Working Adult Guide: Term Life vs Whole Life Insurance. Which Should I Get?
Hey ya! Good job on taking the first step in your personal financial planning – RESEARCH.
It is important to note that there are many different routes to the same destination but it’s definitely best if we take the cheapest route there! – And that’s what we are here for!
TL;DR – Before choosing between a Term and a Whole Life
- Never lose focus on your objective – why are you buying insurance?
- Choose term if you are able to achieve more than 2.36% annual on your return on investment, a Whole Life if you can’t.
- Life Insurance Association Singapore suggests that coverage of 11 times your annual earnings is the most optimal, but it really is relative to your lifestyle.
“Insurance is a form of backup. When your life is smooth sailing, you will need to prepare for the unexpected so you can have more options when your life is at a downfall.”
~ Jack Ma
Advantages and Disadvantages of Term Life and Whole Life
Why Should I Get Life Insurance?
1. If you are the sole breadwinner of your family
This will help your spouse to sustain the current family’s lifestyle while giving him/her time to find a job.
2. If you have dependents.
Meaning children that are not financially self-reliant yet, and/or parents whom you are providing their retirement for.
3. If you have liabilities.
Whether it is an education loan or mortgage loan, you should get yourself insured so as to not pass your burden to your family.
4. If you want to strike the lottery
(I am just kidding, but this was actually something an agent told me)
Editor’s Note: The older you are, the higher the premiums will be. So you should always plan early! This applies to all life insurances.
What Does Life Insurance Provide?
- A payout to your family in an unfortunate event of your passing
- It provides your family with a form of income-replacement to tide them over the first few years.
Your focus is to provide some form of income for your family when you are no longer around.
“The best investment is the one that pays you the most when you need it the most”
What are Whole Life Policies
There are 3 types of Whole Life policies.
Types of Whole Life Policies
- Participating (Par) – Pays bonuses. Upon death, pays the basic sum assured plus any bonuses accumulated.
- Non-participating (Non-par) – No bonuses but has accumulated cash value (which is guaranteed). Upon death, only the sum assured is paid out.
- Investment-linked policies (ILP) – There are 2 types available, upon death:
1) The higher of the sum assured or the value of the ILP units are paid out
2) Both the sum assured and the value of the ILP units are paid out
Par and Non-par Whole Life Policies
Advantages of Par and Non-par Whole Life Policies
- Fixed premium duration, in insurance-lingo, limited pay. (e.g. if my premium term is 20 years, I have to pay my premiums for 20 years)
- Covers you for life until the age of 99.
- Has Cash Value. Do note that this is only available if you surrender the policy before death.
Disadvantages of Par and Non-par Whole Life Policies
- Complicated (with their coverage multipliers)
Investment-linked Policies (ILP)
Advantages of ILP
- Provides both insurance and investment.
- A portion of your premiums is used to buy units of your chosen sub-fund.
- Premium Term:
– Single (Lump Sum), mainly investment into sub-funds
– Regular term where premiums are paid on an on-going basis.
- Investment performance is transparent, unlike Participating policies.
Disadvantages of ILP
- Provides both insurance and investment (can be a disadvantage to depending on how you look at it)
- Value of the ILP depends on the fund you have chosen to invest in.
- Lots of underlying costs
Editor’s Note: Whole Life policies (Par and ILP) tend to cost more as some premiums are invested to build up cash value.
What are Term Life Policies
“You pay, you are covered. Don’t pay, no coverage.”
Term Life policies are really straightforward that covers you as long as your premium term. It is flexible in a way that you are able to add these on to your existing policies if you feel your coverage is insufficient as a short-term solution.
Advantages of Term Life
- Choose your own time frame – 15/25/30 years or even up to age 65/100 etc.
- Straightforward, you are covered as long as you pay your premiums. Vice versa.
Disadvantages of Term Life
- No Cash Value, therefore it is cheaper.
Few term insurance policies that Our Government has graciously supplied us with:
Dependants’ Protection Scheme (DPS) – By CPF
– It is optional.
– Automatically opted in by the Government when you turn 21 years old
– Premiums are deducted from your CPF
– Maximum sum assured of $46,000
SAF Group Term Life Insurance Scheme
– Cheap and affordable
– Offered to all SAF NSmen age 55 and below and Dependants of the SAF NSmen
i.e. $41/month for S$1 million coverage
When should you take up Whole Life?
- Whole Life plans are good to sufficiently cover the very basic living expenses.
- Ask yourself: Do you need to provide for your dependents for the rest of your life? Or only till they are financially self-reliant?
When should you take up Term Insurance instead?
- You are confident that you are able to earn a higher return than what the bonuses that the insurer offers you.
- You require additional coverage due to an increase in income.
- You require additional short-term coverage due to a sudden increase in liabilities. (e.g. Mortgage, Car loans)
A question from the Community,
when would you recommend whole life insurance?
- To someone who has a family depending on their income. I will always recommend some of your cover be whole life especially if you’re getting Early Critical Illness Cover.
~ Hariz Arthur Maloy, Independent Financial Advisor at Promiseland Independent
- My take is that it is not so much about the type of people but rather it is based on one’s individual needs, budget and preferences.
As what Luke Ho mentioned several times, if one’s needs is towards covering critical illness, especially for early stages, Whole Life is a more cost effective solution as compared to term.
If we are purely looking at Death coverage, Sticking to term makes alot more sense from a financial standpoint.
~ Brandan Chen, Financial Planner at Manulife Singapore
Feel free to check out some of their answers on their profile!
Personal experience: I chose Term Insurance for myself. Here’s why.
I have asked my financial advisor for a quote on $200,000 coverage for death only on both plans:
- How long do I have to pay my premiums for?
Whole Life: 20 years
Term Plan: 78 years (till 100 years old)
- In the long run, I will be paying 36% more for my Term Life insurance. (Shocking!)
- That averages to 0.46% additional per year.
I have concluded, if I am able to achieve a higher return than 2.36% (inclusive of core inflation of 1.9% annually), I am better off with a Term Insurance.
- With more cash on hand, I would be able to invest the excess.
Term Life is way cheaper per year
Taking into consideration the concept of Time Value of Money –
The money I have now is worth more than that same money in future.
Editor’s Note: Coverage is $200,000 as I do not have dependents yet. This is according to my personal benchmark, everyone’s situation is different!
Ways you can use the excess change to earn a higher return
- Next month’s (June) Singapore Savings Bonds (SSB) is offering an average return of 2.43% p.a. for 10 years. (Already higher than 2.36%)
- Singapore’s market index, Straits Times Index (STI), is performing at 5.6% based on the last 5 years (More than double of 2.36%)
These are a few ways to achieve a higher return (than 2.35%) with low to moderate risk, but please do your own research as well!
Now that you know the difference between Whole Life and Term Life Insurance, you will now be better at explaining to your trusted financial advisor your needs and to make sure that you are not being over-sold!
If you have more questions, we have an open community for you to get your questions answered and to hear from different perspectives. Check out our blog for more unbiased opinions on your personal finance journey.
I’ll see you in the next one, and until then, may the Personal Finance force be with you!
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