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Term Life Insurance or Whole Life Insurance

Term Life Insurance or Whole Life Insurance

Which is best for you?

Term Life Insurance

Term Life Insurance vs Whole life insurance

For individuals who are in the process of buying life insurance, the search would eventually lead to two choices; Term Life Insurance and Whole Life Insurance. In this article I would like to try to make the choice easier for you.

  1. Before you try to decide which is best for you, it is important to understand how both types of life insurances work, and the fundamental differences between them.
  2. Also the choice could vary based on each individual’s situation and affordability.
  3. There is no set answer as to which is better.
  4. In the end, qualified and independent financial advice from a financial advisor should be the basis for the decision that could very well affect you and your family significantly in the future.

Nevertheless, I have summarised the key differences of both policies side-by-side to make it easier for you to make a decision.

Description

Term Life Insurance

Whole Life Insurance

Typical uses Mortgage Protection, Loan protection, Keyman insurance, Partnership insurance Family Income Protection, Business Continuity Planning, Working Capital Protection, Key man insurance, Partnership insurance, Asset Protection
Typical Benefits Life Cover, Critical Illness Cover, Total Permanent Disability, Waiver of Premium Life Cover, Critical Illness Cover, Total Permanent Disability, Waiver of Premium, Accidental Death Cover, Hospitalisation Cover, Long-term Care Cover, Family Income Benefit, Additional Term life cover, Additional Term Critical Illness cover, Aeroplane Cover
Term (no. of years) Decided by Client (maximum till the age of 79) Till the age of 80 or 95 (client’s choice)
Cost Comparison for similar benefits 1x 3x(Typically costs 3-4 times of equivalent term life cover, depending on age and level of cover as well.)
Payment Term You pay for all the years you are covered for, right up to the last month. You can choose a short payment term, typically between 7 – 50 years, while cover continues till age 95.
Payment Frequencies Monthly or Annual Lump sum or Monthly or Quarterly or Bi-Annual or Annual
Premium payment grace periods 30 to 90 depending on providers 90 days
Premium contribution holidays Not possible (Policy lapses after crossing grace period) A cumulative period of 24 months can be availed with written notice. (after being 2 years in the policy)
Premium Flexibility No flexibility once policy is issued Premiums can be increase or decreased by adjusting benefits after being 2 years in the policy.
Cash back on maturity No cash value if applicant survives the specified term Cash value is typically greater than premiums paid after payment term is completed (also depends on fund performance)

For those who are on a tight budget and would still like the protection and security provided by having a life insurance policy, term life insurance should work for you. Term life insurance is widely popular since it is affordable and fits the average person’s financial needs. The downside to term life insurance is – it only offers protection over the chosen term, not for the whole of life.

For those looking for an investment option aside from financial security provided by having a life insurance policy, then whole life insurance is for you. Whole life insurance is rather more expensive than term life insurance. This is because a portion of your premium is added to your policy investment fund.

Pros and Cons of both forms of life insurance

In general both term life insurance and whole life insurance plans offer similar protection benefits but the key benefits of a term life insurance policy are detailed below:

  1. Death Benefits -
    • Death Cover – A predetermined lump sum is paid out to the policy owner’s nominated beneficiaries in the event of death.
  2. Living Benefits
    • Critical Illness Cover – A predetermined lump sum is paid out to the policy owner in the event of the policy owner suffering from any of the critical illnesses mentioned in the policy schedule such as heart attack, cancer, multiple sclerosis, deafness, blindness etc…
    • Total Permanent disability – A predetermined lump sum is paid out to the policy owner in the event of the policy owner suffering from total permanent disability.
    • Terminal illness benefit – If the life assured has less than one year to live the death cover is paid out in advance to allow the policy owner to set his affairs in order.

In contrast whole life insurance policies offer slightly better benefits such as -

  1. Death Benefits-
    • Death Cover – A predetermined lump sum is paid out to the policy owner’s nominated beneficiaries in the event of death due to any cause except suicide.
    • Accidental death cover – If the policy owner dies due to an accident, an additional lump sum is paid out apart from the death cover.
    • Family Income Benefit – A predetermined lump sum is paid out to the beneficiary for every remaining year in the term chosen at policy inception.
    • Additional term life cover – Some plans have an additional term life cover that can be chosen within the whole life insurance policy to cover temporary investments such as mortgages, loans etc…
    • Aeroplane cover – An additional lump sum is paid in the case of the policy owner dying in a plane accident.
  2. Living Benefits
    • Critical Illness Cover – A predetermined lump sum is paid out to the policy owner in the event of the policy owner suffering from any of the critical illnesses mentioned in the policy schedule such as heart attack, cancer, multiple sclerosis, deafness, blindness etc…
    • Hospitalization benefit – A fixed amount is paid out if the policy holder is hospitalized for 3 days or more for any reason.
    • Long-term care benefit – A fixed annuity is paid out over 10 years for long-term care after the age of 65 if the policy owner cannot perform certain number of activities of daily living to take care of long-term care expenses.
    • Waiver of Premium – This insurance company waives the policy premiums if the policy holder cannot earn money due to disability or serious illness.
    • Total Permanent disability – A predetermined lump sum is paid out to the policy owner in the event of the policy owner suffering from total permanent disability.
    • Terminal illness benefit – If the life assured has less than one year to live the death cover is paid out in advance to allow the policy owner to set his affairs in order.

Example with fictitious data

  1. ‘John Doe’ age 35 – has a budget of USD 1,000 (disposable income) at the end of each month to take care of income protection and regular savings needs.
  2. He needs a life cover of USD 350,000 and a critical illness cover of USD 250,000
  3. He also needs to save USD 700 per month for his retirement goal over 25 years.
  4. The term life quote for him for is USD 139 per month paid over 25 years and covered for 25 years.
  5. The whole life quote for him is USD 487 per month paid over 15 years with cover till the age of 95.
  6. John can either take term life insurance for USD 139 and fulfil his retirement goal of USD 700 per month with some money to spare, or
  7. John can compromise now by taking a whole life insurance for USD 487 and put the remaining towards a retirement savings policy. He could increase the payment towards the retirement policy after crossing the 15 year payment term for the whole life policy.
  8. The whole life policy would potentially give him more than what he paid after 15 years have passed, while the term life policy would not give him anything back.
  9. With the term life policy John would pay USD 139 x 12 months x 25 years – USD 41,700 (non-refundable if he survives the term)
  10. With the whole life policy, John would pay USD 487 x 12 months x 15 years – USD 87,660 with a potential cash-in value of USD 132,974 (assuming 6% growth) at the end of 25 years should he decide to cancel the policy.

The important thing to note is that your numbers could vary based on various factors such as age, level of cover, insurability, state of health etc…, so please contact me by clicking the button below to find out what works best for you.

Ask Amit

Amit Mitbawkar

About Amit Mitbawkar

Amit is a Certified Financial planner specialising in the field of Business Protection Planning and Holistic Wealth Management. He is also a published author of the book 'Creating, Preserving and Distributing Wealth' - Grab a free copy of the book at - http://www.FreeWealthBook.com. Apart from this, Amit's articles on wealth management and financial planning have also been published on the following websites and printed magazines. 1. Gulfnews.com - Are you falling into the debt trap? 2. GulfNews.com - 'Map your Financial Footprint' 3. TheNational.ae - 'Investing is easy. Making money, not so much' 4. Executive Women - 'Protecting businesses and families from financial loss' 5. Arab Business Club - (Page 44, of June 2012 issue) 6. Premium Insurance Magazine - (Page 36 of September 2013 issue)

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