Richmond Tung

Consumers have often found themselves torn between having to purchase a term insurance or whole-life insurance cover. Let us review the differences and see how each one will fit into your own planning.

There’s two school of thoughts when it comes to life insurance purchases. One camp that is pro “term” and the other pro “whole-life”, and either of these camps could be right, if it fits your lifestyle needs or situation.

The various reasons why consumers want to purchase a whole life insurance ranges from; having a forced saving either for retirement or estate planning, for income protection for the family or for critical illness benefits etc…

Whole-life insurance not only provides you a life coverage, but there is an underlying cash value. This cash value comes from the investment component of the plan. This is also known as a participating policy. Usually this cash value, starts accumulating from the 3rd year onwards and it will probably break even with the cost of your premiums paid only after the 15th to 21st year of paying premiums.

It is a well known fact that such whole-life insurance policies do not come cheap at all. This is due to the fact that a portion of your premiums is not only used to cover the cost of insurance (mortality charges), but also the remaining portion will be invested for you. Unlike the term plans, whole-life plans will cover you permanently for life. This is why some whole-life plans can be almost twice the cost of a term plan.

Term insurance on the other hand, offers you cover for a certain period of time or till a certain age for a lower premium amount. However this is at a trade off, of not having an underlying cash value and the longest term plan cover is up till age 100.

If you do need wealth protection, term plans will serve the purpose at a low cost, allowing you to properly allocate financial resources to accumulate wealth and reach your financial goals. Insurance hence will be the last product you want to use as a tool to accumulate wealth as there are better tools around. The proponents of “term” are in view that insurance is for protection only, and that most protection needs are temporary. They also believe that the returns on the “whole-life” plans are generally low, which do not help in the accumulation of wealth.

Proponents of “whole-life” are in view that yes insurance is definitely for protection, but if there is a no claim after your term has ended, you get nothing back as there is no cash value. But with product innovation, whole-life plans have become limited payment terms with lifetime cover, thus making it more attractive than ever. It acts first as a protection cover but allows the provision of using it as a savings element for retirement or estate planning, if and when you achieve financial independence, with the insurance cover being in excess or unnecessary.

At the end of the day, whether right or wrong, every individual have to look and see their own status and situation when making that decision to purchase a insurance policy. Various factors do play a part in making whichever option available to you, e.g. age, gender, health, financial situation. Hence some consumers may opt for a term plan due to budget constrain, and some will opt for whole life due to the permanent life solution cover.

In my opinion, it would always be best to seek the opinion of a qualified independent financial adviser to give you advice on which works best for you and thus allowing you to make an informed choice.