Term Insurance or Whole Life Insurance (A factual comparison)

InterestGuru.sg is here is settle the debate once and for all on which is better.

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The insurance premium for a term insurance policy is much lower compared to a whole life insurance policy. Why should anyone even consider taking up a whole life insurance policy? Are there significant product features and benefits (be it financially or coverage wise), that justify a higher cost to you?

A short foreword: By now, it should be clear that having proper insurance coverage is essential for everyone. But not everyone stands on the same ground when it comes to having health and protection needs covered via a term insurance policy or a whole life insurance policy.

We start by explaining some common misconceptions between whole life insurance policy and term insurance policy below:

Please skip the next three section, if you wish to proceed with the comparison.

My financial advisor proposed a whole life insurance policy to earn a higher sales commission

The truth about the above claim

For the same amount of insurance coverage, the premium for a whole insurance policy is typically higher compared to a term insurance policy. Yes, your financial advisor is very likely to earn a higher commission if you take up a whole life insurance policy, due to the higher payable insurance premium.

The false on the above claim

With a term insurance policy, you pay a fee (the insurance premium) to an insurance company that provides you with a payout when an insured event occurs. In the event that none of the insured events occurs, the premium is what the insurance company earns for the risk of providing you with insurance coverage.

There is no cash value accumulated nor continual insurance coverage once your purchased policy term expires. A new term insurance policy will then have to be taken up, based on your age and medical profile. Certainly, any existing medical condition means that you are going to see your insurance premium rates hiked even higher via insurance loading.

Common sense will also tell you that the insurance premium for the new term insurance policy will be significantly higher. The risk of covering a younger you for death, disability or illness is certainly much different from you at age 70.

Term insurance policy is better due to lower premium for the same coverage amount

The truth about the above claim

If you can foresee precisely the age of your demise or medical condition, the premium for a term insurance policy will work out to be lower, especially in the early years. Over time, the total premium paid could be higher compared to a limited premium term whole life insurance policy,

In order for term insurance to be cost efficient, coverage has to bea fixed period of years, say for example to age 60. However, it will be considered a new application, should you wish to seek coverage after the initial term insurance policy expired. The insurance premium will be adjusted, to compensate for the risk of covering an older you.

The false on the above claim 

There is no doubt that when it comes to the yearly payable premium (annual premium), term insurance policy for the same coverage is certainly cheaper. This is true up to a certain number of years, depending on your age. However, it doesn’t mean whole life insurance policies are here to make you pay a higher insurance premium without additional product features and benefits.

Why does a whole life insurance cost more than a term insurance for the same coverage?

Firstly, in this era where information is available freely, there will not be an entire insurance product category that exists just to allow insurance companies to milk more money out from you. At least not without a huge public outrage or negative publicity. Whole life insurance policies do indeed have its unique product features and benefits.

More importantly, are the benefits of a whole life policy worth paying a higher premium for?

We list out some benefits a whole life insurance can provide, but not a term insurance:

  • Higher insurance coverage via multiplier up to age 65, 70 or 75 (Insurance coverage are boosted, at a time where financial commitments and expense are expected to be higher).
  • Continual insurance coverage for life, even if you choose to pay insurance premium only for a limited number of years ( a limited insurance premium term for lifetime coverage).
  • Fixed number of years to pay an insurance premium (As stated in the point above).
  • Cash value is generated over the years (Upon surrendering a whole life insurance policy, you are expected to receive a lump sum of cash).
  • Product specific features and benefits according to individual whole life policies (It is not practical to fully list details from every single insurance plan from all insurance company, drop us a message on your insurance coverage needs instead).

If you need a more detailed idea of the basics of whole life insurance policy or term insurance policy, refer to the links below:

Now that we made our point clear on the nature of both category of insurance policies, we move on to the actual long-term financial differences between whole life insurance policy and term insurance policy.

How can a fair comparison be done when no two insurance policies are the same?

Unlike the earlier comparison between saving plans and endowment policies (within same insurance product category),  some parameters must be set to ensure fairness as much as possible.

Skip the next two sections if knowing how we get to do a fair comparison does not interest you.

The following conditions are set equally for both the whole life insurance and the term insurance policy:

  • Sum assured for Death: S$100,000
  • Sum assured for Total and Permanent disability: S$100,000
  • Sum assured for Early Critical Illness: S$100,000
  • Profile of test subject: Age 30, Female, Non-Smoker, office-based occupation

*Note: A diagnosis of Critical Illness will trigger a claim payout if Early Critical Illness coverage is taken up. However, a diagnosis of Early Critical Illness will not trigger a claim payout if only Critical Illness coverage is taken up.

In short, Early Critical Illness coverage allows a claim payout regardless of the diagnosis result being an Early Critical Illness or a Critical Illness.

Where do the financial values for the selected whole life and term insurance policy come from?

Comparison data are extracted from CompareFIRST.sg, a financial portal jointly owned by MAS and CASE. To ensure a fair comparison, we took 2 policies from the same insurance company, Manulife.

Note: Previously we used Aviva for comparing the effect of paying a shorter premium on an insurance policy. A different insurer besides Manulife or Aviva will be used for the next comparison.

The selected insurance products for this comparison are:

Manulife – Manulife LifeReady 25 (Whole life insurance policy)

  • Sum assured for Death: S$100,000
  • Sum assured for Total and Permanent disability: S$100,000
  • Sum assured for Early Critical Illness: S$100,000
  • Premium payable for: 25 years
  • Coverage until age: 99 (Lifetime)

Read about: An in-depth product review of Manulife LifeReady 25 

Read about: 3 best whole life insurance policies in Singapore (Updated)

Manulife – Manulife CompleteCare (Term insurance policy)

  • Sum assured for Death: S$100,000
  • Sum assured for Total and Permanent disability: S$100,000
  • Sum assured for Early Critical Illness: S$100,000
  • Premium payable for: 45 years (From age 30 to age 75)
  • Coverage until age: 75

Read about: An in-depth product review of Manulife CompleteCare

Now for the comparison

If you have fully read the article thus far, you would assume the whole life insurance policy would cost you more in the long run.

Here are the actual financial figures extracted:

Manulife LifeReady 25 (25 years limited premium)

Total Premium paid: S$ 65,185

Annual Premium: S$ 2,607

Premium Term: 25 years

Coverage: Lifetime

Guaranteed Cash value at age 75: S$ 68,300

*Non-Guaranteed Cash value at age 75: S$ 88,204

Projected Cash value (Guaranteed + *Non-Guaranteed Cash value) at age 75: S$ 156,504

Manulife CompleteCare

Total Premium paid: S$ 68,760

Annual Premium: S$ 1,528

Premium Term: 45 years

Coverage: Until age 75

Guaranteed Cash value at age 75: N.A.

*Non-Guaranteed Cash value at age 75: N.A.

Projected Cash value (Guaranteed + Non-Guaranteed Cash value) at age 75: N.A.

 Note: Term insurance policy has no cash value, policy and coverage expire at end of policy term.

*Non-guaranteed cash value based on projected investment returns of 4.75% p.a.

What does the above comparison mean?

If the above illustration is not clear to you, the whole life policy provides better value in the long term with a projected cash value of S$156,504 if you wish to surrender it. The surrender value can get even higher as time goes by, surpassing the S$100,000 insurance coverage.

However, if you live to age 75 without any claimable medical condition, there goes the insurance you paid thus far for the term insurance. And good luck trying to get any insurance coverage after age 75, as most insurance companies have a cut-off on entry age. Even if there are available insurance policies, you can bet the insurance premium that comes with it will not be cheap.

Granted, we can increase the term insurance plan to coverage until age 99, but that will only further increase the annual premium amount and the premium term.

So are we saying term insurance plans are useless?

No, term insurance policies have its own features and benefits. Certain needs for additional health and protection coverage may be required on a temporary basis. Once a certain number of years has passed, the basis for the additional coverage may not exist anymore.

Term insurance policies are great for a temporary boost to insurance coverage.

Examples below are some reason to take up a term insurance policies.

  • Cater to the cost of upbringing your children in the event of your demise, disability or loss of income due to illness. (For newborn, likely up to age 25 for male, 22 for female)
  • Replacement of income for your parent(s) if they are financially dependent on your income for their livelihood. (Up to a certain life expectancy age)
  • Paying your mortgage(s) and other regular financial payments in the event of loss or reduced income due to an insurable event. (Until the intended years which it should originally be paid off)
  • Cater to the loss of income in the household and cost of taking care of you, due to death, disability or illness. (The expected loss of income to your close ones that have to take care of you instead of working)
  • Other short to mid-term financial needs based on your individual profile.

These are just some of the reasons that term insurance policies are able to provide coverage at a significantly lower premium compared to other insurance policies. This is due to the coverage boost being required only for a specific number of years when one is still young.

Our partnered site has a piece on why term insurance makes sense financially for those who wish to have an opinion from another point of view.

Read about: Where do I start out with financial planning

Read about: Are you sure you have no budget for financial planning? 

Compare before you commit

Before committing to an insurance policy, it certainly pays to make an effort to compare. Why regret only years later, when you find out that you are not getting the best insurance policy available for the premium paid?

There are no one-size fits all approach when it comes to your financial planning and insurance needs

Compare insurance policies here, 100% free using our Compare NOW feature. We may even assign one of the partnered Independent Financial Advisers to work on your enquiry at no cost to you.

We know you find it too troublesome as well, so you can reach us by simply dropping a message here.

 

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Credits: Kelvin Tan from Aviva Financial Advisers Pte Ltd for sharing his knowledge towards this article.  He can be directly contacted at yanhao_tan@avivafa.com.sg.

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Disclaimer: InterestGuru.sg is not a bank, financial institute or an insurance company. We operate as a financial portal with the goal of promoting financial awareness and knowledge to our readers. The above does not constitute as financial advice and InterestGuru.sg shall and will not be liable for any losses or damages resulting from the above information.

Always speak to a licensed independent financial advisor before considering the suitability of any financial product.