Not All Whole Life Insurance Policies Are The Same – What You Need To Know
I am often asked whether there is any difference between Whole Life Insurance policies from different companies. With so many options available to you and each insurer constantly trying to outdo each other in terms of coverage, benefits, and costs, which is really the best and most suitable for you?
My answer would be: It depends on your individual concerns, circumstance, health conditions as well as your affordability.
So, what is a Whole Life Policy?
A Whole Life policy provides financial protection (i.e. dispensing a lump sum of money) to the policyholder’s family (or beneficiary) in the event of his/her death. As the name suggest, a Whole Life policy typically covers an individual for their whole life, though there are insurers that covers one till 99 or 100 years old instead. You also have the option of adding on additional features to provide coverage for other potential risks, such as Total and Permanent Disability or Critical Illness.
Most Whole Life policies have a limited premium term. This means that you only need to fund the policy over a pre-determined length of time, most commonly 15 or 20 years. After this period, you will not have to continue paying for the policy and you will be covered till you are 99, 100 or for your whole life, depending on the policy.
A Whole Life policy is a long-term commitment. While it may cost more upfront compared to a term policy, we will go through in this article the importance of having this policy in your portfolio. With so many choices out there, committing to the wrong policy that does not fit your needs can be a costly financial mistake that cannot be reversed without substantial loss.
Let us go through the benefits of a Whole Life Policy:
1. Limited Premium Term
As mentioned above, Whole Life policies have a choice of limited term of premium payment. This is beneficial as we do not have to continuously pay for premiums throughout our lifetime to be covered. By shortening our premium term, we also save on the total overall cost outlay.
For instance, assuming if I were to purchase a policy with lifetime premium payment (Term policy) as compared to a policy with limited premium term (Whole Life policy) and live till a ripe old age of 98. Let us look at the total premiums a 30 years old male, non-smoker would have paid for the same coverage:
For illustration only.
Click above image to enlarge.
2. Premiums are fixed upon entry age
Unlike medical insurance, a Whole Life policy do not increase with premiums as you grow older, premiums are locked in as you purchase the policy. That is why it is advisable to get it as young as possible to minimize overall cost and to retire from paying premiums earlier.
3. Savings Component
A Whole Life policy typically participates in the performance of an insurer’s participating funds. This in turn generates guaranteed policy value and non-guaranteed yearly bonuses. What this means is that if the policy is cancelled, there would be a cash component which you could get back.
The cash component, if accumulated over a period, is potentially higher than the interest rates in a bank savings account. However, I would advise that we draw a clear line between protection needs and wealth accumulation needs. If your policy was bought with the intention to protect yourself and your family in times of a premature crisis, it should not be with the intention of terminating the policy to get back returns in future. The bonuses that the company pays out will then be accumulated and added to the total coverage that your policy provides.
4. More cost-effective way to cover for Early Stage Critical Illness
Early Stage Critical Illness coverage are generally more costly compared to coverage for Death and Total Permanent Disability. This price difference is simply due to the higher probability of Early Critical Illness happening in someone’s lifetime than natural death or total permanent disability. Therefore, having Early Stage Critical Illness coverage as a standalone might be more costly due to ongoing payments. Comparing it to a Whole Life policy with Early Critical Illness rider attached to it, the overall cost is lowered.
When looking for life insurance coverage, there is another option that Singaporeans would explore to cover similar risks (Death, Total Permanent Disability, Critical Illness) and that are Term Insurance Policies.
What are Term Policies?
Term policies, as the name suggest, are policies meant to provide coverage for a fixed period. They require less upfront payment as compared to a Whole Life policy, as most Term policies do not provide protection for lifetime and do not have cash value component embedded to it.
Such policies would complement a Whole Life policy to give an additional boost in coverage for a specific period of time and for a specific reason, e.g. outstanding loans and liabilities as well as multiple dependents to provide for.
Unless you are comfortable funding the policy all the way into your retirement years, it is generally not advisable to rely solely on term policies as a main source of coverage.
So, how different are these two policies?
If there is an analogy that we could use, a Whole Life policy is equivalent to a house that you bought, paying the loan over a period of 20 years and being able to live in it for a lifetime. While Term policies is equivalent to renting an apartment, allowing you to live in it for as long as you continue to pay rent. You are also expected to pay rental for the rest of your life and rental sometimes might be subjected to increase as well.
Here is an illustration below to show how a Whole Life policy and Term policy would work in your portfolio:
Click above image to enlarge
It makes more sense to get a Whole Life policy when you are younger, before bumping up your coverage with a Term policy when the need arises (when you have kids and/or when you have taken up a mortgage loan). This is because premiums are generally much cheaper when you are younger, and you will also retire from funding the policy at a much earlier age. For eg, if you bought your Whole Life policy when you are 20 years old, and chose a 15 year premium term Whole Life policy, you would have retire from paying premiums at the age of 35, and the policy would cover you until you are 99, 100 or for your whole life. Sounds like a pretty good deal to me.
While Whole Life policies might seem similar between different insurers, what makes each policy unique and how can you tell if they are able to meet your protection needs?
Here are some unique features of Whole Life policies from different companies (i.e. offered by one company but not another)
1. Retrenchment Benefits
In such volatile times, some Whole Life policies have retrenchment benefits embedded into them, waiving off 6 months of premiums should the policyowner loses his or her job.
2. Option to Convert into a Retirement Policy upon retirement age
Although it is generally not advisable for one to convert their Whole Life Insurance policy to a Retirement policy (as it should be used to cover you all the way into your golden years), it is good to have an option available to draw down from our policy to fund for retirement, should the need arise.
3. Total Permanent Disability Coverage until 99 years old
Majority of the Whole Life policies in the market cover Total Permanent Disability (TPD) until age 70 or 75 years old, due to very practical reasons such as one being more vulnerable to TPD as one ages. However, there are some companies that are willing to take on the risk of covering one till 99 years old.
4. Additional Critical Illness Coverage on top of what is mandated by Life Insurance Act
The Life Insurance Act states that insurers should cover the basic 37 Critical Illness for Critical Illness Protection. However, there are some companies covering more than what is mandated, covering up to 55 different Critical Illnesses.
5. Coverage for Unknown Diseases
Yes, you are not seeing things! There are companies who take on the risk to cover unknown diseases (aka diseases not discovered yet, just like how Covid-19 once was).
6. Carcinoma in Situ for all organs
This is probably the most important factor for anyone who is considering a Whole Life policy to cover for Early Critical Illness. Carcinoma in situ refers to cancer in which abnormal cells have not spread beyond where they first formed in the body. The words “in situ” mean “in its original place.” These in situ cells are not malignant, nor cancerous. However, they can sometimes become cancerous and spread to other parts of the body. Upon careful inspection of the contracts of different companies, we realized some companies only cover specific organs for Carcinoma in Situ, whereas there are other companies that cover all organs.
However, there is no company that has ALL the features listed above (there are many other different features, impossible to be listed all above). They are unique in their own ways and you would have to decide on which feature is most important to you.
Looking for the perfect plan may be a daunting task as there are so many options available. The attached Guide to Limited-Pay Whole Life Insurance Policies lists down some of the plans available. Click HERE to download.
However, if you would like a more comprehensive comparison and advice for your protection needs, do contact me below and I will see how I can help!
Article by Esther Chew
The writer is a financial adviser representative representing GEN Financial Advisory Pte Ltd.