Whole Life V.S Term Life – Which Is Better For You?
What Is A Whole Life Policy?
Whole Life Policy is one of the most common type of insurance policy, just like the name denotes – it covers Whole-Of-Life of the policyholder. In layman language – The insurance policy covers you for your whole life.
Do you know that a whole life policy can be customized with different premium payment terms such that you will be free from commitment in your older age?
Whole Life policies build up cash value over time, and due to compounding effect over time, cash values typically grows faster that your savings deposit account. These cash values can then be used for future needs while you have insurance cover along the way!
**Pro Tip: Add Critical Illness coverage into your whole life plan – you get Critical Illness covered for whole of life even when you finished paying the premiums!
What Is A Term Life Policy
Like the name explains, Term Life Policy covers the policyholder for a fixed term, such as 10 years, 15 years, up till age 65 etc… The policy will then cease upon reaching the term.
Unlike Whole Life Policies which can be customize the premium terms, term life policyholders would need to pay all the way to the full term of the policy.
Another major difference is that Term Life Plan is a pure insurance plan that does not build up cash value. Due to this “plain-vanilla” insurance feature, Term Life Plan is typically more affordable.
Used in a right way, Term Life Plan is a fantastic complement to your portfolio.
**Pro Tip: Some Term Life Policies have a “lump sum” discount when coverage amount exceeds 1 million! You may be paying a cheaper premium even with a higher coverage!
Which is better -Term Life or Whole Life?
Below is a “cheat sheet” for a quick comparison between the two types of policies:
If you are a numbers person like I am, below is an apple-to-apple comparison for my friend, Jason. Some background about Jason to put things into context: Jason is a 25 year old fresh graduate. He recently entered the workforce and everyone around him tells him to start exploring insurance coverage and he is torn between Term Life and Whole Life as his friends are clearly divided into two camps:
Term Life or Whole Life is more suitable for me?
Whole Life Policy – Highly recommended as a “Base Plan” for every individual. Why so – because the need for insurance doesn’t ever end, it is a whole life need and thus a whole life solution.
Term Life Plan – Highly recommended as a “Top Up” for needs that have an end point – such as mortgage loan cancellation, dependent’s care till adulthood.
Everyone is different in their own way at different life stages with encompassing lifestyles and expectation. But certain things in life such as insurance needs doesn’t change – it just gets increasingly complicated as we move on from one life stage to another tackling different issues as they come along. As a Financial Planner, my job is to “un-complicate” such issues and make financial planning easy!
As a thank you gift for reading this article as well as to encourage healthy financial planning, I have provided a Resource List to help you get started on your planning.
Article by Chew Shuxiang (AFP, AWP, CFP)