Think all insurance plans do the same thing? Read this before you waste money on something you don't need
By now, you probably have a good understanding of how important life insurance is. But do you know which type of life insurance policy is the right one to choose? What are these “investments” my financial planner is telling me about? Do I even need them?
If you already have a good grasp of your financial situation, and know what your future financial goals are – it’s a bit easier to choose between a term life or whole life insurance. However, it is not just choosing a plan that is “recommended” but instead is just going to be paying your insurance agent’s commissions.
Whole Life Insurance vs. Term Life Insurance – Which is Better?
That’s an important question you’re probably asking yourself right about now. So which life insurance policy is better? The answer to that question is one you’ve probably heard a thousand times before in your life – it depends.
It depends on your financial situation and future goals. Because the big choice you’ll have to make when choosing a policy is this – do you want your life insurance to ONLY protect you and your family’s financial well-being, or do you want your life insurance to protect AND enhance it? That’s the question you (and your financial advisor) should focus on when looking at all three life insurance policies.
Here is how the two policies compare to each other:
| Term Life Insurance | Whole Life (Par)* | |
|---|---|---|
| Policy Objective(s) | Protection – Your premiums ensure your insurer pays out the assured sum if you pass away within the policy period | Protection + Savings – Part of your premiums goes towards your assured sum while another part goes into a fund that your insurer invests and grows |
| Period of Coverage | By Term (ex. 5, 10, 20 years) By Age (ex. up to age 65, 75, 99) (Varies by insurer) | Full-life coverage or up to the age of ninety-nine |
| Basic Coverage | The majority of life insurance plans cover death and permanent disability. | |
| Policy Cash Growth | None | Possibility of annual bonuses based on the performance of the insurer’s fund (bonuses are not guaranteed) |
| Policy Payout | Insurer pays out a lump sum in the event you pass away during the period of coverage | Insurer pays out a lump sum (sum assured) plus any accumulated bonuses |
| Payout Upon Early Surrender of Policy | None | Insurer will only pay cash value of your policy plus any bonuses up to the point you surrender your policy (which will be less than guaranteed amount to be paid upon death of the insured) |
| Borrowing Options | None | Some insurers allow you to take out a policy loan up to a certain percentage of your policy cash value |
*Note: Whole life non-par policy is not presented in this list. However, items under whole life (par) would generally be the same except that no bonuses/cash dividends would be paid, but your policy would still build up cash value over time.
Look at the Advantages and Disadvantages of Each before Choosing a Policy
Knowing the advantages and disadvantages of each life insurance policy is essential if you want to choose the right policy. Both types will provide protection against unexpected events that endanger you and your family’s financial well-being.
But it’s your mode of building up your retirement savings that’ll play a deciding role in which policy to choose.
Here are the advantages and disadvantages of having a whole life (par) or term life policy:
Whole Life Policy (Par)
| Advantages | Disadvantages |
|---|---|
| • You are protected throughout your entire life | • Your policy may not have a cash value during the first several years (front-end loading) as your premiums may go towards paying the insurer’s expenses first |
| • You can accumulate cash value over the long-term | • If you terminate your policy prematurely, the cash value you receive will be much lesser than premiums paid |
| • Fixed premiums throughout the policy period (varies by insurer) | • If your expenses increase (especially when you start a family), you might find it difficult to keep up with your premiums and your policy may lapse or be terminated |
| • You can withdraw the policy’s cash value before death | |
| • You can use the cash value of your policy to take out a loan | |
| • You can earn annual bonuses (depending on the performance of the insurer’s fund) |
Term Life Policy
| Advantages | Disadvantages |
|---|---|
| • Premiums are much lower than those for whole life | • Once the policy matures and nothing has happened to you, the insurer keeps premiums you paid |
| • Lower premiums means you’re free to dedicate more cash towards investments that generate higher returns than whole life (par) policies | • Term policies don’t have any cash value |
| • Freedom to choose whether to continue with a policy or not | • Premiums will increase with age upon renewal |
| • Fixed premiums throughout the policy period (varies by insurer) | • The older you are when you renew, the higher your premiums will be |
This article was first published on http://www.moneysmart.sg in October 2014 |
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