When people decide to buy an insurance policy, a common question that arises is "should I buy whole life or term plans?" After going through the explanation with many of my clients, I think its appropriate to highlight some features that everyone should know in order to make an informed decision.
1) What is the difference between whole life and term insurance?
Basically the difference between whole life and term can be identified in terms of 3 aspects:
1) the duration of the coverage
2) the cost of the premiums and
3) whether there are any cash/surrender value
Whole life policies usually offer life-time coverage and the policies will start to accumulate cash/surrender value after the 3rd year, but the premiums, ceteris paribus, for these policies are higher. In comparison, term policies offer temporary coverage over a specific period of time (i.e. 10 years) and the policy does not have any cash/surrender value, but the premiums are much lower.
2) What are the pros and cons of whole life?
The pro of the whole life plan are that it allows you to lock in your insurability and premiums at the point of purchase; and it extends the coverage for life-time. Also, consumers have the option to cash out the plan (but at the expense of giving up the coverage). The cons are that for the traditional whole life plans, you will have to pay the premiums for life.
3) What are the pros and cons of term insurance?
The pros of term insurance are that being a 'pure-protection' policy, you can get a relatively high amount of sum assured at lower premiums. However, since term policies cover a limited period you run the risk of not having any coverage when you need it most. Also, if you should need to renew it upon expiry be prepared to pay higher premiums due to the age, or worst, be declined if your health had deteriorated.
4) Are there any alternatives to whole life and term insurance?
In fact there are some variants of whole life plans that integrate both features of a whole life plan and term plan - the limited-payment whole life combines a limited premium payment period worth a permanent life-long coverage. In short, consumers only need to pay for a certain period of time and then the policy will continue for life.
5) Should people get whole life or term insurance?
Basically it depends on the individual's perspective toward insurance as well as what the insurance is meant for. Generally there are two schools of thoughts: insurance as either an expense or investment. The former is epitomized by the phrase "buy term and invest the rest", while the latter perceive insurance to be an instrument to achieve higher returns. For the former, they would prefer to minimize the cost of insurance so that they can devote more resources to investment, while the latter would encompass people who treat the insurance itself as a form of investment in terms of the cash/surrender value.
Also, if the insurance is meant to cover medical expenses, then it would make sense to get a whole life plan because you might never know when an illness will strike. It might strike you tomorrow, it might come one month after you turn 65 - you never know. If the insurance is meant for a temporary increase in the coverage then it would be advisable to get a term plan. In my humble opinion the best would be a combination of both – for it will allow you to maneuver between the duration, coverage and cost. Essentially there are no bad plans, just a mismatch between the actual and expected benefits of the plans.
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