What are the material differences between a term insurance vs life insurance? Which plan should you go for under certain circumstances? Very often, my clients will seek my opinion on getting the best term life insurance. On clarification, some of them are referring to a term insurance, while others are talking about whole life insurance. Some of my clients have the misperception that term insurance only cover for death, total permanent disability and terminal illness, while some others wanted a critical illness term insurance with cash value. While this type of policy exist, in most circumstances, they are looking at life insurance with critical illness coverage bundled in.
In this article, I will highlight the main differences between a term insurance vs life insurance, and I have also included endowment and investment-linked policies (ILP) to make this into a more complete comparison.
What is a Term Insurance?
The main features of a term insurance are:
- It covers for a specific duration (5, 10, 15, 20, 25…)
- No cash value (even though a handful of them have cash values – they are usually geared towards those with multi-stage critical illness cover)
- Generally lower premium
- Coverage as a standalone or added in as riders:
- Death
- Total Permanent Disability (TPD)
- Terminal Illness (TI)
- Critical Illness (CI)
- Early-Stage Critical Illness (ECI)
- Multi-pay Critical Illness (MCI)
- Premium Waivers
As you can tell from the above, a term insurance can provide a wide array of insurance coverage, not just the typical death coverage only.
What is a Whole Life Insurance?
In comparison to a term insurance, the main highlights of a life insurance are:
- It covers for your lifetime
- Usually have limited-pay and multiplier features, where your coverage increases from now till 70 years old (can be up till 85), and drops after that.
- Some cash value
- Generally higher premium
- Coverage – most of these are usually added in as riders:
- Death
- Total Permanent Disability (TPD)
- Terminal Illness (TI)
- Critical Illness (CI)
- Early-Stage Critical Illness (ECI)
- Premium Waivers
In recent times, due to the multiplier feature, life insurance could sometimes be priced lower than a term insurance in the long run, especially if you were to add in an early critical illness cover into the mix.
How about Endowment and Investment-Linked Policies?
These days, an endowment policy allows for Guaranteed Issuance, and because of that, most of them do not provide any substantial death coverage. With that being said, some endowment plans allow the addition of premium waiver, which is subjected to medical underwriting.
Investment-linked policies may have got a relatively not-so-good reputation these days, but it does have its unique points that suit a certain group of people. And with newer plans that provide 100% investment from the start of the policy with additional first year welcome bonus, such as the ManuInvest Duo, it certainly is a viable option.
The main features of an investment-linked policy are:
- It covers for your lifetime
- Premium holiday feature allows you to temporarily stop your premium payment, and the insurance charge deducts from your investment fund.
- Having the option of partial withdrawal when you’re in need of money, without terminating the plan, as long as you keep the minimum account value.
- Increasing insurance charge as you age. Insurance charge starts low and slowly creep up as you age.
- High initial charges, usually compensated by subsequent loyalty bonuses. However, certain insurers removed this, and instead, added a penalty for partial withdrawal, and a mandatory minimum investment period.
An ILP might be suitable for those:
- who are looking to have temporary cover,
- who do not invest,
- who are subjected to higher premium due to smoker status or medical conditions,
- who are budget-conscious,
- who have limited budget and are looking to provide coverage for their child and accumulate funds for their tertiary education at the same time
If you have trouble deciding between term insurance vs life insurance, why not take a look at an investment-linked plan that might be able to provide you with the right mix of coverage and investment? There you go, here’s the summary of the full comparison at a glance.
3 Main Factors When Choosing The Insurance Policy That Actually Works For You
With a wealth of options available, how do you then decide which one works better for you?
These are 3 main factors when I’m helping my clients find suitable plans:
1. Objectives
- Would you want to provide long term coverage for you and your family, or would this be to temporarily cover for the next 15, 20 years?
- Would you want to leave something behind for your family even after you retire, or would you want to cater for the present and immediate future?
- Would you want to utilise this as a back-up fund/coverage during your retirement years, and avoid having your retirement funds depleted due to medical needs?
- Would you want to cover your child for their lifetime, and by the time they take over the policy, it’s fully paid?
These are some questions you can go through to have a clearer idea of what you want, and really, there is no right or wrong here.
2. Other factors that increases the premium
Are you paying higher premium due to smoker status or medical conditions?
3. Long-term costs comparison
How do the premium for the various options weigh over the long term? A 35-year term insurance with early critical illness cover might be more expensive as compared to a 25-year limited-pay whole life insurance, if your cover duration is long. Even if it might be more affordable, the annual savings might not be a lot but your premium duration is extended by 10 years (with no cash value).
Term Insurance Vs Life Insurance Is Not As Straightforward As It Seems
As much as we like to have a clear-cut way of determining what suits us better in the long run, however, this is usually not the case. But I hope that with this article, you have a better understanding of the material differences between the various insurance types and under what circumstances do they fit into your insurance portfolio – so as to make the best possible decision for yourself.
Resources: https://www.moneysense.gov.sg/starter-packs/guide-to-types-of-life-insurance
