Examining the different kinds of life insurance policies available can get confusing and overwhelming. While they may share similarities, each also has distinctive differences that can make it difficult to decide which to get.
We break down the main types of life insurance plans so you can have a better idea of what each has to offer and what might suit you best.
Term Life Policy
This type of policy provides protection for a fixed period or even till age 99. If the insured opts for cover for a specific period, let’s say 25 years, the policy may cease thereafter or allow the insured to renew for another 25 years – depending on the terms and conditions. The premium contribution is ongoing if the policy stays active; any stoppage of the premium contribution will result in the policy lapsing.
Such a policy is suitable for individuals who prefer to achieve more protection coverage and do not require a cash accumulation component.
Whole Life Policy
This type of policy provides protection and cash returns via guaranteed and non-guaranteed reversionary bonus accumulation over the years. The non-guaranteed bonuses will be guaranteed once declared by the insurance company annually. Typically the bonuses will be reinvested to grow over the years.
Over the last decade or so, the Whole Life Policy has evolved into a Limited Pay Whole Life Policy. For the older generation of Whole Life policies, you needed to pay the annual premium till death or a claim was admitted. Now, the policy is designed to be limited pay, and this means that you only need to foot the premium for a limited period. It can be a one-time payment (single premium) or range from 5 to 30 years (regular premium).
The premium contribution will be set as limited pay during the policy application. However, if there is any stoppage of the premium during the payment term, the policy may lapse or trigger the automatic premium loan (APL) to keep the policy active.
Such a policy is suitable for individuals who prefer to have some form of guaranteed cash savings through a protection solution. However, this will also require a higher premium as compared to a Term Life Policy.
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Investment-Linked Policy
This type of policy provides protection and non-guaranteed cash returns via investment over the years. The investment performance of the selected mutual funds will determine the returns. There are generally two types of investment-linked policies: one that fully invests the premium into selected mutual funds, and another that will invest the premium into selected mutual funds and provide a large sum for protection.
The premium contribution is usually required on an ongoing basis if the policy stays active but there are plans offered by some insurance companies which only have a minimum investment period to meet. In the event that the premium is not paid during the required period, the policy may lapse, or the policy will liquidate the units to pay off the insurance charge and go into premium holiday mode. The premium holiday may last till the investment value in the policy runs out or up to a fixed period depending on the terms and conditions of the policy.
The features of the different types of life insurance policies are summarised in the table below:
| Features | Term Life | Whole Life | Investment-Linked |
| Death, Total and Permanent Disability (TPD), and Critical Illness coverage | Yes | Yes | Yes |
| Cash returns | No | Yes | Yes |
| Premium contribution | Whole term of the policy | Fixed period e.g., 10 years | Whole term of the policy or a predetermined minimum investment period |
Case studies
Case study 1
Mr Mark Tan, age 30, a male non-smoker, wants to get lifelong insurance protection with the following coverage:
Death: $300,000
TPD: $300,000
Advanced stage Critical Illness: $300,000
Early to Intermediate stages of Critical Illness: $150,000
The following table illustrates how much the three life insurance types would cost for his needs, at present and into the future. This assumes he makes no claims till age 75.
| Features | Term Life | Whole Life | Investment-Linked |
| Death, TPD, Advanced stage of Critical Illness | Yes | Yes | Yes |
| Early, Intermediate stages of Critical Illness | Yes | Yes | Yes |
| Policy Term | Up to age 99 TPD will cease after age 70 | Whole Life | Up to age 99 TPD will cease after age 70 |
| Premium Contribution | Term of the policy | Fixed period of 15 years | Minimum investment period of 15 years |
| Annual premium | $2,414.88 | $3,975.60 | $4,800.00 |
| Total Premium Contribution | $165,443.52 | $59,634 | $72,000 |
| Projected Surrender Value at age 75 | Nil | $77,953 (Projected 4.25% investment returns, partially guaranteed) | $294,433 (Projected 8% investment returns) |
In this scenario, buying a term life policy will cost him the least annually, while the whole life plan will cost him the least over time. Lastly the investment-linked plan will generate the most profit based on the projected value at age 75.
Case study 2
Ms Chloe Wonn, age 30, a female non-smoker, wants insurance protection with the following coverage for 25 years:
Death: $1,000,000
TPD: $1,000,000
| Features | Term Life | Whole Life | Investment-Linked |
| Death and TPD | Yes | Yes | Yes |
| Policy Term | 25 years | Whole Life | Up to age 99 TPD will cease after age 80 |
| Premium Contribution | Term of the policy | Fixed period – 25 Years | At least 25 Years |
| Annual premium | $363.60 | $3,781.60 | $4,000.00 |
| Total Premium Contribution | $9,090 | $94,540 | $100,000 |
| Projected Surrender Value at 25th Policy Year | Nil | $98,897 (Projected 4.25% investment returns, partially guaranteed) | $169,127 (Projected 8% investment returns) |
| Total cost | -$9,090 | $4,357 (Profit) | $69,127 (Profit) |
In this second scenario, Chloe pays the lowest premium annually by buying a term plan and benefits from the lowest cost of insurance over time compared to the other two solutions. The whole life solution can provide her with the option to continue coverage for life, or she can choose to cancel the plan after 25 years with a small profit. Similar to the first case study, the investment-linked policy provides the highest projected returns, but these are entirely non-guaranteed.
The two case studies hopefully help to illustrate how different needs and profiles may require different solutions. Other factors such as investment preferences and risk profile would also come into play. Should you still have any uncertainties about the types of plans, speak to your financial advisor or reach out to the Planner Bee team via ask@plannerbee.co.
