Life insurance provides you and your family a source of income in the event of critical illness, total and permanent disability, or death. Certain forms of life insurance can also supply you with a retirement income or act as a financial back-up in emergencies, protecting you against healthcare costs.
While there are many types of life insurance, we’ll cover the basic two here: term insurance, and whole life insurance.
What’s the difference between term and whole life insurance?
Term insurance is pretty straightforward: you pay for coverage for a set period of time. It pays the sum insured only if you die or become totally and permanently disabled (if this benefit is provided) during the period. Term insurance is typically cheaper as it doesn’t have a savings element – there’s no value if you cash in.
Whole life insurance, on the other hand, gives you life-long protection. Depending on the policy, you might pay a premium for a limited period,or throughout your life. It also provides long-term savings, as the insurance company invests on your behalf.
The policy will pay out the sum insured and any bonuses you have built up if you die or become totally and permanently disabled (if this benefit is provided). This plan is suitable for long-term savings if you would like the insurance company to invest on your behalf. As with all investment products, you’re exposed to the risk of your investment returns underperforming expectations.
| Term | Whole life | |
| Covers against | Death, terminal illness, total and permanent disability | |
| Optional coverage | Early to advanced stages of critical illness, cancer | |
| Policy term | Fixed term or up to a specific age | Whole life |
| Payment term | Fixed term | Limited payment term or whole life |
| Payout upon claim | Sum assured | Sum assured + any accumulated bonuses |
| Cash value | No | Yes |
| What happens when there is no claim at the end of policy? | You don’t get any money back | You get to cash out when you need it |
In Singapore, common whole life insurance policies can generally be categorised into two groups: participating whole life insurance policies, and investment-linked policies (ILPs).
| Participating policies | ILPs |
| ● Shares in the profits of the insurance company’s participating fund ● Part of the returns are guaranteed ● Limited pay or pay for whole life | ● Invest in the market with the intention of higher returns ● Returns are not guaranteed ● Pay for the length of time you need it |
Optional riders and standalone insurance plans
Like with many types of insurance policies, you can add optional riders on to term and whole life insurance. One common option to cover all your bases is a rider for early to advanced stages of critical illness. This gives you additional coverage if you are diagnosed with one.
One thing to note, however, is that some life insurance policies may become void if you receive a critical illness payout. You could consider buying a standalone critical illness term insurance plan or cancer insurance, depending on your needs.
Like with term insurance, standalone critical illness term insurance has no cash value and offers “pure” protection only. If you are diagnosed with a critical illness, a lump sum is paid out. These standalone plans usually cover you from the early stages of critical illness to advanced stages, with the claim payable depending on the severity of the illness. There may also be additional benefits included, ranging from health check-ups to recovery support.
Another common type of term insurance is cancer insurance. With cancer being one of the most common types of death in Singapore, many people take out standalone term insurance plans to cover the disease specifically. These cancer-specific policies may offer payouts in the event of early- to late-stage cancer. Some even provide support for the follow-up medical expenses needed for treatment.
How does ‘limited pay’ work?
People were once required to pay for whole life insurance over the course of their lives, but these days, many plans are designed for “limited pay”. This means you have to pay only for a specific period of time – for example, 10, 15, 20, 25 or 30 years – but the plan continues to stay in force even after you’re done paying.
For the same person and the same sum assured, the premium you pay will vary depending on how long the payment term is. The shorter the payment term, the higher the premium paid per year – although that will be the “cheapest” possible plan, as you’ll end up paying a smaller total premium compared to a longer payment term option.
“Limited pay” essentially allows you to pay your premiums during your economically productive years, then continue to enjoy protection when you’ve retired.
What’s a multiplier, and what does surrender value mean?
After emerging some time in 2015, multipliers feature in most whole life policies offered today. When they’re added, they multiply and increase the underlying coverage.
There are two ways multipliers can work:
- Sum assured includes bonuses OR multiplier
A claim pays the basic sum assured + a multiplier or annual bonuses, whichever is higher.
- Sum assured includes bonuses AND multiplier
A claim pays the basic sum assured + a multiplier and annual bonuses.
Multipliers expire after a fixed age, which could be 65, 70, 75 or 80, depending on your needs. The idea is that you’ll need a higher sum assured in your coverage as you have more commitments during your economically productive years, but will need less after retirement.
Surrender value, or cash value, is the amount you’ll be paid if you cash in, or surrender, your policy. Whole life policies usually build up cash value after a minimum period, which is usually at least three years. Cash values for investment-linked plans depend on the current value of the units in them, while term insurance plans usually do not have any cash value.
So is term life better than whole life, as the premiums are lower?
There’s no definite answer as to which is better, so what’s important is to weigh your budget and consider why you’re getting insurance. Another key factor is affordability throughout the entire payment term.
Term insurance can be cost effective if you’re looking for a cheaper, protection-only plan with no cash value. While whole life insurance is more expensive, it can be an option for someone who wants financial coverage, with cash value as a back-up
Either way, it’s better to buy a plan when you’re young and healthy. You’ll pay lower premiums, and have less chance of exclusion.
Read more: Who should buy whole life insurance?
And while getting insured is important, always consider the long-term affordability of a policy before buying one. Whole life policies typically take more than 15 years to break even, so you should expect to make a loss if you cancel one before that, if no claim has been made.
Have more burning questions about insurance? Contact us at ask@plannerbee.co and we might take a look for a future article!
