There are generally two camps of consumers.
One group will prefer the whole life insurance as the coverage for an individual's whole life is very attractive.
The other group subscribes to the philosophy of "buy term, invest the rest".
Let's dig deeper to see the pros and cons of each approach.
Disclaimer: this is not a post to illicit the purchase of any insurance product. Rather, it's meant as an educational post for people who are deliberating between the two choices. Please seek advice from a trusted, licensed consultant as each of our situations is different.
Whole Life
To me, there are 3 advantages of getting a whole life as a base.
It covers for whole life.
It is limited pay (you just need to pay for a fixed number of years and you get to enjoy coverage for the rest of your life).
There is a cash value in the policy.
Let's take a look at an example to understand the advantages better.
Based on a male, non-smoker, age next birthday 30, with coverage of 100k as the base sum assured, his annual premium is $3,250/ year.
(Kindly note that the premium will differ according to age, smoking status and other variables like coverage amount, booster and premium term.)
The breakdown of the coverage is as follows:
Death: 100k
Disability: 100k
Early critical illness: 50k
Advanced critical illness: 50k
Premium term: 25 years
What is interesting is that this is not the only coverage available to this person. Most of the newer generation of whole life plans come with a booster. The booster's purpose is to increase the coverage amount. The booster illustrated above is 3x and the booster will last till age 70.
This means that before the age of 70, should the person be diagnosed with a disability, he will be paid 100k x 3 = 300k.
Graphically, this is how it will look like.
This is where I think my earlier points of covering whole life and the plan is limited pay really shine.
What happens after the age of 70?
The coverage will revert to the base sum assured of 100k. If there are no claims made on the policy, the amount of the net death claim will be the base sum assured plus cash value minus any outstanding amount due to the insurer.
Why is there cash value?
This plan is a participating policy. Every year, insurers will declare bonuses for participating policies. These bonuses will usually be accumulated in the policy to generate higher returns for the client.
Additionally, the interest rate in is such a policy is usually around 3+% and it can be compounded annually. Although the interest rate is non-guaranteed, this interest is much higher than most of the normal bank savings rates that I have come across.
When can I unlock the cash value?
Most whole plan policies I know only allow you to unlock the cash value IF you stop the plan. This would also mean your coverage will end.
Another important point to note is that there will only be cash value if there are no prior claims on this policy. The cash value usually increases the longer you hold the plan.
Based on the above example of a 100k whole life plan, the surrender value (or cash value) at age 70 will range between around 71,000 to close to 118,000. The average will be about 94,500.
The total outlay for the whole life plan is $3,250/ year x 25 years = $81,250. The average cash value (assuming no claims and surrender the policy at the age of 70) is around $94,500.
Hence, the way I see whole life insurance is that it is a good starting point for people who wants comprehensive coverage, prefer a limited premium term yet can cover for whole life and has some cash value if there are no claims to the policy.
What is the drawback of whole life insurance?
To better understand the drawback, we need to first look at term insurance.
Term Insurance
As the name suggests, the coverage of such a policy is for a fixed term. Let's use another example to better understand it.
Death: 300k
Disability: 300k
Early critical illness: 150k
Advanced critical illness: 150k
Cover to age 70
The profile for this illustration is the same as the earlier example for a more fair comparison.
The annual premium for such a structure will be around $1,980/ year. And this is where you see the term plans really shine. It is much cheaper than the whole life plan. The annual savings is around $1,270.
As such, the biggest advantage of a term plan in this scenario is. It is cheaper than a whole life plan annually for the same coverage after the booster.
Based on annual pricing alone, the term plan seems like the way to go. However, there are other differences. Let's take a look at the following points.
To continue to enjoy coverage, the term plan's payment period will be the same as the coverage period. This means that for the above example, the person needs to pay 40 years of $1,980/ year. That amounts to $79,200. The whole life plan total outlay is around $81,250.
There is no cash value for term plans. Since there is no cash value, the person will need to use the cost savings he gets to invest in the market.
What happens after the age of 70? The term plan will stop and can't be extended. If he wants to extend the coverage, it would mean he will need to get a new plan (which is likely to be very expensive at that age).
Building upon point 3, that is where the saying of "buy term, invest the rest" comes in.
Assuming you invest the annual savings of $1,270/ year for 25 years, with a 4% compounded return until age 70, you will have about $95,252. This amount is only slightly higher than the average value of the whole life plan surrender value of $94,500.
Bottom Line
The table below consolidates the different figures we talked about.
There is no right or wrong in getting a whole life plan or term plan. The whole life plan and term plan have their own pros and cons. It really boils down to individual preferences, suitability and budget. Here are some guiding questions which have helped me tremendously.
Do you prefer coverage that lasts for whole life or a fixed period?
Are you disciplined in doing your own investment?
Do you have the expertise to manage your investment so that it can generate a positive return of 4% p.a or more in the next 30 to 40 years?
If you prefer whole life coverage and are not certain of managing your own investments, perhaps a whole life plan will be more ideal.
On the other hand, if you are happy with coverage till a specific age and can manage your money well, then a term plan will be better for you.
For me, I'm a greedy person. I want both the whole life coverage and cost savings from the term plan. That's why I have structured a whole life plan and a term plan for myself.
Both plans serve different purposes and I have refined them across the years to be in the most cost-efficient manner.
Meanwhile, stay safe and take care, everyone!
P.S: If you are still uncertain about what to do or would like to find out more on how I can do it in the most cost-efficient manner, hit me up. You can reach me at this link.
The content highlighted in red are amendments made after posting.
Comments