Should I buy a whole life or term policy?

Share on facebook
Share on linkedin
Share on telegram
Share on whatsapp

All along, there have been 2 camps of financial consultants arguing for their opposing views.

The larger group of traditional insurance agents usually argue that whole life insurance is superior, whereas a smaller “new age” kind of consultants would argue that term insurance is the best solution for ALL situations.

In reality, either product may be better, depending on the clients’ needs.

Before I provide the scenarios to illustrate, I would like to highlight that both products have actually morphed over time and the line separating them has become blurred.

Whole life policies these days usually come with a “multiplier” factor, meaning, you can buy a $100,000 coverage but you can choose to multiply it by a few times before the insured’s age reaches 70 or higher. This is achieved by having a term policy built into the whole life policy. So on its own, it is a hybrid policy. There are very few pure whole life products being sold these days.

There are also now term policies that exhibit some characteristics of a whole life policy, such as a limited premium term, is guaranteed to pay even if the insured lives beyond 99, and with some form of cash value.

I believe the reason is that the developers of each insurance type see the advantage of the other type and try to incorporate them into their own.

Let’s now come back to my illustrations, using the traditional term policy.

The obvious strength of a term policy is to protect dependents. Say, for young parents who have young children to look after for another 20 years. Assuming a modest family expense of $50,000 a year, the parent should have a sum assured of $1 million ($50, 000 per year for 20 years), not considering inflation. At 35 years of age, the premium can be as low as $560 a year! Nothing beats this – term policies are indeed the most efficient solution, and this is what I will usually recommend to most young parents.

But term insurance is definitely not the most suitable solution for all needs and situations. Indeed, it is best only if the need for protection is only temporary.

It is also not efficient when the insured person is very young. So, let’s take the case of a newborn at 0 years old. The premium for a $300,000 cover (with multiplier) for whole life is about $1,500 a year, including critical illness cover. But it’s only payable for 20 years, and the coverage is for life. So, the total premium is only $32,000. At age 71, the projected cash value is about $278,000 – much more than the total premium of $32,000. For a term policy with a similar cover, up to age 70, the premium is about $968 a year. But the premium is payable for 70 years! So, the total premium is almost $70,000! And the coverage is not for life, so if the insured suffers from critical illness or dies after the age of 70, the coverage is $0, and you would have paid $70k premium for nothing! Cash value is also $0! In this case, a term policy is an extremely unattractive solution!

The same comparison can be done for a young adult in the 20s, and term policy will still be unattractive.

The “new age” advisers also like to argue that the need for protection is only temporary, only during the years when their dependent is young, or when they are still working. This helps them justify the attractiveness of the term policy. Such an argument is again flawed. Let me provide 2 situations to show why sometimes coverage is required for life.

First, critical illness protection. We all know that the risk of getting a critical illness like cancer and heart attack increases with age. While it is true that at an older age, a person may need a lower coverage, because his children may be all grown-up, and his mortgage has been paid off. However, some coverage is still required – to pay for outpatient treatment costs that may be not covered by the typical hospitalization policy, or for alternative treatment like TCM. Indeed, when a person falls very sick, some injection of cash is always useful and handy. Who would disagree? This is especially so when the total premium of whole life maybe cheaper than term policy.

Second, term cover mainly thrives on dependent protection. But there are people who want insurance to cover death even when their dependents are no longer dependent on them. This is very true for enhancing the estate. Say a person has $500,000 that he wants to pass down to his children when he passes on, instead of passing $500,000, he can put that amount into a life policy and be guaranteed for a $1.5 million injection into his estate when he passes on. Why give cash when you can multiply that by 3 times when the time comes? Term is not an appropriate solution simply because the person may outlive the term protection period.

So I hope I’ve given a more balanced view of when the different products are best for different situations. I hope financial consultants can be less biased, not hold a lopsided view and be more competent, especially those who argue that term is the best for all situations when it is clearly not true.

Important: The information and opinions in this article are for general information purposes only. They should not be relied on as professional financial advice. Readers should seek independent financial advice that is customised to their specific financial objectives, situations & needs. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.

Published By:

Tan Siak Lim

Please goto https://www.linkedin.com/in/tansiaklim/

CONTACT US

Contact Me

What type of services are you looking for? 请问您需要咨询哪些方面的服务?(Please select all that applies)

ACKNOWLEDGEMENT

By submitting this form, I confirm that

提交此表格,即表示

  • I have read and understood FAPL’s Personal Data Policy, and hereby give my acknowledgement and consent to FAPL to use my personal data in accordance with FAPL’s Personal Data Policy.
  • 我已阅读并理解鑫盟理财私人有限公司的个人数据保护政策,并同意鑫盟理财私人有限公司根据个人数据保护政策所阐述的用途使用我的个人资料。
  • I have read and understood the disclaimers above and hereby affirm my acceptance of these terms.
  • 我已阅读并理解了上述免责声明,特此声明接受这些条款。
  • I have not been directly contacted or approached by any representative or employee of FAPL with an offer or solicitation to apply for any financial products not offered in my home country.
  • 鑫盟理财私人有限公司的代表或员工并未直接与我联系或提出要约或招揽购买我原居住国境内所不提供的任何金融产品.
  • Financial Alliance Pte Ltd ( “FAPL”) is licensed by the Monetary Authority of Singapore (“MAS”) and allowed to conduct financial advisory activities in accordance with the Financial Advisers Act (Cap. 110) (“FAA”) and the Securities & Futures Act (Cap. 289) (“SFA”) within the jurisdiction of the Republic of Singapore and in accordance with the licenses granted by MAS
  • 鑫盟理财私人有限公司( “鑫盟理财”)持有由新加坡金融管理局(“MAS”)所颁发的牌照,并许可在新加坡共和国境内依据财务顾问法(第110章)和证券与期货交易法(第289章)进行财务咨询等相关业务
  • Any services provided by FAPL to persons not ordinarily resident in Singapore are provided solely on an offshore basis from Singapore, resulting from direct enquiry on the part of the foreign residents.
  • 鑫盟理财为非新加坡居民所提供的任何服务仅限于直接向鑫盟理财发出咨询请求的国外居民。
  • As an integral part of the provision of such services, FAPL may from time to time make available to such residents, documents and information making reference to capital markets products (for example, in connection with the provision of fund management or investment advisory services outside of the foreign jurisdiction).
  • 作为提供此类服务的一部分,鑫盟理财会不时向此类咨询者提供有关产品的参考文件和信息(例如,关于海外司法管辖区以外的资金管理或投资咨询服务等信息)。
  • Such documents and information are provided by Financial Alliance Pte Ltd (“FAPL”) is for general information only and is not intended for anyone other than the recipient.
  • 此类由鑫盟理财所提供的文件和信息仅供收件人做一般信息参考。
  • It does not take into account the specific investment objectives, financial situation or particular needs of any particular person.
  • 此类文件和信息不会把-个人投资目标,财务状况或其特定需求等考虑在内。
  • It does not constitute the making available of, or an offer or solicitation by FAPL to buy or sell or subscribe for any such capital markets product or to enter into a transaction or to participate in any particular trading or investment strategy nor an advice or a recommendation with respect to such financial products.
  • 鑫盟理财向该人士提供此类文件和信息将不构成要约或招揽购买或出售或认购任何此类资本市场产品,或达成交易或参与任何特定的投资策略,也不构成有关此类金融产品的建议或推荐。
  • These documents may not be published, circulated, reproduced or distributed in whole or in part to any other person without FAPL’s prior written consent.
  • 未经鑫盟理财的事先书面同意,不得将这些文件全文或部分发布,传播,复制或分发给其他人。
  • This document is not intended for distribution to, publication or use by any person in any jurisdiction, where such distribution, publication or use would be contrary to applicable law or would subject FAPL and its related corporations, connected persons, associated persons and/or affiliates to any registration, licensing or other requirements within such jurisdiction.
  • 鑫盟理财无意在分发,出版或使用此类文件可能违反当地法律,或本公司及关联公司或关联人士需要注册,获得许可或符合规定的司法权区向当地人士分发、出版此类文件或供其使用。
  • You shall ensure that you have and will continue to be fully compliant with all applicable laws in your home country when entering into discussion or contracts with FAPL.
  • 在与鑫盟理财进行讨论或签订合约时,您应确保您已完全遵守并将继续遵守您所在原居住国的所有适用法律及条规。

In compliance with the Personal Data Protection Act, Financial Alliance Pte Ltd (“FAPL”) seek your consent to collect and use your personal data (e.g. name, NRIC, contact numbers, mailing addresses, email addresses and photograph) for the purposes of and in accordance with FAPL’s Data Protection Policy, which can be found on FAPL’s website at https://fa.com.sg/data-protection-policy/.

根据《个人数据保护法》,鑫盟理财私人有限公司征求您的同意向您收集并使用您的个人信息。鑫盟理财将根据公司的个人数据保护政策所阐述的用途使用您的个人资料(例如姓名,证件号码,联系电话,邮寄地址,电邮地址和照片)。 该政策可在本公司网站上查寻,网址为 https://fa.com.sg/data-protection-policy/.

By submitting this form, you are deemed to have read and understood FAPL’s Personal Data Policy.

提交此表格,即表示您已阅读并理解鑫盟理财私人有限公司的个人数据政策

Scan for Contact Details

Join our newsletter

Subscribe to our newsletter to receive updates on our latest content!

By providing the info below, I confirm that I am the user and/or subscriber of the telephone number(s) and email address provided by me and I consent to receive from Financial Alliance and/or its financial adviser representatives, any marketing, advertising and promotional information organise by Financial Alliance via voice calls, SMS/MMS (text messages) or faxes to my telephone number(s) provided below. I understand I may withdraw any consent I have given at any time by writing in to Financial Alliance Pte Ltd.

Scan for WeChat QR