Term vs Whole Life Insurance in Singapore: Which should I get?

Are you confused about the different types of life insurance and which one is right for you?

Term vs whole life insurance is a common debate among individuals seeking to protect their loved ones financially.

While both options offer benefits, understanding the differences between the 2 can help you make an informed decision.

Term life insurance provides coverage for a specific period, usually ranging from 10 to 30 years.

It offers a death benefit to your beneficiaries if you pass away during the term.

On the other hand, whole life insurance is a permanent policy that covers you for your entire life and includes an investment component, known as cash value.

Each type of insurance has its advantages and considerations, making it essential to evaluate your needs and financial goals before making a choice.

In this article, we will explore the differences between term and whole life insurance, including their features, benefits, and potential drawbacks.

By understanding the nuances of each policy, you can determine which option aligns with your personal circumstances and provides the necessary protection for your loved ones.

Term Life Insurance vs. Whole Life Insurance: A Quick Comparison

What is Term vs. Whole Life Insurance?

Term life insurance is a type of life insurance policy that provides coverage for a specified period of time, typically ranging from 10 to 30 years.

It offers a death benefit to the beneficiary if the insured person passes away or gets diagnosed with total and permanent disability (TPD) or terminal illness (TI) during the policy term.

On the other hand, whole life insurance, also known as permanent life insurance, provides coverage for the entire lifetime of the insured individual.

It includes a cash value component that accumulates over time, making it a long-term financial investment and a source of financial protection.

While term life insurance premiums are typically lower and more affordable than whole life insurance premiums, whole life insurance offers lifelong coverage and the potential to build cash value.

It’s essential to understand the key differences between these 2 types of policies to decide which one best suits your needs and financial goals.

Benefits of Each Type of Coverage

Term life insurance and whole life insurance are 2 common types of life insurance policies that offer different benefits and suit different needs.

Term life policies provides coverage for a specified period, usually 10 to 30 years.

It offers affordable premiums and provides maximum protection coverage during the policy term.

This type of coverage is ideal for young individuals who want to protect their loved ones financially in the event of their untimely death, TPD, or TI.

Term life insurance is also beneficial for homeowners, as it can help cover mortgage payments and ensure that their family can continue to live in their home even if they are no longer around.

Additionally, business owners can utilise term life policies to protect their business by providing funds to cover outstanding loans or other financial obligations.

On the other hand, whole life insurance provides lifelong coverage.

It offers a death benefit to the beneficiaries and includes a cash value component.

This cash value grows over time, allowing policyholders to borrow against it or surrender the policy for its value.

Whole life insurance is a good option for individuals looking for permanent coverage and a savings or investment component.

It can be used to provide financial protection too in the event of death, terminal illness, or total and permanent disability.

When considering life insurance coverage, evaluating the coverage term and choosing a duration that aligns with potential future financial burdens is important.

By selecting a longer coverage term, individuals can ensure that their loved ones are fully protected against any unexpected events that may occur later in life.

Types of Term Insurance

Term life insurance policies come in various types, providing individuals with options based on their specific needs and preferences.

The most common type is levelled term insurance, where the death benefit and premiums remain consistent throughout the policy term.

This type of policy is straightforward and offers predictable coverage.

Another option is decreasing term insurance, where the death benefit and premiums decrease over time, making it suitable for individuals with short-term financial obligations, such as a mortgage.

Renewable term insurance allows policyholders to renew their coverage at the end of each term, without needing a medical exam.

Convertible term insurance allows individuals to convert their policy into a whole life insurance policy, annuity, or an endowment plan without undergoing additional underwriting.

These different types of term insurance policies provide flexibility and adaptability to individuals, ensuring that their life insurance coverage aligns with their changing needs and circumstances.

Short-term

Short-term term life insurance policies provide coverage for a short period of time, typically up to 10 years.

These short-term policies offer a death benefit to beneficiaries if the insured individual passes away during the term.

The key feature of short-term term life insurance is its flexibility.

This type of policy allows individuals to tailor their coverage to their immediate needs.

For example, those with financial dependents or outstanding loans may opt for a short-term policy to protect their loved ones and liabilities.

One of the main benefits of short-term term life insurance is its affordability.

Premiums for these policies are typically lower than whole life or permanent policies, making them a cost-effective option.

Additionally, short-term term policies offer straightforward death benefit payouts, providing financial security for beneficiaries in the event of the insured’s death.

However, short-term term life insurance also has limitations.

Since it only provides coverage for a specific period, policies can expire without any payout if the insured outlives the term.

Renewing or converting a short-term term policy can also become more expensive as the insured ages or if there are health changes.

Furthermore, short-term term policies usually do not build cash value over time, unlike permanent policies.

Mid-term

Mid-term term life insurance policies offer coverage for a specific period of time, typically ranging from 10 to 30 years.

These policies provide individuals with a longer-term solution compared to short-term term life insurance policies, but without the lifelong commitment of a whole life or permanent policy.

The key advantage of mid-term term life insurance is the flexibility it offers in tailoring coverage to fit specific needs.

Individuals can choose a policy duration that aligns with their financial obligations, such as mortgage payments or college tuition expenses.

This allows them to have sufficient coverage during the critical years when their dependents rely on their financial support.

Compared to short-term policies, mid-term policies provide coverage for a longer duration, which provides you with peace of mind knowing that your loved ones are protected for a significant period of time.

However, they differ from long-term term life insurance policies in that they do not offer lifelong coverage.

Long-term (Term to 99)

A term to 99 term insurance policy is a type of term life insurance policy that provides coverage for a specified term, typically up to age 99.

Term life insurance is temporary coverage that provides a death benefit to the policyholder’s beneficiaries if they pass away during the term of the policy.

A term to 99 policy allows individuals to have coverage for a longer period compared to traditional term policies, which often have terms of 10, 20, or 30 years.

This type of policy may be beneficial for individuals who want coverage for a longer period or who have specific financial obligations that extend beyond traditional term lengths.

This is also a term policy that can be used for legacy planning at a low costs. Traditionally, many use endowment plans or whole life plans for legacy planning purposes.

Take note that you will have to pay insurance premiums for as long as the policy is in force.

So be sure to get the limited pay option and the premium waivers should something happen to you.

This limits your premium payments while getting the best of a term plan while getting some form of returns for your next generation.

Types of Whole Life Insurance

Whole life insurance is a long-term coverage option that provides lifelong protection and includes a cash value component.

There are different types of whole life insurance policies that you can choose from based on your specific needs and financial goals.

One type is traditional whole life insurance, which offers a fixed premium and death benefit throughout the policyholder’s lifetime.

This is the typical whole life insurance plan that you probably know and familiar with.

Additionally, there is also single premium whole life insurance, which requires a one-time lump sum payment for immediate coverage and a cash value that grows over time.

There are also insurance-based investment linked policies and universal life policies, but we won’t cover them in this post.

Instead, we’ll compare a term plan against the traditional whole life plan.

Traditional Whole Life Insurance

Traditional whole life insurance is a type of permanent life insurance that offers lifelong protection along with several other unique features and benefits.

Unlike term insurance, which provides coverage for a specified period of time (with the exception of term to 99), whole life insurance remains in effect for the entire life of the insured individual.

One of the key advantages of traditional whole life insurance is its cash value component.

This means that as you continue to pay your premiums, your policy accumulates cash value over time.

You can borrow against this cash value or even withdraw from it if the need arises.

This can be particularly useful for unexpected expenses, such as medical bills or other financial emergencies.

Whole life insurance plans also come with the limited pay option – usually anywhere between 15 to 30 years, in multiples of 5 – that limits your premium payments to a specific number of years.

However, it’s important to note that traditional whole life insurance generally comes at a higher cost compared to term policies.

Additionally, there may be potential surrender charges if you decide to cancel the policy before its maturity.

Furthermore, outstanding loans against the policy can impact the death benefit payout to your beneficiaries.

There are many things to take note of when purchasing a whole life insurance plan, so make sure you know how to choose one.

The Cash Value Portion

The cash value component in a whole life insurance plan is a feature that allows the policy to accumulate cash value over time.

As you pay your premiums, a portion of the money goes towards the death benefit coverage, while the remaining portion goes into the insurer’s participating fund.

This participating fund grows in value, usually between 3% to 4.5% over your lifetime.

The amount of cash value in the policy increases over time, providing a savings element in addition to your life insurance coverage.

Because this is an investment, the life insurance company cannot guarantee you returns.

Instead, they provide both the guaranteed portion and the non-guaranteed portion.

As they need to give you the guaranteed cash value portion, the insurer will be more careful with their investments so that they have enough money to pay you when you surrender your policy.

Your non-guaranteed returns will then depend entirely on the participating fund’s performance, which you will only know at the point of surrender.

The cash value component can be used for various purposes, such as supplementing retirement income, funding a child’s education, or covering unexpected expenses.

It is an attractive feature for those looking for a life insurance plan that provides both protection and a savings component.

Cost Considerations for Different Types of Term and Whole Life Insurance Policies

When considering life insurance policies, one of the key factors to evaluate is the cost.

Both term life insurance and whole life insurance come with their own set of considerations when it comes to cost.

Term life insurance policies are generally more affordable compared to whole life insurance.

This is because term insurance provides coverage for a specific period of time, usually 10, 20, or 30 years, and does not include a cash value component.

The premiums for term life insurance policies are typically lower since they only provide a death, TPD, and TI benefit that doesn’t accumulate cash value over time.

On the other hand, whole life insurance policies tend to have higher premiums.

Whole life insurance offers lifelong coverage and includes a cash value component that accumulates over time.

The premiums for whole life insurance are higher due to the additional cash value growth potential and the guarantee of a death benefit payout.

When deciding between term and whole life insurance, it’s important to consider your budget and financial goals.

If you have a limited budget or need coverage for a specific period, term life insurance may be the more cost-effective option.

The exact premiums you’ll have to pay will vary depending on many factors, so you’ll need to get quotes for them to understand how it impacts you.

However, if you are looking for lifelong coverage and the potential for cash value growth, whole life insurance may be worth the higher cost.

Impact of Age on Cost & Coverage Amounts

Age significantly determines the cost and coverage amounts of both term and whole life insurance policies.

In term life insurance, premiums are primarily based on the insured’s age, health, policy term, and desired death benefit size.

Younger individuals generally pay lower life premiums as they are considered less risky to insure.

As individuals age, premiums tend to increase due to the higher probability of experiencing health issues or mortality.

Therefore, obtaining term life insurance at a younger age allows policyholders to lock in lower rates and coverage amounts that can meet their long-term needs.

On the other hand, whole life insurance has premiums that are locked in at the time of purchase.

Age is crucial in determining the initial premium, with younger individuals benefiting from lower rates.

Additionally, the coverage amount in whole life insurance remains the same throughout the policy’s lifetime.

This means that if individuals purchase whole life insurance at a younger age, they can secure higher coverage amounts that will remain fixed as they age.

Early Critical Illness & Critical Illness Coverage

When choosing between term life insurance and whole life insurance, it’s essential to consider your early critical illness (ECI) and critical illness (CI) coverage.

This coverage refers to the protection you have in case you are diagnosed with a critical illness.

Typically, whole life insurance policies offer more comprehensive ECI/CI coverage, meaning they cover a wider range of conditions.

However, because of this extended coverage, whole life insurance tends to be more expensive compared to term life insurance.

If you already have a multipay critical illness plan, which provides coverage for multiple critical illnesses, you may opt for a term life insurance plan instead.

Since the standalone plan already provides ECI/CI coverage, there is no need to duplicate it with a whole life insurance policy.

When deciding between the two types of insurance, your personality and risk tolerance also come into play.

If you are a risk taker, a term life insurance plan combined with a standalone multipay plan might be a suitable option.

On the other hand, if you prefer more comprehensive coverage and are not as comfortable with taking risks, a whole life insurance plan with an ECI/CI rider (or a standalone ECI/CI plan) would be a better choice.

Regardless of which option you choose, it is crucial to ensure that it fits within your budget.

If a whole life insurance plan is too expensive for you, a term life insurance plan with an ECI/CI rider can still provide adequate coverage.

When considering early critical illness and critical illness coverage, it’s important to weigh the benefits and costs of each option and choose the one that aligns with your needs, risk tolerance, and financial situation.

So…which is better: Term or Whole Life Insurance?

Here are some questions to help you find out which type of life insurance is most suited for you:

What are your insurance objectives?

Are you looking for pure financial protection for your loved ones if anything were to happen to you? Or do you also want to enjoy the added benefit of growing your money on top of your protection?

If you’re the former, a term plan allows you to fulfil that need at a much lower cost. But if you’re looking for a savings element, then a whole life plan might be more suitable.

On top of just increasing your wealth, the cash value in a whole life policy allows you to enjoy other features such as automatic premium loan, getting some cash back if you surrender your policy, and borrowing from your policy’s cash value.

With an automatic premium loan, if you face a situation where you’re unable to pay for your policy, your insurer will use the cash value to fund your premiums until your cash value runs out.

Following this, your policy will terminate.

Unfortunately, with a term plan, there is no cash value for your insurer to draw down from. Therefore, if you don’t pay your policy before the end of the grace period, your policy will terminate.

Getting a new insurance policy would entail higher premiums and requires underwriting, which might lead to certain health exclusions.

While your insurance objective is one of the main factors when choosing between term or whole life, it should not be the be-all and end-all.

After all, insurance is a big-ticket item that requires a long-term commitment, and making the wrong choice could affect your entire financial plan.

Are you comfortable investing on your own?

If you were to get a term plan, what financial plans do you have in place to help you grow your money? Are you willing to put in the due diligence to read up on investing so that you can generate a higher return on your money than what is offered on a whole life plan?

And on top of that, can you ensure that you can generate better returns through your investments?

Or do you have a low-risk appetite and prefer investing in low-risk instruments like government bonds?

If you have a plan to invest your money and earn a return that is higher than what a whole life plan offers, then getting a term plan is definitely the wiser option.

However, if your financial plan is essentially your bank’s savings account, or you’re not very disciplined with your money and tend to go from paycheck to paycheck, then a whole life plan would be a better choice.

It acts as a kind of forced savings plan and would at least allow you to beat inflation, even if you were to take on a passive approach.

Remember, the whole phrase is “buy term, and invest the rest”, not just “buy term”.

Will your dependents be financially independent in your later years?

One of the key differences between term and whole life is that the former only provides coverage for a fixed period of time (with the maximum age usually cutting off at 85), while the latter covers you until the end of life (or up to 99 in some cases).

If your dependents will be able to support themselves financially when you’re older, then a term plan would be a better choice.

With insurance, you should only get the coverage that you require. So, once your dependents are financially independent, you’ve paid off all your debts and secured your retirement needs, your insurance needs decrease significantly.

It should be around this time that your term plan terminates. Of course, this needs adequate forward planning on your part as well.

If you need to provide for them for the rest of your life, then it might be better to consider a whole life policy due to term insurance’s “expiry date”.

If you realise that you still need financial protection after your term plan terminates, getting another term plan will be more expensive and more of a hassle.

You might even face some health exclusions or be denied from purchasing another life policy due to pre-existing health conditions.

If you’re suffering from a pre-existing condition, you might not have much of a choice.

But if you’re in the pink of health and you’re still set on not purchasing a whole life plan, then a long-term term plan might be a good alternative.

Do you have a financial plan in place if you were to contract a critical illness (CI) when you’re older?

It’s unavoidable, as we get older, our health tends to deteriorate, and the likelihood of developing a serious illness increases.

If you’re one of the lucky ones who manage to stay healthy in your older years, then kudos to you.

But more often than not, life gets to us and we may end up getting diagnosed with a critical illness, which can burn a big hole in your wallet and derail your dream retirement plans.

Your financial planning should cover financial protection for your loved ones, saving enough to afford your dream retirement, and ensuring you have enough to cover you in the event of an unfortunate event like a CI diagnosis.

The ideal scenario would be to get a term plan with a CI rider, and once it expires, have enough emergency funds set up in case your get diagnosed with a CI.

The Life Insurance Association recommends that a Singaporean have $316,000 of CI coverage, and with quality cancer treatment costing up to $100,000 – $200,000 a year, it’s no wonder why they recommend such a huge amount.

Unfortunately saving up this amount is easier said than done. If you have an investment strategy that sees you save up enough to cover this cost in your later years and you are confident that it will work, then get a term plan.

However, if you’re just leveraging on your life insurance plan for your early critical illness or critical illness coverage, then it might be a safer bet to get a whole life plan.

This is because, for term insurance, any add-on riders will expire along with your base policy, requiring you to dip into your hard-earned savings if you contract a CI after your plan’s term ends.

How life insurance comes into play for your children

What’s my legacy plan for my children?

Whenever we talk about saving, investing, and accumulating wealth, we tend to think about our retirement.

However, one thing that some of us might miss out on, which I am guilty of, is providing an inheritance for our children when we pass on, which might seem very far away in the future. But as the saying goes, it’s better to be prepared than not.

This is something a whole life plan might be able to help with.

Purchasing a whole life plan puts in place a legacy plan so that you can focus your investment efforts on building your wealth for your dream retirement.

Perhaps you’ve already factored in your children’s inheritance into your financial strategy?

There might still be an instance where getting whole life insurance might be a better fit, especially when it comes to getting insurance for your child.

What type of insurance is best for my child?

If you’re getting life insurance coverage for your child for the sake of providing financial protection, my suggestion would be to not get it. Before you click off, hear me out.

The purpose of life insurance is really to protect your loved ones if anything happens to you, but in this case, your children do not have anyone depending on them.

You’re better off investing this money in other investment instruments or even an endowment plan for certain milestones, like your child’s future education.

However, if you’re looking to get a critical illness or early critical illness coverage, then a whole life plan might be more cost-efficient, and can also double up as a great gift when they come of age.

As mentioned, treatments for CI tend to be very costly. And unfortunately, it doesn’t discriminate by age.

Therefore, it’s important to ensure that your child is sufficiently covered for CI.

One possibility would be to get a whole life plan with a CI rider, especially when they’re younger and their premiums are much cheaper with a low likelihood of facing any health exclusions.

Getting a whole life plan for your child when they’re young – even when they’ve just turned 1, might be the gift that they never thought they needed but would be grateful to have in the future.

You can opt for a limited pay whole life plan and pay off their policy’s premiums before they even come of age. Giving them the gift of lifelong protection coverage makes for a meaningful and useful gift.

Conclusion

While whole life insurance is not all bad, there are instances where it beats out a term plan – which boasts affordability, flexibility, and gives you the option to reinvest your money elsewhere to make it work harder for you.

Bundling your investment with your protection is not the wisest choice, as you don’t really get a transparent view of the portions of your premiums that go towards protection, wealth accumulation, and other expenses like sales commissions.

Generally, if you’re willing to put in the work to ensure that you have sufficient financial plans such that you’re financially secured when your insurance coverage expires, getting a term plan would definitely be a better option out of the 2.

Interested to understand more about term life insurance and how to select a term plan that is aligned with your needs? Also check out our guide to term life insurance in Singapore.

After which you can read our best term life insurance in Singapore post.

If you’re still unsure which type of insurance would fit your needs, speak to one of our experienced financial advisors, who’ll ask all the right questions and offer their unbiased recommendations on what type of insurance is the best for you.

A common theme throughout this article is that there are many considerations to make when choosing your life insurance and it should not be a decision that is made lightly. So do ensure you do sufficient research or speak to an expert before making your decision.

References

• https://www.investopedia.com/term-life-vs-whole-life-5075430
• https://www.nerdwallet.com/article/insurance/term-vs-whole-life-insurance
• https://www.fool.com/retirement/2020/02/10/heres-why-you-should-avoid-whole-life-insurance-li.aspx
• https://www.lia.org.sg/media/1332/protection-gap-study-report-2017.pdf