The purpose of an insurance plan is to protect one from future potential financial losses caused by events such as one’s death or disability. While both types of policies provide financial protection, the key differences between them include the duration and amount of coverage of the plan. It is important to know about insurance, as well as daily things like the sp power tariff to ensure that you’re all set for adulting.
Term insurance
As the name suggests, term plans cover an individual for a fixed term such as within an age range or up to a specific age. If anything befalls the individual during the term, coverage will be provided by the company. However, once the specified age is surpassed, the plan will expire without any sum assured back to the individuals as it does not bear cash value. This happens when the plan is terminated or surrendered as well.
For people who are looking to cover their dependents over a specific period of time, term insurances serves as a cheaper option to meet their protection needs.
Whole life insurance
On the other hand, a whole life policy covers an individual for life as long as premiums are still being paid. Unlike a term policy, a whole life plan also comes with the capability to grow cash value. The type of cash growth available would depend on the type of policy you obtain such as either endowment or investment-linked policies (ILP). Upon termination, surrendering, or maturity, the receiving individual will obtain monetary value back.
For people who are interested in receiving protection for the whole of their lifespan and monetary returns, whole life insurance would be a better option for pricier premiums.
The difference between endowment and investment-linked whole life policies
Often seen as a tool to build financial discipline, endowment policies are a way to practice saving as premiums are split into covering for insurance protection and potential monetary growth. After saving for a period of years, one would be able to obtain cash returns as the policy accumulates, and these returns are dependent on the guaranteed and non-guaranteed benefits of the specific plan.
Instead of savings, the premiums of an ILP are split for buying investment fund units. And unlike endowment plans, an ILP does not provide guaranteed benefits as it depends on the fund performance. While this offers higher returns, it also leads to higher risk and potential losses due to the market. ILPs also comes in different fund profiles suited for various risk appetites and monetary objectives of their buyers.
The differences between term and whole life insurance
If an individual is in a position where they are unable to set aside cash for higher premiums, term insurance is able to still provide substantial amounts of protection for a lower cost.
We can see the premium differences in the annual premium costs of various plans. For example in term insurance, policies such as FWD Insurance Term Life and Great Eastern Max Term Value requires annual premiums of $510 and $840 respectively. While for whole life insurance plans such as NTUC Limited Pay Protection and AXA Life MultiProtect requires higher premiums of $10,038 and $13,440 respectively.
Due to the huge difference in premiums, some financial advisors encourage their clients to purchase term plans and use the remaining savings to participate in investments. This strategy provides an opportunity for clients to grow their cash if they obtain the right investment funds. However, some clients do prefer having whole life policies due to the guaranteed cash value returns.
Another significant factor to take note of would be the duration of the plan as term plans may expire while one may still want financial protection. Once the policy expires at an old age, purchasing new plans may prove to be too expensive during retirement years.
Where an individual is in life may also influence their purchasing decisions as term and whole life plans have different advantages. When one is young without any dependents or obligations, a term policy may be sufficient to meet their needs. However, when one has a family to provide for, whole life insurance allows them to protect their loved ones and grow cash returns for future retirement. According to NTUC Income in April 2019, 48% out of 329 people were incentivized to purchase insurance to protect the lives of their loved ones. Especially for children where they are likely to be healthier and enjoy lower premiums due to their age, a whole life policy can provide them life-long protection for limited pay premiums while beating inflation.
What is limited pay?
A limited pay period refers to providing premiums for only a limited number of years. For example, Mike (age 35) may purchase a whole life plan which needs him to pay premiums of $250 per month for only 15 years. This means that at age 50, he is no longer required to pay premiums while the insurance continues for the entirety of his life.
What is the surrender value?
Surrendering a policy refers to terminating the policy contract. This also leads to obtaining the accumulated cash value available in the plan, provided that no claims have been made before. Some people advise against surrendering a policy as the surrender value will be lower than the death benefit of the plan. In addition, purchasing a new plan at an older age would require high premiums.
Conclusion
Whether one should purchase a term or whole life policy, this is dependent on their needs and income. A whole life policy costs more, it has many advantages that term insurance does not provide such as life-long protection and a savings or investment component. While endowment allows for guaranteed returns but lower returns, ILPs offer higher returns for higher risk without any guaranteed returns. While term insurance serves as an affordable option for people who are only interested in financial protection, are unable to afford a whole life plan, or are only interested to protect themselves for a specific period of time. It can be a cost-effective solution for those in need.
Shift Frequency © 2020 – What Are Whole Life
WAnd Term Insurance?