Life Insurance vs Term Insurance: Which is Better?
Insurance has always been an essential purchase for Singaporeans, who are coming of age. As one enters the working force, spending power increases and uncertainties are bound to happen when you least expect it to. Having a safety net to fall back to or rely on is very important.
Insurance companies are shouldering the responsibility to have each and everyone of their policyholders insured based on certain mutual conditions agreed between both parties (insurance company and policyholder). Buying an insurance can be as affordable as a couple of dollars a month to exorbitant monthly premiums. It all depends on the final payout, how much would you want your family members or next-of-kin to receive if any mishaps were to happen to you.
First and foremost, understanding which insurance is suitable for you and what is the difference between them would allow you to make a clear and concise, informed decision.
For starters, you need to know the difference between a Life Insurance and a Term Insurance. “Both life and term plans are traditional insurance that provides similar coverage, but it’s usually for different purposes and life stages,” says Tan Kia Leng, Director, Financial Services at Chamberwealth Financial.
Everyone has different needs, so doing more research, through family members, friends, and trusted insurance advisors would be good. Do not rush into getting insurance as it is a long term commitment. Kia Leng emphasizes that every single insurance portfolio should be tailored made to suit ones existing needs.
“The crux is finding out what you really need at this stage in life,” Kia Leng advises. “Whether you are married or single, with or without dependents as well as your current liabilities. Don’t be mistaken that a life plan will cost a bomb or term plan will be the one that you shouldn’t miss.”
What is a Whole Life Insurance exactly?
The purpose of life insurance is mainly to provide protection to the insured’s life. Upon the death of the policyholder, there will be a death benefit payout which will benefit your spouse, next-of-kin, or family members financially. Life insurance can be seen as essential insurance to have, especially if you are the breadwinner of the house, in case of a terminal illness or permanent disability.
Whole life insurance works like this. You pay a fixed premium monthly for a specific period of time, usually 20 to 30 years. Upon the completion of the premium, one will be guaranteed a certain insured sum. Some see it as a form of savings while others will keep it as it is because no payment is required after that specified number of years.
Policyholders can either choose to surrender the life insurance or retain it till their deathbed. If they have an urgent need financially, you may choose to surrender the policy and cash out a lump sum, which would usually be lesser than the total premiums you have made throughout the years, which is not advisable. There will be a cash surrender value column including the guaranteed and non-guaranteed columns for your perusal. The guaranteed is quite self-explanatory while the non-guaranteed is only if the insurance company makes a profit for that period/year.
DEATH BENEFIT ≠ CASH SURRENDER VALUE
Do not be confused between Death Benefit and Surrender value. You will be entitled to the Death benefit upon death, and the surrender cash value is when you decide to surrender the policy back to the insurance company before death to receive a lump sum.
What about Term Life Insurance?
Term life insurance is a miniature version of whole life insurance. Basically, it only insures the policyholder for a fixed period of time. All coverage and protection will only be valid for that X number of years. A common scenario where a term insurance is being purchased is where the parents decide that they will want their child to be independent financially upon completing National service or university, they will purchase a term life insurance for their child which will cover them till NS is completed for the guys and for the ladies, till they graduate from university.
Since this seems like “temporary insurance” there would be no surrender cash value when the policy matures or is terminated abruptly even when the premiums are not being paid fully. Term life insurance typically requires a lower premium to be financed, compared to whole life insurance, but at the same time offering the same coverage as a whole life insurance policy.
Here, Tan from Chamberwealth Financial summarises the main distinguishing features between the term insurance and life insurance:
- Flexibility: Nowadays life plan comes with more flexibility. Companies are able to offer limited premium paying terms for their clients whereas term plan, the premium term can go as long as 40 years.
- Cash value: It will become something substantial over the years and value is more than simply cash value, a life plan can be used as collateral or even legacy due to its longevity. Term plan, on the other hand, does not offer any form of cash value.
- Premium amount: Exposure to a higher premium if the term plan is being renewed after the specified term.
- Health conditions: Life plans lock in the health status of an individual while the Term plan guarantees the health status only for that term.
If you wish to continue the term insurance upon maturity, it is also subjected to financial and medical underwriting as your financial capabilities and health 20 to 30 years ago will be different 20 to 30 years after. Always make it a habit to pay your premiums on a timely basis, if premiums have defaulted, it will result in the termination of the policy and the reinstatement will be subjected to underwriting approval again.
Made your choice and decide on whole life insurance or a term life insurance already? Feeling unsure and worried about having to approach the various insurance companies one by one? Fret not, these days, there are websites like Comparefirst and DIY Insurance that allow you to make the comparison at your convenience.
They are credible and trustworthy comparison websites you can utilize to make your comparisons quickly. These websites provide comprehensive information on life and term life insurance from the respective insurance companies.
“Many assume that they do not need any insurance because they are young, and some think that they have a healthy lifestyle and eating habits, so nothing will happen in the future (they should be free of illnesses),” says Kia Leng from Chamberwealth, noting on an area often overlooked by Singaporeans.
“Unfortunately, death and sickness don’t go around choosing people or time. If premature death may occur yesterday, tomorrow or the day after. What remains are the lives of our spouse/ children/ parents, can it continue as per normal? Who’s going to handle the liabilities that you had when you were alive and kicking?”
Kia Leng further adds that critical illness is another top killer in Singapore. “If today we were to be diagnosed with cancer, we might need our spouse or parents to quit their job, stop the income and take care for us and or our children. Or continue with work, put bread on the table and increase their burden? At the end of the day, those who suffer will always be the ones we leave behind.”
As such, Kia Leng advises that it is always good to a step back and relook into the planning that you have in place. Kia Leng is the Director of Sales (MDRT) at Chamberwealth Financial – a financial advisory focused on your needs.
With all that being said, it is also wise to not enter into any commitment that you are unsure or lack the knowledge to. Different people have different needs during different phases of life. Whether you are taking up whole life insurance or term insurance, it is always good to check out a couple of companies where you are comfortable with, compare their quotes provided before making up your mind which company you would like to have yourself insured with.
As we are talking about a monthly premium payment or a yearly payment, also make sure you are financially disciplined, ready to set aside a couple of hundred dollars monthly for that 20 or 30 years before taking up a whole life or term life insurance policy.