What’s The Difference Between Term Life, Whole Life And Investment-Linked Insurance?
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Getting life insurance for the first time?
It can be overwhelming. All you want is a plan that gives you a financial safety net, but there’s a dizzying array of products in the market and insurance jargon makes you feel like you’re sitting for an exam you didn’t study for.
Don’t worry. Here’s what you need to know about three common types of life insurance: term life insurance, whole life insurance and investment-linked policies (ILP).
What is term life insurance policy?
Term life insurance is a plan that covers you for a specific amount of time (i.e. a ‘term’). You can pick a term as short as five years, or as long as several decades.
It’s the most straightforward life insurance policy out of the bunch. You just need to pick a term (e.g. 20 years) and pay the monthly premiums for coverage. You won’t get any cash payout by the end of the term, but if you pass away or experience total permanent disability (TPD) before the term is up, you or your family will get a payout (also known as the ‘sum assured’).
Term life insurance is relatively affordable. If you are a young adult, it is generally cheaper than whole life insurance and ILP, but your monthly premiums will increase as you age.
What is whole life insurance policy?
Whole life insurance covers you for your entire life (typically until age 100, but you can also choose a shorter term).
It’s more expensive than term life insurance, but your monthly premiums won’t increase with age. Like a term life insurance policy, you (or your beneficiary) will receive the sum assured if you pass away or experience TPD before the term ends.
But here’s where it differs: throughout the policy term, you’ll accumulate a cash value. The premiums of a whole life insurance policy are higher because part of the payment goes to building this cash value. You can withdraw your cash value during your policy term; it will also be paid to you when the policy term ends. This cash value is a guaranteed payment.
There are two types of whole life policies:
- Whole life participating: A participating policy (your insurer may refer to it as an endowment policy) entitles you to part of the profits of a life insurance company – in other words, you participate in its earnings. You can receive these profits in the form of cash bonuses, which is in addition to the cash value. Cash bonuses may not be guaranteed. Your policy may also offer annual guaranteed payouts in addition to non-guaranteed cash bonuses.
- Whole life non-participating: A non-participating policy does not entitle you to part of the profits, so you will only receive your cash value without any bonuses.
What is an investment-linked insurance plan?
Under an investment-linked plan (ILP), part of your premiums will be invested in unit trust funds. You’ll have the flexibility to choose which funds you prefer to invest in.
Like term life or whole life insurance, you (or your beneficiary) will receive the sum assured if you pass away or experience TPD before the policy ends.
Similar to whole life insurance, an ILP has a cash value. You can withdraw your cash value during your policy term, cash it out when your policy ends or use it to pay your premiums. But its cash value is not guaranteed, because it depends on the performance of the unit trust funds you’ve invested in. This means that it can provide a potentially higher cash value than a whole life policy (or potentially lower, if your investments do not perform well).
Term life insurance vs whole life insurance vs ILP
Here’s a summary of differences:
| Term life | Whole life | ILP | |
|---|---|---|---|
| Premium | Low | High | High |
| Premium increases with age | Yes | No | No |
| Coverage length | Term (e.g. five years, 10 years, 20 years) | Lifelong (up to a certain age) | Lifelong (up to a certain age) |
| Cash value | None | Guaranteed | Depends on the value of the unit trust funds |
| Cash bonuses | None | Yes (participating policies only); not guaranteed | None |
Which insurance policy should you choose?
Each policy can be useful for different situations. Here’s how to decide between them.
Consider term life insurance if:
- You need something affordable
- You just need your life insurance policy to cover a specific period (e.g. until your child reaches adulthood)
- You don’t want to mix savings/investment with insurance; you are comfortable making your own investing decisions, and prefer to buy term insurance for its cheaper premiums and invest the rest of your money separately
Whole life insurance could benefit you if:
- You want life-long insurance coverage
- You can afford higher insurance premiums
- You want to build cash value by the end of your policy term (to fund your retirement, leave an inheritance, etc.)
An investment-linked policy can be beneficial if:
- You want life-long insurance coverage
- You can afford higher insurance premiums
- You are comfortable taking on the investment risk involved
- You have a long investment horizon for your cash value to grow and ride out market volatility
Ultimately, the best policy for you depends on your affordability, financial needs and goals – so make sure you’ve considered them before choosing a policy or talking to your insurance agent.
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