Previously, we uploaded a Personal Finance Evaluator to help readers understand their current financial situations. One specific part of our evaluator that we paid more attention to is insurance as insurance is a financial instrument. The question comes up often, whole life plan or term life plan?
The reason why we narrowed in on insurance spending are
- it is an important tool that can divert risk away from us
- most people spend too much on it and/or getting too little coverage
- it is one of the most flexible parts of our expenses that we can easily reduce
What is Life Insurance?
Well, first thing first, what is life insurance? Life insurance is an insurance that is not for you. You don’t get to benefit from it.
It is an insurance that pays a sum of money upon your death.
Since you will be dead by the time the money is paid out, one should look at Life Insurance as an insurance for your dependents. Essentially, you are leaving money behind for other people.
Do you need one?
That depends on this question;
- Do you have any dependent?
A dependent is someone that relies on you for their livelihood. Examples are children and elderly parents.
Therefore, if you have a small kid, there is a need for you to insure your life for your kid. However, there is no need for you to insure your kids’ life as nobody is financially dependent on the kid.
Of course, that been said, not having a need doesn’t mean you cannot go ahead to buy it, it’s a choice.
What is Whole Life?
Whole life insurance, as you may have guessed, means that you would be insured for your whole life.
(You don’t say. Come, I clap for you.)
Usually, how it works is that you will have to pay premiums until a certain age and you can stop paying.
Whole Life plans usually have cash benefits as well, meaning to say, at any time, you can surrender your policy in return for cash.
The variable here is simply, how much will you get back? Most of the time, you have to hold onto the policy for many years before you can even break even in terms of the amount of premiums paid.
Obviously, the moment you surrender your policy, there is no more coverage.
Due to it’s nature, Whole Life policy are very expensive. Premiums from a comparable Whole Life policy vs a Term Life policy can differ by more than 100%.
What is Term Life?
No puns here, so it’s better. Thumbs up. Term life insurance is a life insurance for a period of time, hence, a term.
In comparison to Whole Life insurance, Term Life is MUCH MORE SIMPLER.
Decide how long you want to be insured, decide how much you want to be insured. As long as you pay, you are insured.
Once you stops paying, your insurance stops.
As simple as that.
There is no cash benefit, no age that you stop paying and what not. Pay and you are insured.
Simple and straightforward.
Due to it’s nature, Term Life insurance are a lot cheaper than Whole Life and therefore, provides you with more coverage per dollar. Allowing you to make your same dollar work harder for you and provide you with additional coverage.
Our preference is definitely term insurance. Whole Life insurance has advantages over term life insurance, but the biggest advantage term life has trump whole life insurance hands down.
Insured sum is dependent on the number of dependents that you have and how long you would have to support these dependents. Therefore, the typical average Singaporean family would usually need a 6-figure coverage. You can download the Personal Finance Evaluator to calculate the coverage you need.
Term life is simply cheaper, more straightforward and has higher coverage.
Example: For Singaporean regulars, NSFs and NS-man, take a look at the Aviva Mindef insurance, the one that we were forced to buy at gun-point. Ok, fine, bad pun.
It is outright one of the cheapest, if not the cheapest policy in the market, and it’s only available for the Singaporean Son and volunteer corps. It only cost 40 bucks/month to get life coverage of $1 million. In comparison, paying the same amount of premiums, will probably get you a $50000 coverage for whole life plan.
Investment or Insurance
One advantage of the Whole Life Insurance is the cash benefit. Your policy has cash value. You can surrender it for money, whereas term policy do not have such function.
If that’s the case, is Whole Life better and more suitable for you?
Therefore, the question you have to ask is, are you buying insurance or investment? Whole Life insurance is an insurance. Do not mix them together.
So what if there are cash benefits? The amount of extra premiums that you pay for a Whole Life insurance adds up across the years to the extent that it makes me wonder, “Isn’t it better to keep that money in your own pockets?”
My Pocket vs Their Pocket
It is this reason that Term Plan is our choice anytime over Whole Life Plan. Whole Life Plan is simply too expensive to justify the cash value.
Why not save the extra premium and keep the cash in your pocket, instead of keeping it in the pocket’s of the insurer for a few decades.
Money in your pocket is your money. Money in their pockets are not your money.
Yes, there will be further arguments from some financial advisors that you can grow your money through the Whole Life plan, the guaranteed and non-guaranteed portion of things, then it goes back to the question, of “Insurance or Investment?”
If you want to grow your monies, there are so many other better alternatives, even the Singapore Government Savings Bonds provides equal growth and much more liquidity and flexibility.
And of course, if you want to grow your money, you can look at this.
I will end of with,
Money in my pocket is better than money in other people’s pocket.