Whole life insurance pros & cons: Is it ever a good idea?

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Or maybe you’ve heard about this whole vs term life insurance debate, and thought to yourself, same same but different. After all, they’re both life insurance — how different can they get?

Actually, whole life insurance is quite a different beast altogether. In this article, we’ll go through the pros and cons of whole life insurance (versus term insurance).

What is whole life insurance?

At its core, life insurance is simply a contract between you and the insurer, where the insurer agrees to pay out a fixed sum of money if you die (or become terminally ill, or totally and permanently disabled).

The simplest form of life insurance is called term life insurance or term insurance.

As the word “term” suggests, you indicate how long you wish to be protected for — let’s say 20 years — and the contract is valid for that period.

When the policy comes to an end, you can renew it, or your protection ends. Of course, if nothing happened to you during that 20-year period, you don’t get a payout.

So, if that’s the case, whole life insurance, from the looks of it, gives you lifelong life insurance protection, right? Well, yes, but that’s just part of the story.

Whole life insurance also has an additional financial benefit apart from the usual death payout. You can choose to nullify your policy in exchange for a separate payout (known as “cash value” or “surrender value”).

Is whole life insurance a good idea?

Well, some form of life insurance is a good idea if you have dependents to support. If you die, the payout would help tide them through the short term. And if that’s all you need, term life insurance is a perfectly good place to start.

You would probably only consider whole life insurance if you’re interested in the additional features.

That said, whole life insurance can be a huge commitment, so let’s go through its pros and cons below. In summary, they are:

  • Pro: Practically lifelong coverage
  • Pro: Has cash value
  • Con: Expensive premiums
  • Con: Longer commitment
  • Con: More complicated as a product

Pro 1: Practically lifelong coverage

Good stuff first. The most obvious pro of whole life insurance is that it offers practically lifelong coverage. Most whole life insurance policies will either cover you for the rest of your life, or up to a ripe old age like 99 or 100.

That helpfully eliminates the need to decide on when you want your protection term to end. Plus, it’s almost a given that you’ll die by then, so your family will almost certainly get a payout. (Whether they need it then is another matter altogether!)

That being said, there are some term life insurance plans that can also cover you up to a ripe old age, as old as age 101. Here’s an example.

Pro 2: Has cash value

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One of the key features of whole life insurance is that it also helps you accumulate cash value over the years. Thus, people think of whole life insurance policies as a hybrid insurance-investment product.

The idea is that you enjoy life insurance protection while you still have dependents. But when you reach a point where they’re no longer depending on you, you can choose to cash out your policy.

The whole life insurance plan then pays out a cash value or surrender value, though there is no guarantee that you’ll get good returns if you cash out early.

This cash value is somewhat variable. It may comprise a guaranteed component and/or non-guaranteed bonuses or dividends, which depend on the performance of the insurer’s investments.

The hope is that this cash value will be greater than the total amount of premiums you have paid in over the years.

Con 1: Expensive premiums

The major downside to whole life insurance is just how expensive the premiums are compared to term insurance.

Term life insurance premiums can be in the $18 to $100 a month range for a 30-something. With whole life insurance, you’d typically need to pay at least 10X the amount (so anywhere from $200 to over $1,000 a month!) for the same amount of coverage.

The reason whole life insurance is so expensive? Cash value.

Every time you pay your premium — let’s say it’s $1,000 — the insurer allocates a portion — say $100 — to insurance coverage. The remaining $900, after fees and commissions, go into investments. This builds up the cash value of your whole life insurance policy.

Con 2: Longer commitment

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Term insurance is sort of a pay-as-you-go product — just keep paying your premiums over the policy term and you continue to get covered. If you stop paying, your coverage ceases, that’s all.

Whole life insurance is a much longer commitment than term life insurance, since you can’t just pick a date for the policy to end. And that’s worrying when you have expensive premiums to pay every month.

Cash value is also a compounding factor. Although you can choose to surrender the policy and cash it out midway through, the cash value might not be great.

That said, some whole life insurance policies have features to make things more flexible — but you need to figure them out in the first place. Which brings us to…

Con 3: More complicated

As a hybrid insurance-investment product, whole life insurance is also a whole lot more complicated.

First, there’s the whole cash value thing to figure out. What’s the guaranteed component? How much can you expect in non-guaranteed bonuses? When do you get the (non-guaranteed) dividends? What are “multipliers”?

Some whole life insurance policies let you make partial withdrawals at a later point, but that may affect your cash value.

Meanwhile, certain policies offer “premium holidays” and/or “limited pay” which let you take a break from paying hefty premiums if your get retrenched or after you retire. But again, figuring these out is far from straightforward.

A sampling of whole life insurance in Singapore

Obviously, we can’t compare all plans out there in this one article, but to give you an idea of what’s out there, here are some whole life insurance plans available in Singapore right now.

* The above premium estimates are for a 30-year-old male non-smoker with a policy premium term of 20 years, $100,000 sum assured and X2 multiplier.

Is whole life insurance right for you?

It depends on what you’re hoping to get out of your policy. Term insurance is generally more than sufficient (and a lot more cost-effective to boot) if you’re looking for plain old financial protection.

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But whole life insurance might be for you if…

You are using it as a way to help you accumulate wealth for the future. The cash value portion would be important to you. You can’t quite replicate that with just term insurance alone — you’ll need to manage your own, separate investments as well.

You wish to have life insurance protection for your whole life rather than up to a certain age. For example, if you have family members who will be financially dependent on you throughout your entire life. Some whole life policies even allow you to pre-pay the premiums upfront/in a short period, so if anything happens to you later on, you know that your dependents be provided for.

You can afford the premiums, which tend to be much higher than term insurance premiums. Only go for whole life insurance if high premiums are not an issue for you, now and in the future.

Are there alternatives to whole life insurance?

Yes. But the exact alternative depends on what aspects of whole life insurance appeal to you most.

If you’re interested in lifelong insurance coverage, consider a term life insurance policy that can cover you up to a ripe old age.

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Examples are SingLife Term Life Series Three (up to age 99), Prudential PRUActive Term (up to age 100), and AIA Secure Flexi Term (up to age 101). Note that all these insurance policies do NOT contain cash value.

If it’s the wealth accumulation aspect that interests you most, consider separating your insurance and investments, along the lines of “buy term & invest the rest”. Simply buy your own low-cost term life insurance, and allocate the remainder of your cash towards long-term, passive investments.

There are also other types of hybrid insurance products you can look into, such as endowment plans (which focus much more on wealth accumulation) and retirement plans (where you secure monthly/yearly retirement payouts).

Really want a whole life insurance policy, but can’t afford it? Big-name life insurers like AIA, Great Eastern and Prudential offer “convertible” term life insurance policies.

These policies can be converted to whole life plans later on without the need for medical underwriting. That’s one option if you actually want whole life insurance but can only afford term life insurance right now.

This article was first published in MoneySmart.