What are Term, Whole Life & Universal Life?
A Thorough Comparison & Analysis
Since death is an absolute certainty, we should always ensure that we are sufficiently insured for that unfortunate event as to provide financial protection to surviving dependents after the death of an insured.
In today’s market, there are many types of insurance coverage. We are going to compare and analyse the types of life insurance. There is a traditional saying “Buy term and invest the rest” How true is this statement?
There are mainly 3 types of plans which covers Death;
Term Plan, Whole Life Plan and Universal Life Plan
Table of Contents
What is the purpose for Term Plan, Whole Life Plan and Universal Life Plan?
One of the main reasons why we get Term Plan, Whole Life Plan, or Universal Life Plan is to protect our income.
If you’re a sole breadwinner of the family and have someone who relies heavily on you just like your children or parents, or undertaking liabilities.
If you have children, the best gift to give a child could be life insurance.
All this can only happen with your income… but… what if something happened to you and how would you be able to find money to replace income lost during that period?
Here are some of the typical commitments, goals and expenses you may occur during your lifetime:
So, in addition to the medical costs, don’t forget… You still have to account for these other commitments and goals, which could be a huge amount
What does Term Plan, Whole Life Plan and Universal Life Plan covers?
The basic of all coverage and pretty self-explanatory.
However, exclusions do apply such as the clause of suicide: “if death is caused by suicide within 1 year from the date of the policy issue or the date of reinstatement, whichever is later, there will be no compensation.”
Death usually goes hand in hand with terminal illness coverage.
Terminal Illness refers to a situation in which you have a medical condition that, in a medical professional’s opinion will lead to death within the next 12 months.
One concern is that during the final stages of a terminal illness, modern medical technology can potentially prolong life. However, the dying process can not be prevented.
You have an option to apply for an Advance Medical Directive (AMD) if you do not want any extraordinary life-sustaining treatment to be used to prolong your life.
Critical Illness claims may be higher than death claims. That’s why Critical Illness’s costs are higher.
The insurance industry standardized the definitions across Singapore’s life insurance companies to make Critical Illness coverage clear and straightforward.
Critical Illness plans will only pay out if one of the 30+ Critical Illness definitions is met by the patient. If one has a “less aggressive” illness, he/she is not eligible for any payout. That’s when the gap can be bridged by early critical illness coverage.
Technically, Early Critical Illness plans are easier to claim but are they justified by high costs as it is one of the most expensive forms of insurance.
Insurance companies can have different definitions for their TPD coverage (see the policy contract). But as a broad definition, the name suggests what it covers: TOTAL AND PERMANENT disability.
Here’s an example you may have seen before of a clause. It is not conclusive and there are usually multiple definitions in most contracts.
If the Assured is aged seventy (70) next birthday and below and has suffered total and irrecoverable:
a. Loss of the sight of both eyes; or
b. Loss of sight of one (1) eye and loss by severance or loss of use of one (1) limb at or above the
ankle or wrist; or
c. Loss by severance or loss of use of:
i. Both hands at or above the wrists; or
ii. Both feet at or above the ankles; or
iii. One (1) hand at or above the wrist and one (1) foot at or above the ankle.
It is also commonly relatable to “Severe disability”, which is when an individual is unable to perform at least 3 out of 6 Daily Living Activities (ADLs). independently, with or without mobility aids (e.g. walking aids, wheelchair). This means that the individual will require the physical assistance of another person for the ADLs.
In Singapore, we have ElderShield and CareShield Life (to be launched in 2020) schemes. Both of these plans provide a payout when it is found that an individual is severely disabled.
What is Term Plan?
Term insurance is a product that is quite straightforward which provides cover for a fixed term (policy term) and a fixed premium. Upon reaching the end of the policy term, the coverage will usually stop and the plan will end.
It is possible to use term insurance to cover temporary requirements. The term of premium payment is the same as the period of coverage. This implies that you will need to pay the premium for the entire time you are covered.
There is no cash value in the term plan but it offers a much higher amount assured at a cheap rate to make up the difference.
If an unfortunate strike happens during the insured period, a lump sum will be paid out that will help relieve the insured and family financial burden.
Types of Term Plan
Here’s a short overview of the ones you should’ve heard before:
1. Level Term Plan
This would be the plan that most people are familiar with and interested in.
Basically, throughout the term, the coverage remains the same and only ends when the term is up. You may determine how long the term will be, and most Singaporeans will choose at least a term up to their retirement age.
2. Group Term (Employee welfare & MINDEF Aviva)
Group insurance is pretty common if you’re an employee or have been through National Service (NS).
Employers typically offer group insurance as a form of welfare benefit for their workers, and this coverage can be enhanced if necessary.
However, such benefits will terminate if you leave the company (or forced to leave). There’s a chance that you may be disqualified or rejected if you choose to apply for your own personal insurance afterwards if there is any pre-existing, leaving you in a state of “no man’s land”.
That’s why most people would still get their own personal insurance, despite being covered by the company.
You were given an option (or not) as an NSF to take up group term offered by Aviva, a partnership with MINDEF and MHA.
3. CPF Dependent Protection Scheme (DPS)
Dependent Protection Scheme is an opt-out scheme that is automatically applied to eligible CPF members.
Dependent Protection Scheme protects covered members for a maximum sum assured of $46,000 up to aged 60. If the insured members pass away or suffer from Terminal Illness or Total Permanent Disability (TPD), the Dependent Protection Scheme benefit will be paid to insured members and their families.
You will be automatically included under Dependent Protection Scheme if you:
- are a Singapore Citizen or Permanent Resident;
- are between 21 and 60 years old; and
- have made your first CPF working contribution.
4. Mortgage Reducing/Decreasing Term
Mortgage reducing/decreasing term is also known as Mortgage Insurance / Decreasing Term / Mortgage Reducing Term Assurance (MRTA).
The coverage decreases year by year, as the name suggests, and ends at $0 coverage when the term is over. The reason for this is because your liabilities decrease as you pay off your loan, which corresponds to how much you ought to cover yourself.
5. Early Critical Illness (ECI) / Critical Illness (CI) Plans
This is pretty straightforward as the name suggested.
If the only shortfall in your insurance coverage is for critical illnesses, the best value for your money will be a standalone Early Critical Illness (ECI) plan or a Critical Illness (CI) plan.
However, if your insurance coverage has an overall shortfall, alternative options such as Term Plans or Whole Life Plans while adding early critical illness or critical illness as a rider can provide a better value for your money.
What is Whole Life Plan?
Whole Life insurance, as the name implies, covers one for the whole life. Whole Life insurance is used in the case of death to safeguard the life insured.
The premium you paid is divided into two parts. A small portion of your premium will go to the insurer’s participating fund (or into investments for Investment-Linked Policy) and the remaining portion will be used to pay the cost of insurance coverage.
The premium you need to pay for new Whole Life insurers is generally fixed for 5 years to 25 years. This implies you only have to pay for 5 years or up to 25 years and have coverage of your lifetime.
Types of Whole Life Plan
There are 2 main types of whole life insurance policies: Participating and Investment-Linked Plans.
Participating Whole Life Insurance is low savings and high insurance coverage. Since there is a savings component in Whole Life insurance, there will be a certain money value declared annually by the insurer as a reversion bonus.
The death benefit will then have a guaranteed portion which is the sum assured of the policy plus a non-guaranteed portion of reversionary bonus. The amount of reversionary bonus is based on the performance of the participating fund.
One of the main reasons people use it as it accumulates cash value. This means you would receive payouts if you were to surrender in the future. The amount you get back depends on the length of time the policy has been held The longer you keep, the greater the cash value.
The other reason is that the coverage will last for life. This is the most common type of whole life insurance.
The other type of whole life insurance is linked to investments. This is also commonly known as Investment-Linked Policy (ILP).
Part of the premiums you pay are for insurance coverage, the rest will be for investment.
You can still retain this plan for life (or up to 100), but the insurance charges for the High Coverage ILP usually go up with age and get insanely expensive until it eats massively into the value of the investments for the front-end load type of ILP.
Since investments are volatile, the “cash value” inside will rise and fall depending on the conditions of the market and is therefore not guarantee.
For the term plan, the amount of coverage can be much higher than the whole life plan (within the same budget) as you pay with pure protection. Term plans with sum assured amounts of $1,000,000 or more are common these days.
The whole life plan premiums will be sky-high for the same level of coverage. And, of course, to match your budget, you can lower your coverage.
However, whole life plan has a “multiplier” feature, which provides whole life coverage for the assured basic amount and an enhanced coverage (usually a multiple of the assured basic amount) for a specified amount of time (usually up to age 80).
Examples of how a multiplier features works in Whole Life Plan will be elaborated at the next section.
There are various lengths of coverage that you can pick for the term plan. It may be customised years, 10, 20, 30 years or even up to the age of 99, etc. But there will be no coverage after the coverage period ends.
The coverage period usually lasts for life or up to the age of 100 in a whole life plan. It is particularly useful for people with concerns about the critical illness. Since the probability of it being striking is higher when you’re older, you’d like to have this cover beyond your retirement age.
In this aspect, both term and whole life plans are similar.
Death, total & permanent disability, critical illness and early critical illness are the main riders or cover you can add. These are just about everything you need.
In the term plan, the amount of the death benefit will be as per the contract (the amount assured to you).
In the whole life plan, the payout will usually be the standard amount guaranteed (or enhanced cover) plus any bonuses accrued throughout the plan. When time goes on, the payouts will also increase.
Since the term insurance offers only pure coverage, the plan does not accumulate any cash value. So if nothing happens at the end of the day, you don’t get anything back.
“Buy term invest the rest”, this philosophy will give you more flexibility when separating all aspects of your need for protection and accumulation, as they may differ.
The whole life plan is a combination of protection and accumulation, all in one plan.
There are guaranteed and non-guaranteed values in the portion of the accumulation (or cash/surrender value).
It may make more sense for those who are more conservative and unwilling to take any form of investment, as your money does not lose to inflation in the bank.
Let’s say you’ve got a $5,000/year fixed budget:
With this budget for a term plan, it can give you a few million coverages (depending on age and other factors).
Because part of the premiums goes to insurance coverage or accumulation for a whole life plan, the coverage you can get will probably be just a few hundred thousand.
In conclusion, premiums for term plans are cheaper than whole life plans for the same level of coverage.
Term plan’s premium payment period is usually the same as the policy term.
You can cancel the plan if you no longer wish to have the cover or let the policy lapse if there are no premium payments. Since it does not accumulate cash value, there will be no penalties Just that you’re no longer going to enjoy the cover.
For the older days, “pay as you go” was the only choice for Whole Life plan. These whole life plans’ premium payment is for life. One downside is that you will still have to pay for the premiums when you retire. And if you can’t pay, you can pay the premium with the cash value you’ve accumulated in the plan If the value of the money is depleted it will eventually lapse
There are limited payments options for the newer Whole Life plan these days as you can choose to pay terms of 1 to 25 years or up to age 65, etc. After the premium payment period is up, the plan is already “paid for.” You can hold the plan until the time you want to surrender or if anything happens.
It offers much more flexibility to accommodate people’s different needs.
How does a multiplier feature works in Whole Life Plan?
Since life insurance tends to be more important as you work and provide for your family during life stages, insurers will provide a multiplier that allows you to increase your guaranteed amount for a period of time.
Below is an example of a $200,000 sum assured whole life plan with 4 times multiplier ($800,000) on top it.
– The sum assured coverage for life will be $200,000
– The 4x multiplier effect which enhances the coverage by another $800,000 will ends at age 80
When does Whole Life plan work the best?
Are you the Term Plan person or the Whole Life Plan person?
The following are groups of people who think it makes the most sense for them if you’re not completely sure. The list may not be exhaustive.
There are mainly 3 types of people under this group…
Firstly, one of the key concerns that people are against the concept of term plans is that when the policy term is up, they are no longer covered, and if anything happens, they would not be able to claim. Because of this, they would prefer to have a guaranteed but a lower life-long coverage amount.
Secondly, they think the premiums are “wasted” for the term. Especially when they have been paying the premiums for years. So they want at least to have some cash value back.
Lastly, it is advisable to invest the rest with a term if you are not going for the whole life plan. But some people don’t want to take risks in any way or park their money elsewhere which are not able to counter inflation. So a better option can be delivered through the whole life plan.
There are several ways to leave your legacy for the next generation(s).
One option is to get a term up to the age of 99. The premiums you pay(when you are older) are much higher as there is a higher likelihood of claiming.
and what if you live beyond that age?
All the premiums for which you paid will go down the drain as there’s no payout.
That’s why it can be useful for whole life plan as you are covered for life. You’re going to get a payout even if you’re living over 100.
It can be a wonderful gift to acquire a whole life plan for a child.
Let’s say if you’ve chosen the limited pay option of 25 years, as your child grows up, you can pass the policy over to him when it’s fully paid. And in the future, your child will have several choices to do with it.
Firstly, he can keep it for income protection needs. It will also be cheaper by getting it when he is young and most likely has a good health record. So he doesn’t have to wait until he’s grown up where it’s going to be much more expensive (especially when you know he’d still need insurance).
Secondly, it’s a blessing as the cash value continues to grow and he can choose to “cash-out” the plan when he hits retirement age or beyond.
This is why when the child is born, most parents apply for a whole life plan for their child.
If you have a decent budget and substantial money in the bank, and you have no idea what to do with it.
Instead of going for a term plan, you can allocate it to a whole life plan.
Because if you put your money in the bank, it will lose to inflation and will not gain higher returns for you. The cash value grows in a whole life plan. You’re making some of your money work harder for you at least.
Critical illness, especially the occurrence of early critical illness, is higher than death or TPD. And as you grow older, there’s a higher risk. This is why the probability of claiming is also higher (which explains why it is more expensive).
The problem with a term plan or a standalone Early Critical Illness plan is that you will still have to pay the premiums after the retirement age, so it has to come out of your retirement funds and money surplus (if any).
For those who don’t like that concept, whole life plan offers lifetime coverage with limited-pay option.
Downside of Whole Life Plan
If you want to take up a policy, there’s just one thing you need to know.
And that is… Early termination.
You should only plan to take it up if you can afford the premium and the premium term.
As buying a life insurance policy is a long-term commitment, early termination of the policy usually involves high costs and the surrender value, if any, that is payable to you may be zero or less than the total premiums paid.
But another perspective: this acts as a form of discipline. Having the plan ensures you have long-term coverage plus some form of savings. In the future, you will be able to access some savings when you most need it.
What is Universal Life Plan?
Universal life is a type of whole life plan which is’ interest-sensitive’ that offers a death benefit and an opportunity to build cash values that you can borrow from or withdraw. The cash values at a declared rate earn interest, which can change over time. Nevertheless, most universal life plans guarantee a minimum interest crediting rate.
Such arrangements give you the flexibility to help you achieve your financial goals. You can choose the amount method and timing of your premium payments. It is, therefore, necessary to review the performance of your plan regularly to ensure that it continues to support your financial objectives.
On top of it, Universal Life plan is one of the best solutions for legacy planning and retirement planning. It provides guaranteed returns and liquidity in a volatile time and can grow your wealth and preserve your legacy at the same time, for several of the following reasons:
You can spend the policy value and not worry that you do not leave enough for your children. As they will get the insurance payout eventually.
As the crediting rate offered by most insurers are generally higher than the bank (currently about 4% per year), your money works harder for you.
Subject to the policy’s terms and conditions, you can spend (partial withdrawal) and save more (top-up) during the entire policy term.
Most traditional universal life insurance products invest 100% in bonds. That means you are not subjected to the stock market volatilities. There is no bonus declaration, only interest credits.
Similar to life insurance policies, most universal life insurance products are covered under the Policy Owners’ Protection Scheme.
Because most universal life insurance products allow you to change the life assured, it means you can pass down the universal life policy to your next generation. In other words, your policy can outlive you.
Overview between of differences between types of Life Insurance Coverage
How much Life Insurance coverage should I get?
The mortality protection gap is the shortfall in the amount of money you should be providing to meet the financial needs of your family in the event of your death.
The Critical Illness protection gap is the shortfall in the amount of money you should be providing to meet the financial needs of you and your family before you can return to work.
Do you know your shortfall amounts? Life Insurance Calculator by the Life Insurance Association (LIA) will estimate how much additional insurance you need.
Factors to consider before taking up a Term Plan, Whole Life Plan or Universal Life Plan
The pros for life insurance is you can pay off the premium during the early age of life which most likely when you have the capability to pay the premium.
This statement has two parts. “Buy term” analysis is done in this post. You will save some cost by buying term insurance. The second part of this statement is to “Invest the rest”. You need to invest the rest. If you are a spender that spends the amount that you save from buying term insurance, then I would rather prefer you go get life insurance.
Some Whole Life/Term insurance allows you to add attachable riders such as Early Critical Illness rider that covers for a lifetime. Riders may be a considerable option if you are looking for protection against Early-Stage Critical Illness.
Are Term plan / Whole Life plan / Universal Life plan worth it? Do you have to get one? Ideally, you have learned enough about life insurance so that you can make an informed decision.