Starter Guide to Financial Planning
Whole Life Or Term Life Policy? Which One Is Better?
This question has been around for a long time. And actually, there are no right or wrong answers.
There are differences in the policies hence it is important to know what they are. On paper, both will give you a payout when you have passed away when the policy is still in-force. That is one thing similar to the policies.
This article will give you some details on each policy and point out the difference.
Whole Life Policy
From the name itself, this policy will cover you all your life. Nowadays, whole life policy has a limited pay option. Meaning that you may pay premiums for 20 years but you will be covered for the rest of your life. Previously, if you wanted to be covered for your whole life, you have to pay premiums for the same duration.
To the next point, since you are covered your whole life but paying for only maybe a quarter of the duration, the premiums are more expensive compared to term life policies due to that reason. But that is not the only reason to why whole life policies are more expensive. The other reason is the fact that a Whole life plan is a participating plan.
Wait a minute, what are participating plans?
Every month you will be paying premiums and that money will land with the insurance company. Part of the premium will be used for insurance, it means the money is pooled in together and will be made ready if an insurance claim arises.
The other part will be used to invest in the insurance company’s pool of investments. Hence part of your money will be participating in the insurance company’s pool of investments. As a result, it is called a participating plan.
At a certain point of the policy duration, you are able to have a surrender value when you decide to withdraw the policy. Put it simply, after paying all the premiums over the years, you are still able to salvage some amount of money when you decide that the policy is no longer needed.
But do be aware that sometimes you do not get the same amount with what you have paid for. So do think twice when you want to surrender the policy. Or you can ask a professional to help you in this matter and have a second opinion on your decision.
Term Life Policy
Term life policies are cheaper than whole life policies; there is no doubt about that fact. But there has to be a reason why.
The answer is simple. They are a non-participating policy, which means that all of your premiums are put into the insurance pool. None of it is used to invest in the insurance company’s investment fund. Therefore it cost lesser.
On the other hand, due to the fact that there is no part of the premium is used to invest, that is why term life policies do not have a surrender value. Say for example you want to withdraw your policy; you will receive nothing in return, no matter how long you have paid for it.
Term life policies are flexible as you are able to select for how long you want to be covered. Some might want to be covered with insurance until their retirement age; therefore you may select your plan to cover you until age 65.
On hindsight, since you want to be covered until 65 consequently you have to pay premiums until 65 as well. Imagine still paying premiums when you are already 55 years old.
Your choice should depend on your situation
There you are, the difference of a whole life and term life policy. As a rough estimation, whole life policies might cost about 2 or 3 times more than a term life policy. But just keep in mind on how they are priced differently and the reason for it as well.
Which is better? It depends on you, not the policy.
Say, for example, you are a 25-year-old and just started working, buying a whole life policy might not be a wallet-friendly option. Therefore you might want to opt for a term life instead.
Or perhaps you are the kind of person who is defensive minded, and you rather be safe. Therefore buying a whole life is a better option, as you do not want to worry about the duration of your insurance policy and want to be covered as long as possible.
If getting either will be your first ever policy, it will be better if you seek an opinion on which will better suit you. And even if you bought a policy before and want to get additional coverage, ask a professional for advice in which will better suit you and your current situation.
Hope that this article was useful. Do share it with your family and friends. Till next time.
Disclaimer:
I am a financial adviser but I am not your financial adviser. Therefore, what is posted on this website, are my opinions and NOT to be taken as financial advice. Information provided might be relevant at this period of time but may be irrelevant due to alterations to rules, regulations or policies. The information provided is true to the best of my knowledge, but there maybe omissions, errors or mistakes.
