Term vs. Whole Life: Why a Term Plan Might Be the Smarter Choice
Whole Life Planning Overview
Whole life planning is straightforward, providing lifelong coverage with a limited premium-paying term.
However, there are some important points to take note of due to the structure of whole life policies:
Decreasing Coverage and Slow Break-even: Coverage tends to decrease after a certain age, and it often takes 25-30 years to reach a break-even point on the surrender value with premiums paid.
As a result, the coverage or cash value in later life stages may be insufficient for both protection and cash growth.
Single Claim Limitation: Whole life plans typically provides only single claim. Once a payout is made—such as for a critical illness—there won’t be any remaining coverage for other situations like death.
With these two considerations in mind, life assured individuals may face high premiums though for limited years, but with limited benefits in the long run.
Potential Alternatives
A more tailored reward plan may be available for the life assured, depending on their priorities—whether focused on coverage or cash value.
What is their priority?
The following two scenarios illustrate this approach.
Coverage Focused - Forever Term Planning Overview
With term planning, there’s no cash value component, so the sum assured is guaranteed and unaffected by company par fund performance.
This approach benefits the life assured, by offering two separate term policies: one for critical illness and another for lifetime death coverage.
This structure ensures multi-claim coverage.
Even if a critical illness claim is made, the death payout remains intact. If no critical illness claims are made, the death payout is still guaranteed, as it is an inevitable event.
This approach may yield a higher return relative to premiums paid compared to whole life policies, offering stronger coverage and enhanced estate planning for the family.
Cash Value Focused - Term Planning Overview
If cash value and coverage are priorities, limited term planning till a certain age (65-75) may offer a lower premium and high coverage during important years.
Ideally, the longer the coverage, the better, if budget permits.
This approach may save on premiums compared to whole life plans.
These savings can be invested, potentially yielding high returns due to the long time horizon compounding effect.
With the investment - Should incident happens at a certain age after coverage ceases off, life assured would still have access to a significant, liquid amount for “coverage” payout or retirement.
This strategy provides a win-win situation: insurance coverage protects during the prime years, and a pool of accessible cash is available if needed later.
