Whole Life vs Term Life Insurance

Whole life and term life are two well-known variants of life insurance policies. Though they share the concept of providing cash relief in the event of the policyholder’s death, there are some key underlying differences. Let’s take a closer look, shall we?

What is term life insurance?

Term life insurance (also referred to as pure life insurance) is a life insurance policy type that protects one’s dependents by providing them with a tax-free death benefit.

The most common term life duration is 10 years. However, one can sign up for 20 or even up to 30 years. Generally, in most term-life policies, the premium remains the same for the initial term (called level premium). This means that the policy's cost and payout are maintained throughout the plan's lifespan.

There are other variants of term policies, like decreasing term insurance (often known as "credit life"), under which premiums stay the same, but the death benefit reduces yearly.

How does term life insurance work?

In practice, term life insurance is usually purchased for a particular period term. This can be 1, 5, or 10 years. And if the insured party succumbs to death during the term, the death benefit is duly paid to the beneficiary.

At the end of the designated period, the policy expires and is either renewed, or a totally new one is purchased.

Essentially, annual renewable term life insurance always starts with a low premium that increases annually and is automatically renewable. On the other hand, level premium term life insurance policies guarantee a premium for 10, 15, or even 20 years before dramatically increasing upon renewal (presuming the insured party does not become an unacceptably high risk on the basis of their medical state, or age).

What does term life insurance cover?

This insurance involves the policyholder paying their insurance premiums with after-tax monies to provide death benefits intended to help one's beneficiaries replace a dependent's income in case they pass away. For instance, the money can be utilised to help pay for education costs or even daily expenses like groceries.

Term life insurance benefits

Here are some noteworthy advantages:

Affordable

Term policies are usually more quite affordable and can last until one’s child enters adulthood. Because of this affordability, it’s a great option for single parents who seek an additional safety net.

Flexible tenure

These policies provide flexible tenures as insurance companies typically set a maximum age limit for coverage, ranging from approximately 80 to 90 years. And the other beauty of this policy is that you can end it when you want to.

Convertible

These policies can be easily converted to other policies, even when you later have health issues or become uninsurable. This means they can be easily exchanged for, or converted to more permanent policies issued by the same insurance entity.

Customisable

Term policies are customisable for people with growing families. Essentially, you can customise it while anticipating the coverage that will be needed until your children have reached adulthood, for example.

What are the main disadvantages of term life insurance?

Following are some downsides of a term life policy:

• Because it eventually expires, you can find yourself having spent money you can’t recoup while still alive.

• There is no cash value to build up as you cannot use your investment in premiums to build wealth or save on taxes.

• Premiums can easily increase depending on your age.

• Its temporary coverage nature means you may need to take more than one policy in your lifetime.
  
  

What happens to term life insurance when it expires?

When a term life insurance policy expires, you can decide to renew the policy, but at higher rates for each year, you choose to renew.

This policy fully expires when you outlive the policy's length, without activating renewal. Essentially, afterward, you will not receive premiums paid into the policy unless you purchased a return of premium term life insurance policy.

What happens if you stop paying term life insurance premiums?

Some people can decide they no longer require term life insurance before they reach the end of their term and stop payments altogether. If you take this route, you will not receive any refunds unless you opt for a premium term life insurance policy.

How to buy term life insurance?

The following are some factors to consider before signing an insurance policy:

1. Decide on your coverage

You can use a free insurance calculator to get a clear estimate of your life insurance needs. Such a calculator should be able to consider the expenses you want to cover (like college tuition) and assets your family could use if you pass on (like existing life insurance). Alternatively, you can speak to an insurance provider or a Wealth Planner for some insight.

2. Pick the term length

Ensure to purchase a length that covers the number of years you desire coverage. For instance, you may seek coverage that lasts until your children graduate from university.

3. Some insurers offer no-exam options

Young and healthy customers always have more options. For example, they may be eligible for no-exam life insurance in contrast to clients in their 50s with a poor health history. The latter are typically required to take medical exams before being tied to a policy.

4. Ask for quotes

Always ensure you have quotations from several providers to have a good comparison baseline. Besides pricing, carefully examine the policies’ features like living benefits, or the ability to convert to permanent life.

Which is better - term life or whole life insurance?

This question is typically based on one’s preferences regarding permanence.

Nonetheless, whole life insurance is specially designed to protect you for your entire lifetime. This is why its premiums are considerably higher than term life policies to compensate for the higher mortality risk in one’s later years.

For more on whole life insurance, read ‘Life Insurance for First Time Buyers in Malaysia - Everything You Need to Know’.

Where to get term life insurance in Malaysia?

You can purchase term life insurance in Malaysia that delivers death protection for a defined time period from Prudential for a relatively small initial premium.

Prudential’s term life insurance products are well suited for short-range goals like coverage to pay off loans or protection for your children in their early years.

Conclusion

In summary, term life insurance offers a temporary coverage duration. However, after the initial term expires, policyholders can choose to renew the plan.

If a person passes away while the policy is active, the beneficiaries collect the death benefit. If not, the policy duly expires, and the life insurer has no further obligation to refund any monies. For this reason, term insurance is considerably cheaper than whole life insurance.