By now, you probably have a good understanding of how important life insurance is. But do you know which type of life insurance policy is the right one to choose? What are these “investments” my financial planner is telling me about? Do I even need them?
If you already have a good grasp of your financial situation, know what your future financial goals are – it’s a bit easier to choose between a term life, whole life, or whole life investment-linked policy (ILP) and not just choosing a plan that is “recommended” but instead is just going to paying your insurance agent’s commissions.
Whole Life Insurance vs. Term Life Insurance vs. Whole Life (ILP) – Which is Better?
That’s an important question you’re probably asking yourself right about now. So which life insurance policy is better? The answer to that question is one you’ve probably heard a thousand times before in your life – it depends.
It depends on many financial situation and your future goals. Because the big choice you’ll have to make when choosing a policy is this – do you want your life insurance to ONLY protect you and your family’s financial well-being, or do you want your life insurance to protect AND enhance it?
That’s the question you (and your financial advisor) should focus on when looking at all three life insurance policies.
Here is how the three policies compare to each other:
|Term Life Insurance||Whole Life (Par)*||Whole Life (ILP)|
|Policy Objective(s)||Protection – Your premiums ensure your insurer pays out the assured sum if you pass away within the policy period||Protection + Savings – Part of your premiums goes towards your assured sum while another part goes into a fund that your insurer invests and grows||Protection + Investment – Part of your premiums goes towards your assured sum while another part is invested into sub-funds of your choosing, which hopefully grows|
|Period of Coverage||By Term (ex. 5, 10, 20 years)By Age (ex. up to age 65, 75, 99)(Varies by insurer)||Full-life coverage or up to the age of 99|
|Basic Coverage||The majority of life insurance plans cover death and permanent disability. However, the payment schedules and|
|Policy Cash Growth||None||Possibility of annual bonuses based on the performance of the insurer’s fund (bonuses are not guaranteed)||Possibly of policy cash growth depends on the performance of the sub-funds you invest in (policy cash growth not guaranteed as investments are subject to risk)|
|Policy Payout||Insurer pays out a lump sum in the event you pass away during the period of coverage||Insurer pays out a lump sum (sum assured) plus any accumulated bonuses||Insurer pays out a lump sum (sum assured) plus the cash value of investments (note: some insurers might only pay the higher of either the sum assured or value of investments)|
|Payout Upon Early Surrender of Policy||None||Insurer will only pay cash value of your policy plus any bonuses up to point you surrender your policy (which will be less than guaranteed amount to be paid upon death of the insured)||Insurer will only pay the cash value of investments up to the point you surrender your policy|
|Borrowing Options||None||Some insurers allow you to take out a policy loan up to a certain percentage of your policy cash value||None|
*Note: Whole life non-par policy is not presented in this list. However, items under whole life (par) would generally be the same except that no bonuses/cash dividends would be paid, but your policy would still build up cash value over time.
Look at the Advantages and Disadvantages of Each before Choosing a Policy
Knowing the advantages and disadvantages of each life insurance policy is essential if you want to choose the right policy. All three types will provide protection against unexpected events that endanger you and your family’s financial well-being.
But it’s your mode of building up your retirement savings that’ll play a deciding role in which policy to choose.
Will you pay less for a term life policy and build up your nest egg through a diversified investment portfolio?
Or will you use a whole life (part) or whole life (ILC) to help you? Those are questions you should think about when making your decision.
Here are the advantages and disadvantages of having a whole life(par), term life or whole life (ILP) policy:
|Whole Life Policy (Par)|
|Term Life Policy|
|Whole Life Policy (ILP)|
Based on your insurance needs, what type of life insurance policy suits you? Share your thoughts with us on Facebook! For even more useful information on everything personal finance, visit MoneySmart today!