Term VS Wholelife: Is Wholelife Insurance Better For You?
Updated: Sep 28, 2022
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Whenever it comes to life insurance, the most common question that clients would ask is the question of: “Which is better for me? Term life or whole-life”
In my other video, we’ve looked at the quantitative comparison of whole-life versus term life insurance and also the considerations to have as to whether a term life will be better for you.
In this article, we will look at 3 considerations to have as to whether whole-life insurance will be better for you.
1. You need this coverage for a long duration of time
From a pure cost standpoint, whole life insurance is better for you if you need this coverage for a long duration of time for purposes such as income replacement or legacy planning.
To illustrate, let us take a look at 2 different scenarios and compare the lifetime cost.
The first scenario is if you purchase one term insurance that covers you till the age of 70 years old while the second situation is if you purchase two-term insurance to replicate a whole-life insurance behaviour.
For the first scenario, the difference between the total premiums payable between term life and whole life is about $25,000.
Essentially that $25,000 in cost is for the coverage of $100,000 beyond the age of 70 years and the cash value factor that I didn’t mention.
For the second scenario, a whole-life plan will be cheaper than a term life insurance plan and on top of that, there is still the cash value factor that I didn’t talk about.
All things considered, if you need coverage for a long time, whole life insurance might be better for you than term life insurance.
2. You want to have a lifetime coverage
If you want to be covered for life, whole life insurance will be better for you as the cost of term life insurance would not make sense.
Theoretically speaking, you do not need any life insurance coverage beyond your retirement.
The reason for saying this is because you will be receiving an income from your retirement portfolio and even if something were to happen to you, your lifestyle will not be compromised.
So why then would people want to have coverage beyond their retirement?
There are two reasons for this:
The first is if they want to leave a legacy for the next generation
The second is if they want to create a buffer to pay for unexpected expenses that might pop up when they suffer from a disability or a critical illness.
Examples of unexpected expenses are things like the cost of home modifications, change in diet, caregiver expenses and also perhaps alternative treatment that are not claimable under hospitalization insurances.
That said, while there is no need for life insurance coverage beyond retirement, having a certain amount of coverage would be good for you as it acts as a buffer to provide for the unexpected expenses that we didn’t previously provide for.
3. You do not know how or have the time to invest
If you need to be insured for a long duration of time AND you do not have the know-how or time to invest, you will be better off with whole life insurance.
The reason for saying so is that for term life insurance to be quantitatively better than whole life insurance in the area of payout receivable and the surrender value, you need to at least be able to earn a yearly return of 4 to 6%.
While in theory, earning 4,6,8 or even 10% a year seems very doable.
In practice, it is not as easy as it seems to be large because of the lack of discipline and emotional control that may impede your performance.
Also, for you to earn a return of 4 to 6% a year, you will need to take on additional risk that, chances are, is higher than the risk of a whole-life plan.
That said from a risk-adjusted standpoint, I believe that a whole-life insurance plan would make more sense especially if you do not have the know-how or time to invest.
So, there you have it, these are the three considerations to have as to whether or not a whole-life plan is better for you.
To recap, the first is if you need to be covered for a long duration of time, the second is if you want to be covered for life and the third is if you do not know how or do not have the time to invest.
In these situations, a whole-life plan might be better for you as compared to a term-life plan.
If you do not know how to get started or do not have the time to do your market research, you can consider engaging an Independent Financial Advisor who can help you make sense of the market and shortcut your insurance planning process.
To find out more about how you can benefit from my financial and insurance planning services, you can check out what I do on my website:
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Daniel is a Licensed Independent Financial Consultant with MAS and a Certified Financial Planner (CFP®)
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This article is meant to be the opinion of the author
This article is for information purposes only
This article should not be seen as financial advice
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