Term life vs. whole life cover: which one is for you?

Life insurance comes in a lot of forms so that the choice on what kind of insurance to buy may be a bit confusing. Two of the more common types of life insurance include term life insurance and whole life insurance. The first covers you for a specified period of time while the second provides a longer cover, usually for the whole of one’s life.

How It Works

Term life insurance is coverage for a specified number of years (usually 1 year, 5 years, 10 years or 20 years). After the term has ended, you can:

Consider the cover terminated
Convert it into a whole life or permanent life insurance policy
Renew the term where premiums will be set based on your particular situation at that time

Meanwhile, whole life (as the name suggests) is life insurance coverage for your whole life. You are guaranteed coverage for your lifetime. Whole life insurance also has a cash value component. Over time, the cash value on your policy grows. This cash value provides you with the ability to:

Take out a loan based on the policy’s cash value
Withdraw that cash value
Use the cash value to pay future premiums

We will not try to tell you which product is good for you – it really depends on your individual situation and financial capability.

Here is a graphic illustration of term and whole life premiums and death benefits/cash values.

As you will notice, the term life cover is a level term policy. You can also opt for an increasing or decreasing term life coverage.

We’ve put the various features of the two products side by side in a table for easier reference and comparison:

	Term Life Insurance	Whole Life Insurance
Purpose	Temporary life insurance cover. This addresses: The need to secure a mortgage or high-ticket loan Provide temporary life insurance cover while you cannot afford whole life cover	Life insurance for the whole of one’s life This addresses: Estate planning needs (where the proceeds of the insurance can pay for inheritance or estate taxes) Provide income replacement in the event of a breadwinner’s death To ensure that a parent or child who needs constant care has enough funds to survive even in the event of the parent/guardian/caregiver’s death
Length of Coverage	Depending on how the policy is set up, this provides coverage for as long as you are paying your premiums. There are also term life insurance products that have a fixed term (i.e. 20 years, 30 years, etc.) Please note, though, that there are some term life insurance policies that allow you to convert a portion of the sum insured into a whole life insurance policy.	This covers you for your entire life (hence, the name – “whole life”).
Premiums	Premiums are cheaper while the insured is young. However, the premiums increase as you get older.	Premiums usually do not change throughout the life of the policy. At the beginning, the premiums will be more expensive than term life and since there will be no increases based on the same type and amount of coverage, the premiums are cheaper than term life insurance as one gets older and less healthier.
Insurance Payout	Payout will be the amount of insurance coverage. This will only pay the sum insured if you die while the policy is effective. If you die after the policy is terminated, no payments are forthcoming. There will also be no refunds on your premiums if you outlive the coverage period.	Payout = Sum insured plus cash value at the time of death less any unpaid cash value loans. Payout is provided upon the insured’s death for as long as the policy is in force
Pros	The cheaper option at the onset. You can use the extra money you “save” by getting term life instead of whole life and invest it for higher returns than what is provided by a whole life policy. You can buy term and invest the “premium savings” yourself, presumably for a higher rate of return as compared to that offered by a whole life policy. Premium savings, especially if you opt for a decreasing policy	Cash value accumulates over time. The cash value can be used to fund the premiums when it is large enough. Can function as “forced savings”, since you don’t have easy access to the cash value. This can be later used to fund one’s retirement. Earnings on cash value are tax-deferred.
Cons	One may not have the discipline to invest the “premium savings”. If you don’t make a claim while the term insurance is in force, you start all over again, but with a higher premium rate. There is a risk that you become uninsurable (i.e. an accident renders you totally disabled or you get diagnosed with a critical illness).	The rate of return offered by the cash value is lower as compared to other investment vehicles. Premiums are more expensive at the onset. Cash value needs time to accumulate so you can’t expect a significant amount 5 to 10 years into the policy.

You can actually combine both types of policy to come up with an insurance coverage portfolio that matches your specific needs. For instance, you can get a whole life policy and then supplement it with a term policy where the term life cover is geared towards covering your mortgage, etc.

Whole life insurance is just one type of cash value policy. Know more about how term life compares with cash value life insurance and its other variants by reading our articles:

Updated on: 03.06.2013

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