Life insurance is for those who want to protect their loved ones with financial support in the event of death or permanent disability. Not everybody needs life insurance, but if you wish to protect loved ones (who may be reliant on your income) with financial support in the event of your death or permanent disability, then life insurance could be the answer for you. There are two main types of life insurance – term and whole life. The main differences between the two are:
1) How long your policy will cover you
2) The compensation you receive if you do not make a claim by the end of the policy life
3) Premium payment term. Term is always pay-as-you-go, whereas Whole Life has the option for limited payment term, meaning that coverage may last for a period much longer than you were paying premiums for
If you’re younger, term life insurance could be more suitable. The lower premiums will make budgeting easier, plus you have more freedom over how you invest the rest instead of locking it in an investment-linked policy. On the other hand, the enhanced freedom of choosing how you invest comes with the responsibility to actually do it and not just put the money into a savings account, or worse, simply spend it!
Whether whole life insurance should be used as a form of investing is debatable. Although potential gains would be tax-deferred (mainly if you live where capital gains are taxed), there is an argument that you are better off with a cheaper term life insurance and reinvesting the savings elsewhere. Most policies come with sales and marketing commissions. The surrender charge poses a potentially costly penalty for those who drop the policy early. On top of all that, there are annual management fees, which, combined with other charges, can cause a real dent in your returns. Ultimately, you could be paying a much higher rate for your investment product than you would with, say, an ETF or Unit Trust. Whole life insurance is no longer as popular as it once was.
However, it is still suited for some people. For young adults, purchasing whole life insurance enables you to lock in at lower premiums, as you are at an age where you are likely to be young and healthy. If you have dependents, then buying a whole life product implies that you are protecting your dependents for the rest of your life, instead of just protecting them against a loss of your income until they are financially self-reliant (or until the end of your working career).
Most likely, yes, but if you do die within two years (in many places, much less) of activating a policy, the insurance company may cite a contestability clause. It’s pretty reasonable for insurance companies to have this condition, even if it is very rough on those who genuinely are diagnosed with a dread disease (or pass away) before this period is up. The clause is there because those with pre-existing conditions may be tempted to buy a policy without declaring and then immediately and fraudulently make a claim. Or worse, for those with suicidal tendencies etc. For those, there is often a suicide clause, but more importantly, please seek help.
Beneficiaries should expect extra time to be taken to investigate a death claim when it’s shortly after taking out life insurance.
WHOLE OR TERM LIFE INSURANCE? COMPLETED. ✅
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