Term Life Insurance or Whole Life Insurance

Life insurance is indispensable for any income earner who has dependents to take care of. Having a life cover is essential to cover your near and dears ones in case of any contingency that leads to your demise. In your absence your spouse, children, parents or other dependants should be in a position to atleast lead a normal life although they have to bear the loss of a family member.

So fundamentally, insurance is just a risk protection or cover that protects your family from a severe financial loss or crisis in case of your untimely death.

What is Term Insurance?

A term insurance covers the policy holder for a fixed term (say up to 20 years). Lets say that you are the insured and you have a sudden death, in this case your family will receive the insurance cover amount.

What is Whole Life Insurance?

On the other hand whole life insurance is where you are covered for entire life (or up to the age of 100 in India). Whole life plan has a premium paying period (say for 10 years, 20 years, etc as per the plan opted). The plan has two components – life insurance plus some savings/investment (also known as cash value).

Comparing Term insurance and Whole life insurance

We will compare term and whole life insurance and see how they are different and what kind of needs they meet.

1. Tenure

Term Life:

On the other hand a term insurance policy is for a fixed term say 20 years, after which the insurance expires.

Whole Life Insurance:

Whole life policy covers a policy holder till he or she is alive (or up to the age of 100).

2. Benefits and Payouts

Term Insurance:

This provides you a good amount of risk cover at affordable rates. The only downside is you do not get any survival benefits. If you survive the length of the policy, then you get no money back.

Whole Life Insurance:

A whole life insurance provides life insurance cover plus some survival benefits after the premium paying term. This is the key difference between term and whole life insurance. The survival benefits in whole life insurance would be a mix of guaranteed and performance-based bonuses or payouts. There would be a certain guaranteed payout to you after the premium paying term, while the performance based payouts is based on the insurer’s investment performance.

The returns are linked to how well your insurance company invests their funds. Although whole life insurance is a form of forced savings, its ability to deliver good returns is highly debatable given the high premium cost and long term tenure of the product.

3. Premium/Costs

Term insurance:

This is the most affordable form of insurance with high risk protection.

Whole life insurance:

This is a lot more expensive, given the fact that you are paying for insurance as well as for savings/investment services. Premium paying term is atleast 10 years and varies according to the plan opted. So benefits are going to accrue only after that.

Let’s take an example to understand this better. For instance for a 35 year old male (non-smoker) a 20 year term policy with Rs.50 lakh cover costs about Rs.7,445 per annum based on the plan of a leading insurer (Source: ET Wealth Feb 14, 2011).

Extending our previous example, the whole life insurance plan of the same leading insurer (discussed above) costs atleast Rs.6,000 per annum for a life cover of Rs.10,00,000. So for a life cover of Rs.50 lakhs the annual premium for whole life insurancewould work out to be atleast Rs.30,000.

So looking at pros and cons, whole life insurance is far more expensive in terms of premium. So a buyer can buy term insurance for a lower cost (Rs.7,445) and invest the balance (Rs.30,000-Rs7,445=Rs.22,555 in other avenues such as equity funds to benefit from higher returns than a whole life plan.

Conclusion

To cut the long story short, a whole life insurance plan can be beneficial for people who have adequate assets and cash flows but are looking at a savings plan or estate plan rather than a pure insurance cover. The only advantage that whole life plan has over term plan is its life long tenure. For instance if a 30 year old takes a 25 year term policy, she may get covered only up to the age of 55. What happens once she crosses the age of 55? I would not say that whole life plan is the best solution, but it is one of the options available for her.

However, a plain vanilla term insurance is indisputably the best and most affordable plan and works for a majority of people. You can find leading financial advisors and planners giving strong recommendation about having a term life insurance plan as a fundamental building block in your financial planning. However, there are some financial planners who always insist on taking whole life insurance. These planners should be avoided since they are looking at their own commissions.

To put it in a nutshell, one should look at insurance as a protection from risk or downside, and look at other options for savings and investment. As a concluding note I would see term insurance plan as a basic necessity and a whole life plan as an optional plan to consider (or good to have).

Video

Watch some real life examples and learn why term life insurance is the best option

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Article by Sridhar

Sridhar has written 95 articles.

Sridhar is a financial analyst and his work experience spans areas of financial analysis, modeling, valuation and research on companies, specific sectors, etc. Sridhar is an MBA graduate with Finance major from Maharishi Institute of Management..