Whole Life or Term?

There has always been the ongoing debate over whether buying a whole life or term insurance plan is better.

It is not possible to have a standard answer that applies to everyone as it really depends on your objectives. Not to mention the fact that products from one company might differ from that from another company. In most cases, it would also take more than one product to cover your needs.

Let me share with you some of my viewpoints and then you can decide whether what I say makes sense. Along the way, I might put in some numbers to help you better understand. All figures are based on a 24-year-old male non-smoker with a sum assured of S$100,000 using benefit illustrations from NTUC.

Your views might differ but like I mentioned earlier, everyone’s objectives is different and there is no right or wrong answer.

1) I do not use a whole life plan for savings (ie I will never surrender it for the cash).

The table below shows the cash value (for Vivolife) upon surrender and also the benefit upon claim after 40 years. These figures are based on projected returns of 3.75% and 5.25%. Premiums are $1644 per year payable for 40 years.

It is clear from the amounts shown that the payout from a claim is much higher than that for surrendering a plan.  The actual rate of return (% pa) is shown in the table below:

Therefore, if I buy a whole life plan, I buy it with the intention of holding it till I claim.

The claim will be upon death, total and permanent disability (TPD) or critical illness (CI). Which brings me to my second point.

2) The only reason why I even consider a whole life plan is for the lifetime Critical Illness (CI) coverage.

I will not need death coverage for life so I use the benefits more for TPD or CI. Any extra death coverage required can be covered using a term plan.

For a claim, returns of 3.76% and 4.75% is not anything fantastic but pretty decent I would say. If I hold the plan long enough, the claim will definitely happen. Hopefully, it’s for CI (and not death) so I will get to use the money.

Effects of Deduction

Under the benefit illustration, you can find a table called effects of deduction. It shows you what the value of your premiums ($1644 per year) would be if you had invested it yourself at 3.75% or 5.25%. It works out to be $152,857 and $222,243 respectively at the end of 40 years.

If you compare it with the cash values (upon surrender), it will show the effects of deduction to be quite hefty at $54,871 and $96,862 for the 3.75% and 5.25% projections respectively.

Actually, that’s not the best way to compare it as there is a price to factor in for the insurance component. In the first place, we shouldn’t even use the insurance plan as a savings plan. If you want to save/invest, invest the money directly so that there is minimum deductions.

For a fairer comparison between a whole life plan and a buy term and invest the rest strategy, you will need to factor in the cost of the term insurance. At $420/year for NTUC’s Living Rider, you would only be able to save $1644-420=$1224 per year.

$1224 invested over 40 years will grow to $113,809 and $165,470 after 40 years at rates of 3.75% and 5.25% respectively. To match the cash values and claim benefits of the Vivolife plan, your investment would need to grow at the following rates (% pa) shown in the table below:

For example, if you can grow your $1244 yearly savings at a rate of 3.13%, you will end up with $97,986 at the end of 40 years.

Look at all the numbers and see what conclusions you can draw by considering your own investment returns.

A person who can achieve 9% p.a. returns consistently might be better served investing most of his own money.

A person who leaves all his or her money in fixed deposits might even struggle to match the returns achieved from the surrender of a whole life plan.

At the end of the day, it is not only about whether whole life or term is better. It is about whether you can cover all your needs based on your budget.