Term vs. Whole Life Insurance: Key Differences

You can read chapter 4 of our eBook here.

There are various types of insurance policies in the market. Typically, the common three types of insurance policies provide life, total and permanent disability (TPD), and critical illness coverages as listed here:

  • Term life policies
  • Whole life policies
  • Protection-based investment-linked policies (ILPs)


1. Term Life Policies 

A distinctive characteristic of a term life policy is its focus solely on insurance protection, devoid of any cash value or returns. The term policy does not have any complicated features as compared to other types of insurance policies, and as such, it provides the simplest way for you to get protected.

The premium for a term policy is generally low as the policy owner does not get the right to participate in the insurance company’s “life fund or participating fund” that entails an additional premium. Hence, once a term policy expires, the policy owner does not get back any money, and the policy will usually expire without any further extension.

One important consideration involves a form of term policy structured for renewal after a specific duration, such as five or 10 years. Such a renewable term policy is meant for those who require short-term coverage plus the option to renew if needed. Such a term policy is less common nowadays, because once the policy is renewed, the premium is adjusted, often resulting in a higher cost. Also, the overall premium payable in total compared to a level term might be far higher. It is therefore better to purchase a level term policy that matches the duration of your needs, till the end of your expected working years.


Figure 26: Term Life Policies


2. Whole Life Policy 

The key feature of a whole life policy is to provide permanent life coverage throughout your entire lifetime with guarantees. The premium is more costly than a term life policy, as a whole life policy provides the cash value, which is invested in the insurance company’s “life fund” or “participating fund.” Hence, those who simply purchase a whole life policy would either have insufficient coverage or would need to pay an exorbitant amount of premium to cover the insurance gaps.

Within the whole life policy, there is a revisionary bonus tiering system that ranges between a lower projection (3% of investment return) and a higher projection (4.25% of investment return). This projection is non-guaranteed depending on the performance of the insurance company’s “life fund” or “participating fund” for that particular year. The cash value within the whole life policy accumulates throughout the lifetime in the form of an annual declaration of revisionary bonus. Once the bonus has been declared and allocated into the policy, it is considered guaranteed.

The annual investment return from the insurance company does not mean that the policy owner will receive the full return. Under the illustrated return, the non-guaranteed bonus does not equate to the actual return. To put it simply, if the insurance company manages to get a 4.25% annual investment return for that year, they will pay a portion to the policy owner after deducting all expenses that are reflected in the policy.

What happens if the insurance company’s returns are greater than 4.25% for that year? The surplus may be retained by the insurance company and may be utilised during adverse market conditions as a reserve for paying bonuses to the policy owner. This process is known as the “smoothing of bonuses”. Of course, if an insurance company accumulates significant surpluses and desires to reward the policy owner, they might issue a one-time cash incentive (special bonus) directly to the policy owner instead of adding it to the policy’s cash value.

One drawback of most participating policies (life funds), such as whole life, is the imposition of high early surrender charges. This implies that if you were to surrender the policy in the early years, you will not get back all the premiums that you paid to date. In fact, you will only get back a portion of the amount that you paid. Please refer to Figure 27 for further details.


Figure 27: A Whole Life Policy Flow Chart


In the past decade, more “hybrid whole life” products have been introduced. These are packaged products that combine a whole life policy with a term policy. The term portion is deemed as a “multiplier,” meaning that the whole life sum assured is multiplied (e.g., by two, three, four, and five times) until a certain age. For example, a $100,000 whole life policy with a five-times multiplier results in total coverage of $500,000 until age 70, after which the coverage reverts to $100,000 plus the cash value from the policy for the remaining policy term.

Additionally, the introduction of limited premium payment terms (pay “x” number of years and be covered for a lifetime) makes it more appealing compared to regular premium payment terms (payable for a lifetime). This means that the limited pay whole life policy will be more costly as the premium is compressed to “x” number of years instead of paying for a lifetime.


Figure 28: A Hybrid Whole Life Structure


Case Study

In a case study featuring two different profiles of David and Andy, we conducted a needs analysis to ascertain their requirements concerning life and total and permanent disability. We evaluated the type of policy that would be most appropriate for them.

Using two standard profiles for context, both David and Andy are males, aged 40, non-smokers, with a family comprising one child, and an intention to retire at the age of 60.


Life and Total & Permanent Disability Needs

Figure 29: Life and Total & Permanent Disability Needs for David and Andy


Based on the analysis in Figure 29, with the aim of replacing income, covering liabilities, and funding a child’s education in the event of demise or total & permanent disability:

  • David will require an additional $500,000 in coverage.
  • Andy will require an additional $1,300,000 million in coverage.


Which Type of Policy Is More Suitable for David and Andy?

Figure 30: Premium Payment Term of 20 Years (Calculated as of 3 Jan 2024)


In Figure 30, it is evident that a term life policy has a significantly lower premium compared to the other two whole life policies. Therefore, a term life policy provides a better value option in our financial planning considerations. This implies that David and Andy will have more disposable cash to pursue the things that they like (e.g., hobbies and travel), build wealth for their child’s education, or grow a retirement fund.

Given the exorbitant premium of the whole life policy, if David or Andy still considers getting the policy, they may need to reduce their coverage to fit their budget. This would result in them being under-insured, and in the event of an unfortunate incident, their families could face financial impact.

In most cases, obtaining a term policy is sufficient to provide a good amount of coverage. Once protection coverage is adequately addressed, the next consideration would be estate creation for the next generation. There are many different solutions or products that cater to estate creation (in layman’s terms – legacy planning). Whole life insurance is not the only solution for leaving a gift for the next generation.


In part 2 of this chapter, we will go through the third kind of insurance policy: Protection-based investment-linked policies. Stay tuned!


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