Term Versus Whole: Which Life Insurance Is Right for You?

Both term life and whole life insurance cover you in the event of death or Total and Permanent Disability (TBD). They pay out a lump sum for you and your loved ones if you’re not able to provide for them anymore.

So, what’s the difference between term and whole life insurance? And does it matter which one you choose?

Term life insurance protects you for a fixed period and insures you against a potentially financially debilitating event. It’s similar to how you would buy car insurance to protect you from the financial cost of an accident - it doesn’t pay out any cash or investment returns if you don’t have an accident. And, you only get coverage for as long as you pay for it.

On the other hand, whole life insurance covers you for your entire life and has a savings and sometimes an investment component. This is built by the higher monthly or yearly contributions that you make. 

If you end your insurance because you don’t need it anymore, you’ll get the accumulated cash value back. For this reason, many people like the idea of getting whole life insurance because they can use it to build their wealth on top of getting protection.

With that said, it’s not just about whether you get a protection-only plan or a plan that protects and builds wealth. There are also other things you should look at when deciding between term and whole life insurance, and what tradeoffs there are when choosing one over the other.

Here’s what else you need to consider when choosing between the two.

How flexible your insurance is for your changing needs

With term life policies, you can adjust your total amount of coverage over time.

The reality is that different life stages require different amounts of coverage. With term insurance, you can start with the coverage you need at the time and then supplement this plan with more coverage as your life stages change. In comparison, with whole life insurance, you’re getting one amount of coverage for your entire life. 

Let’s say you move in with your partner at 28 but don’t plan on starting a family until you’re 35. At 28, your coverage needs would be different with just a partner than it would be if you had to cover kids as well. At 35, you could renew your policy or add-on another policy to get more coverage to protect your family.

But if you buy a whole life policy, you might be covered for more than you need. For example, once your children move out and you’ve paid off any major liabilities that would affect them, like your mortgage. You’re throwing money away if you’re paying for more coverage than you need. 

How much term insurance costs compared to whole life insurance

Term life premiums are less expensive than whole life and give you the freedom to save and invest your money more flexibly.

Whole life tends to have significantly higher premiums. When you pay for whole life insurance, some of your money goes towards a savings component, maybe an investment component, and their corresponding management fees. If you end your insurance before the end of its term, you’ll receive a cash value (but you may have to pay a fee for early termination, known as a surrender fee).

When considering whole life insurance, be sure to check that the cash value makes sense against the fees you may need to pay and what you could otherwise earn if you saved and invested your money separately. Ask yourself:

  • Would the future cash value beat inflation rates?
  • Would the returns from saving or investing in a whole life insurance policy beat the returns from other cash management or investment options? 
  • Can you afford to lock up your savings for the long term?
  • How would the surrender fees affect your cash value if you withdraw early?

In comparison, by choosing term insurance, you’ll pay less for your premium. Because you only pay for your insurance needs, a large chunk of money is free for you to save and invest more flexibly and cost-effectively. An example is in large, liquid, and low-cost ETFs. This is a better option if you have a long time horizon to save and invest as it allows you to adjust your investment risk profile over time.

Consider keeping your savings in a cash management fund, or investing with StashAway

Whether you have enough retirement savings to cover the cost of a serious illness or disability after the age of 65

Whole life insurance covers you after 65, but you can also buy term insurance and invest the rest towards financial protection in retirement.

In most cases, with good financial planning during your working years, you can save enough to cover any healthcare costs in your retirement while paying off any major liabilities that might affect your dependants.

Remember that you may pay significantly more for a whole life premium. So if you plan to work a few years before retiring, consider getting term insurance and investing your savings separately into a retirement fund to build up your safety net. You can invest at a level of risk appropriate to the number of years you have left until you plan to retire to maximise your returns.

How confident you feel about paying premiums each year for your whole life

With whole life insurance, you can front-load your premiums during your working years, but they’re more expensive and less flexible.

It might give you comfort to have all your life insurance paid off by the time you retire. But remember, you might be paying for more coverage than you need, meaning you’re paying higher premiums than you need to.

What if in future, you decide to take a salary cut to learn something new? Or what if you want to upgrade or downsize your lifestyle? It can be difficult to predict your cost of living in 5, 10 or 20 years. 

With term life insurance, you’ll need to keep up insurance premiums each year for as long as need protection. But remember that term life premiums are significantly cheaper than whole life premiums and are much more flexible for any lifestyle changes.

Consider what’s important to you when choosing term versus whole life insurance

Choosing term life and saving and investing separately is the clear winner when it comes to flexibility and cost-effectiveness, whereas whole life insurance is convenient because it gives you coverage for your entire life, bundled with savings and investment components; albeit at a much higher cost, and possibly for more coverage than you’d need.

Learn more about our flexible life insurance offering, StashAway Term Life.

Term Versus Whole Life

Term Life

Whole Life

Duration of coverage

Fixed-term or period (I.e. You pay for life insurance for as long as you need it.)

Whole life (I.e. You get perpetual coverage as long as you pay in advance.)

Coverage

Both pay a lump sum upon death or Total and Permanent Disability (TPD).

Both pay a lump sum upon death or Total and Permanent Disability (TPD). 

Premium (assuming the same coverage amount)

Less expensive, as the premium only covers insurance.

More expensive, as the premium covers insurance and a savings and possibly an investment portion.

Purpose

Provide pure financial protection only when you need it.

Provide financial protection for your whole life as well as savings and/or investments.

Payout

Sum assured (i.e. coverage value)

Sum assured + possible bonus

Cash value 

No cash value, so if you stop the plan before the term ends then you won’t get any cash returned to you.

Cash value included, so if you stop the policy before it ends, you’ll get most of the accumulated cash returned to you.

Option to convert to a paid-up policy*? 

No

Yes

How it impacts your cash flow (i.e. your household budget and expenses)



Easier to manage costs and control expenses. Term insurance allows you to maintain flexibility in household budgets and doesn’t strain your cash flow as you only pay for what you need.

More difficult to plan and manage your costs as whole life insurance requires long-term financial commitment. If you aren’t able to commit to your premiums over the long term, your coverage may lapse.

What it means for your savings and investments 

You can take better control of your financial planning by saving and investing separately.

You have less control of your savings and investments, as the insurance provider manages your savings and investments for you.

*A policy that continues to provide coverage even if you stop paying premiums