Getting life insurance for the first time? Show
It can be overwhelming. All you want is a plan that gives you a financial safety net, but there’s a dizzying array of products in the market and insurance jargon makes you feel like you’re sitting for an exam you didn’t study for. Don’t worry. Here’s what you need to know about three common types of life insurance: term life insurance, whole life insurance and investment-linked policies (ILP). What is term life insurance?Term life insurance is a plan that covers you for a specific amount of time (i.e. a ‘term’). You can pick a term as short as five years, or as long as several decades. It’s the most straightforward life insurance policy out of the bunch. You just need to pick a term (e.g. 20 years) and pay the monthly premiums for coverage. You won’t get any cash payout by the end of the term, but if you pass away or experience total permanent disability (TPD) before the term is up, you or your family will get a payout (also known as the ‘sum assured’). Term life insurance is relatively affordable. If you are a young adult, it is generally cheaper than whole life insurance and ILP, but your monthly premiums will increase as you age. Total permanent disability (TPD) is when someone is not able to work due to an illness or injury. What is whole life insurance?Whole life insurance covers you for your entire life (typically until age 100, but you can also choose a shorter term). It’s more expensive than term life insurance, but your monthly premiums won’t increase with age. Like a term life insurance policy, you (or your beneficiary) will receive the sum assured if you pass away or experience TPD before the term ends. But here’s where it differs: throughout the policy term, you’ll accumulate a cash value. The premiums of a whole life insurance policy are higher because part of the payment goes to building this cash value. You can withdraw your cash value during your policy term; it will also be paid to you when the policy term ends. This cash value is a guaranteed payment. There are two types of whole life policies:
What is an investment-linked policy?Under an investment-linked policy (ILP), part of your premiums will be invested in unit trust funds. You’ll have the flexibility to choose which funds you prefer to invest in. Like term life or whole life insurance, you (or your beneficiary) will receive the sum assured if you pass away or experience TPD before the policy ends. Similar to whole life insurance, an ILP has a cash value. You can withdraw your cash value during your policy term, cash it out when your policy ends or use it to pay your premiums. But its cash value is not guaranteed, because it depends on the performance of the unit trust funds you’ve invested in. This means that it can provide a potentially higher cash value than a whole life policy (or potentially lower, if your investments do not perform well). Here’s a summary of differences:
Which insurance policy should you choose?Each policy can be useful for different situations. Here’s how to decide between them. Consider term life insurance if:
Consider whole life insurance if:
Consider an investment-linked policy if:
Ultimately, the best policy for you depends on your affordability, financial needs and goals – so make sure you’ve considered them before choosing a policy or talking to your insurance agent. Read moreHow Does Life Insurance Work In Malaysia? Are You Paying Too Much For Your Insurance? How To Make A Medical Insurance Claim In Four Steps Is whole life insurance a good long term investment?Whole life insurance is a steady investment in that the cash value grows at a set rate, and returns are dependable. They're not subject to the ups and downs of the market, so you won't lose any money if the market takes a turn.
Should life insurance be part of an investment portfolio?"Between the cost of insurance, the premium fees and modest return expectations, life insurance should be one of the last sleeves of an investment portfolio and, for the most part, will be done by wealthier end clients who can afford to put significant funds into a policy for a number of years."
What are two disadvantages of using life insurance as an investment?What are the disadvantages of whole life insurance? Whole life insurance is a lot costlier than term life insurance — you'll end up paying 5 to 15 times more towards premiums. Additionally, the cash value component doesn't yield as high of a return as a traditional investment account.
What is the downside to whole life insurance policies?What is the downside of whole life insurance? Compared to a term life policy, a whole life policy is more expensive and complex, in part because it's designed to provide a death benefit that lasts a lifetime.
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