Do you need cover that lives for as long as you do, or are does your family only need protection for a certain period of time?
Term Insurance
COVER DURATION
Chosen by the client. Ordinarily anywhere between 1 year and 20 years. Death within the term results in payout. After the term concludes, no premiums are paid and cover ceases.
COVER COST
Low cost because the risk of dying within a pre-determined period is small for most people.
COMMON USES
Family protection. Providing money for a spouse or children. Term length often matched to children’s ages.
Whole Of Life Insurance
COVER DURATION
Sometimes referred to as “permanent insurance”. Pays out on the death of the policyholder – whenever that may be. Cover never stops.
COVER COST
Higher than the cost of Term insurance because the death benefit payment is guaranteed, i.e the policyholder will eventually die.
COMMON USES
Inheritance tax planning. Creating a financial legacy for oneself and family. Prestige.
Choosing between different types of insurance does not have to be complicated. With all the different bells and whistles companies advertise in order to set themselves apart, it can seem like there are dozens of different options out there….
The truth is, there is no magic to insurance, and the vast majority of plans are nearly identical. If you want more cover you have to pay more, if you want to save money on your premiums you have to accept lower cover. It’s just math. There are two categories of life insurance: Term Insurance and Whole of Life.
Term Insurance: With this type of insurance, you specify the amount of cash you would like your family to receive upon your death (the “death benefit”), and how many years you would like to be covered (the “term”). The premiums are fixed throughout the term, you can cancel your cover any time with no penalty. As long as you continue paying your premiums, if anything happens to you within the set term, your family receives the money. At the end of the term the coverage ceases and the plan ends. It is a risk management tool that we all hope our families never have to use.
Whole of Life: As the name suggests, this type of insurance covers you for the entirety of your life, as long as you continue to pay the premiums. With some plans the premiums go up every year, sometimes the premiums maybe go up some years, and some plans have guaranteed fixed premiums.
Whole of life insurance policies sometimes contain an investment component, but this also tends to increase the cost of the cover itself due to the fees of the investments. Some people like to combine their investments with their life protection to keep things simple but on the whole, investment performance is generally better for standalone investment products. In terms of pricing, Whole of Life insurance typically costs three to five times as much as Term Insurance; again, this is not to say that it is “expensive” or “overpriced”- it is simply a different set of calculations to price the timing of a guaranteed event- the death of the policyholder.
This is essentially the main benefit of Whole Of Life insurance. It is guaranteed to pay out. This can be an effective tool for estate and inheritance tax planning, especially if you live in a country with high rates of inheritance tax and plan to eventually accumulate a multi-million dollar estate. This insurance money will be used by your family to pay their tax liabilities for receiving your assets, and means that they will not have to sell off the family home or investments to raise the money owed.