Term insurance
Term insurance products offer life cover for a specified term. The Insurer accepts the risk for a specified premium over a specified term and the cover ceases at the end of that term. There is no cash value or investment payout at the end of the term.
Some Insurance Companies may allow you to purchase a “guaranteed insurability option”, for a specific amount of life cover. This would allow you to take up a new policy of their specification at the end of the term, without medical underwriting. However this option could be quite expensive and the premium of the new policy will be calculated at your age then.
Term insurance policies have set premiums and are initially much cheaper than whole life products, but the benefit is fixed and does does not escalate. Your life cover does not keep pace with inflation and at the time of a claim, the value of the payout in terms of purchasing power, may well be significantly less than anticipated.
The important thing to remember when considering purchasing term insurance, is that the cover will cease at a specified age. When purchasing a new policy at the age of termination you would be subject to medical underwriting and may receive a loading, exclusion or even be declined as a result of your health. You may be in good health now, but what about 10, 20 or 30 years from now?
Whole life insurance
This is life insurance where the Insurer accepts the risk for the whole of your life and you are medically underwritten at the time of purchasing the policy. The policy has an investment account and your premium is split between a risk portion and an investment portion. This policy carries a cash value and may be surrendered at any time, for a cash payout as determined by the Insurance Company and subject to the terms and conditions.
You have the option of adding a premium escalation to your policy, a portion of which would be applied towards a cover escalation, e.g. A 5% annual premium escalation may provide for a 3% annual increase in cover. This protects your benefit against the effects of inflation.
Many people prefer whole life insurance purely because of the investment account and overlook the most important aspect of this product; the medical underwriting. In the final analysis life assurance is purchased with health and not money.
There are two important aspects to be aware of regarding whole life insurance products:
1. Some Insurers only guarantee the cover for a specified term. At expiry of the
guarantee term the cost of the cover will be re-calculated, and they will advocate
a premium increase or lower benefit for an unchanged premium, if deemed necessary.
2. The investment account is not to provide you with a payout, but to help the Insurer fund
the future cost of your life cover, by investing a portion of the premium. At regular
intervals the insurer will calculate the cost of your life cover and if the risk
portion of the premium is insufficient, they will fund the shortfall from the investment
account, without increasing the premium of the policy. The return on the investment
account thus helps to offset the future cost of the life cover.
Whole life insurance or term insurance?
Whole life insurance should always be your first choice. Term insurance should only be used when covering a liability that would not increase over a specific term, like a fixed term loan.