Risk Management: Considerations before choosing Term or Whole Life Insurance plans

I have read with interest on the above topic. While much debated, the following is my personal opinion. While opinions differ from Financial advisers, there’s really no right and wrong answer. I hope this article crystallizes the on-going debate choosing between Term or Whole Life Insurance plans.

Before I commence, it would be wise to understand the features of 'Term' and 'Whole Life'. While both are insurance plans, the common monetary benefit is that each provide a coverage/protection for a face value (required amount) of x dollars in return by paying a premium for the cost of risk transfer to the insurer.

The Term plan does NOT provide any cash value at the end of the Term while the Whole Life (WL) plan provides a cash value depending on the investment performance of the participating funds. This is the major difference between the two plans.

There is a primary consideration before you should take into account before making a decision. This consideration stems from your Budgeting and Cash flow statement. It all depends how healthy is your Cash flow statement?  If it is not healthy, would you choose a WL plan?

Another consideration is the journey you will make in financial planning. You could start a financial plan after you complete your studies or when you start your first job or career. As you progress on a journey through life from being single, getting married, buying your HDB flat or property, having one or more children, would you have the budget to buy WL policies as a solution? Not forgetting endowment plans are also participating plans which contains cash values. The decision is entirely yours.

There are several terms/definitions in the Benefit Illustration of an insurance plan that you might need to be familiarize with. One of the definitions being ‘the projected rate of investment return’ (and the effects of reducing the projected investment rate of return). This might range from 1% to 4% but does not represent the lower and upper limits

The question is ‘Are you investment savvy?’ If you are and by assuming that your investment yield each year is higher than the projected rate of investment return, than the course could be buy Term and invest the difference. However, if you are NOT investment savvy, the choice is obvious.

Our profession as financial planners is/are to make recommendations for your risk management or financial plans. In this situation, while your financial risk had been highlighted, recommendations are laid on the table, advantages or disadvantages are being spelt out, you as the Client is deemed informed of possible recommendations. Based on some or all of the above, the decision on Term and Whole life seems pretty obvious.

In summary before coming to a choice between Term or WL recommendation?

·         How healthy is your Cash flow statement?

·         Consider the journey in financial planning?

·         Are you investment savvy?

·         Is your rate or return higher than the projected rate of return?

·         (Not an exhaust list of consideration)

Please do NOT be ‘tested’ by insurance agent who emphasize that Term plans have no cash value or that WL plans have cash values. The objective is risk management! In the first place, did your financial planner lay down the possible Term and whole life plans? I hope the above article would crystalize the decision making process of choosing between Term or Whole Life. If I did, please drop me a line. Thank You