Whole Life Critical Illness Insurance
What is Whole Life Critical Illness Insurance?
Whole Life Critical Illness Insurance combines “protection” and “savings” into one product and is one of the more common critical illness insurance options.
Unlike “pure protection” Term Critical Illness Insurance, Whole Life Critical Illness Insurance divides the policyholder’s premiums into two purposes: purchasing protection and investing in different assets, such as funds. The returns from these investments can grow exponentially, achieving the effect of compounding.
When the policy matures, the policyholder can choose to withdraw the accumulated bonuses and interest without affecting the original sum assured of the critical illness coverage. However, if the policyholder chooses to withdraw the cash value of the policy, it will be considered a partial cancellation and will affect the original sum assured.
Can Whole Life Critical Illness Insurance be an Investment Tool?
As Whole Life Critical Illness Insurance converts premiums into cash value, it is sometimes seen as a conservative investment tool.
However, it is important to note that the cash value of the policy consists of both “guaranteed” and “non-guaranteed” portions, and the actual returns may differ from expectations.
Since the primary focus of critical illness insurance is “protection,” it is better to consider Whole Life Critical Illness Insurance as a product for risk diversification rather than an investment tool.
Advantages and Disadvantages of Whole Life Critical Illness Insurance
Advantages of Whole Life Critical Illness Insurance
- Lifelong Coverage
In general, the premium payment period for Whole Life Critical Illness Insurance ranges from around 5 to 25 years. After that, the policyholder no longer needs to pay premiums, and the coverage remains in effect until the insured reaches the age of 100.
- Fixed Premiums
Unlike Term Critical Illness Insurance, the premiums for Whole Life Critical Illness Insurance do not increase with age. Once the premium amount is determined, it remains fixed throughout the payment period, eliminating concerns about increasing premiums as one gets older.
- Ability to Receive Premium Refunds
After paying premiums for a certain period, Whole Life Critical Illness Insurance accumulates a cash value. The policyholder can withdraw the accumulated returns when surrendering the policy, without worrying about paying premiums without making a claim.
- Premium Waiver in the Event of Illness
Most Whole Life Critical Illness Insurance policies include a “premium waiver benefit.” If the insured is diagnosed with the specified critical illnesses stated in the policy during the premium payment period, the remaining unpaid premiums will be waived, and the coverage will remain in force, providing the policyholder with more financial resources to cope with the crisis.
Disadvantages of Whole Life Critical Illness Insurance
- Higher Bundled Costs
Since Whole Life Critical Illness Insurance includes a savings component, the premium payment period is generally longer than that of Term Critical Illness Insurance. Moreover, policyholders cannot surrender the policy early, as doing so may result in a loss of the total premiums paid, causing financial loss.
- Higher Premiums
The premiums for Whole Life Critical Illness Insurance are higher because they are used for both protection and investment purposes. According to surveys, the premiums for Term Critical Illness Insurance can be nearly 10 times cheaper1 than savings-type critical illness insurance.
- 1Term Critical Illness Insurance: Data is the average of the standard premiums of three Term Critical Illness Insurance policies in the market as of March 10, 2022; Savings-Type Critical Illness Insurance: Data is the average of the standard premiums of six Savings-Type Critical Illness Insurance policies with multiple protection options in the market as of March 10, 2022 (18-20 years premium payment period).
- Long Premium Payment Period
As mentioned above, the premium payment period for most Whole Life Critical Illness Insurance policies is at least 20 years. Before purchasing the policy, the policyholder must ensure that they can afford to pay the premiums for several decades to avoid losing the previously paid premiums due to temporary financial difficulties, which lacks flexibility.
Premiums for Whole Life Critical Illness Insurance
In addition to factors such as the insured person’s age, gender, lifestyle, and medical history, insurance companies use the following factors to determine the premiums for Whole Life Critical Illness Insurance:
- Critical illness benefit/ coverage
- Coverage scope
- Number of coverage instances
- Premium payment period
- Guaranteed cash value
Due to the investment component of Whole Life Critical Illness Insurance, the premiums are generally higher than Term Critical Illness Insurance for the same coverage amount.
For example, for a coverage amount of HK$1 million, the monthly premium for a 35-year-old non-smoking male insured person for Bowtie Term Critical Illness is HK$144, while the average monthly premium for Whole Life Critical Illness Insurance is HK$2,700, which is over 17 times more expensive.
Who is Suitable for Purchasing Whole Life Critical Illness Insurance?
- Higher and Stable Income
Due to the characteristics of “higher premiums” and “long premium payment period” of Whole Life Critical Illness Insurance, it is generally recommended for individuals with higher and stable income to purchase it to avoid cash flow burdens caused by insurance premiums.
- Desire for Fixed Premiums
A major selling point of Whole Life Critical Illness Insurance is that the premiums do not increase annually. This allows the insured person to plan for future protection expenses from the moment of purchase, without worrying about the premiums exceeding their financial capacity in the coming years.
- Lack of Saving or Financial Management Habits
For individuals who do not have knowledge or experience in investment and financial management, purchasing Whole Life Critical Illness Insurance can be a low-risk investment tool that offers certain returns. It can partially meet their financial management needs.
Are There Other Options for Critical Illness Insurance?
In addition to Whole Life Critical Illness Insurance, Term Critical Illness Insurance is another popular option among individuals aged 20 to 40.
Term Critical Illness Insurance has a shorter premium payment period, lower premiums, and does not include a savings component. Even if the insured person decides to cancel the policy at any time, they will not suffer any financial loss. It is particularly suitable for individuals who want to flexibly allocate their funds and seek cost-effectiveness.