Types of Life Insurance
2 major types of life insurance: Savings VS Pure Protection
Life insurance can be broadly categorised into Savings Life Insurance and Pure Life Insurance:
| Savings Life Insurance | Pure Life Insurance | |
| Purpose | Long-term Investment | Pure Protection/ Protection for a specific term |
| Components | Life protection and savings return | Life protection |
| Policy Term | Often lifelong | 1 / 5 / 10 / 20 years |
| Premiums | More expensive | Cheaper |
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4 common types of life insurance
Within these two major categories, life insurance can further be divided into term life insurance, whole life insurance, universal life insurance, and variable life insurance. With so many products and options available, it can be overwhelming. To help alleviate confusion, we will provide a brief explanation of each type of insurance product. We hope this will help answer your questions.
1. Term life insurance: Often with lower premiums
Term life insurance provides coverage for a specified period of time, typically renewable every 1/5/10/20 years until age 85. Most term life policies do not have a savings component and premiums are much lower than those for whole life insurance, which calculates premiums for the insured’s entire life. Policyholders have a contractual obligation to pay premiums on a monthly, quarterly, semi-annual, or annual basis.
If premium payments are missed for a designated period (such as 2 months), the life insurance company has the right to terminate the policy unilaterally.
Although term life policyholders can apply to reinstate a lapsed policy within a grace period, the grace period is usually short (such as 60 days). The premiums for many term insurance products increase with the age of the insured.
In addition, some companies offer fixed premium structures that maintain fixed premiums during a specified period (such as the first 10 years of the policy). However, after the initial fixed premium period, premiums may be several times higher than before and will continue to rise with the age of the insured.
Term life insurance can provide affordable life insurance coverage for loved ones and is suitable for young people and couples. Most term policies do not have cash surrender values and are non-participating (i.e., do not pay dividends).
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2. Whole Life Insurance: Combination of Investment and Protection
Whole life insurance is a product that combines insurance protection and investment opportunities. Like term insurance, policyholders have a contractual obligation to pay regular premiums to the insurance company to avoid contract termination. The insurance company also allows policyholders to revive lapsed whole life insurance policies within the grace period.
Part of the whole life insurance premiums paid for whole life insurance products is converted into cash surrender value, which means that premiums are generally higher than those for term insurance products. One difference between whole life insurance and term insurance is that the premiums for the former remain fixed throughout the contract period and do not increase with the age of the insured.
As a result, most whole life insurance policyholders hold their policies for as long as 20 or 30 years and use the accumulated cash surrender value to supplement their retirement income. For dividend-paying whole life insurance policies, the life insurance company may distribute non-guaranteed dividends to policyholders.
Whole life insurance policyholders can withdraw dividends in cash, use them to purchase additional life insurance coverage, or deposit them with the life insurance company as savings. Of course, premium payments for dividend-paying whole life insurance policies are higher than those for non-dividend-paying policies. Like term insurance, whole life insurance is also popular among traditionally conservative customers.
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Universal life insurance also provides life insurance coverage. The main difference between this product and term life or whole life insurance is that the policyholder can flexibly adjust the premium payment amount and time when the account value is positive.
However, as the insured person ages, the cost of insurance will also increase. If the cash value of the policy does not grow as fast as the cost of insurance, and the premiums paid by the policyholder are not enough to maintain a positive account value, the life insurance company has the right to terminate the policy. To reinstate the policy, the policyholder must replenish the account value to an acceptable level within the grace period.
Universal life insurance policies operate with greater transparency. The accumulated premiums are credited to the account value, which increases with interest but decreases due to insurance costs and other expenses. The life insurance company has the discretion to declare a dividend rate, but it cannot be lower than the guaranteed interest rate. Due to the greater flexibility in premium payment time and amount, as well as the clear reflection of investment performance in the account value, universal life insurance is favoured by investment-oriented customers.
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Variable life insurance operates similarly to universal life insurance, with the main difference being that the policyholder (rather than the insurance company) is responsible for determining the investment strategy of the policy.
Policyholders can choose to invest premiums in mutual funds, hence the name investment-linked insurance.
Investment returns are credited to the policyholder’s account after deducting the cost of death benefit protection and investment expenses.
Variable life insurance is suitable for experienced investors who are willing to take on market risk and want to use the policy as another tool for stock market investment.
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Which types of life insurance works best for you?
When deciding which life insurance type is the best for you, you may want to ask yourself the following three questions:
When deciding whether term life or whole life insurance is the best for you, you may want to ask yourself the following three questions:
1. Do you need short-term or long-term insurance coverage?
If you need lifelong coverage for asset transfer planning, you may want to choose whole life insurance, because at the age of 80 or older, the premium for term life insurance may be very expensive.
2. Do you want to transfer investment risk to the insurance company or assume it yourself? What is your risk tolerance and capacity?
If you are not a risk-averse investor, we recommend that you purchase term life insurance and use the saved premiums for investments, which may yield greater returns. Conversely, you can consider purchasing whole life insurance, as you can at least receive “guaranteed return.”
3. Do you want the policy to be solely a life insurance protection tool, or both an insurance protection and investment tool?
If you view life insurance as a “protection tool,” we recommend that you purchase term life insurance because you can obtain greater protection with less premiums. Conversely, you can consider purchasing whole life insurance.
Honestly answering these questions will help you find the right type of life insurance for yourself.
Remember that life insurance is a product that needs to be tailored to your needs. The product purchased by your neighbor/friend, or recommended by an insurance agent/broker, may not necessarily be suitable for your personal situation.
Therefore, you have a responsibility to make the final decision based on your own needs and circumstances.
Answering these questions honestly can help you find the life insurance type that works best for you. Remember that life insurance is a product that needs to be tailored to your specific needs. What your neighbour/friend buys or what insurance agents/brokers recommend may not be suitable for your individual situation. Therefore, you have the responsibility to make the final decision based on your own needs and circumstances.
