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Whole vs Term Life Insurance

Russell Cain Updated: 22 June 2020

Whole Life Insurance is no longer available in Australia. Whole of life insurance was regarded as Australia’s number-one investment choice until 1991, before Superannuation Funds changed the focus from saving for your death (Whole Life) to save for your retirement (Term Life). Term Life replaced this policy type due to all the problems with whole life insurance.

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What is Whole Life Insurance?

Whole life insurance holds both an insurance component and an investment component with a surrender or cash value. The cash value refers to the refund you’d receive for a portion of your paid premiums, paid as a lump sum if you cancelled your policy. However, because Whole Life included both an insurance and cash value component it became too expensive for many customers and was thus replaced with Term Life.

Whole of life insurance offered:

Is Whole Life Insurance a good investment?

Whether or not Whole Life Insurance is a good investment depends on your specific needs and circumstances. You might want to consider your age, your liabilities during life and after death, and the premium amount you can afford. Also, determine your main reason for wanting to purchase a policy – protection or for savings?

Take note, whole of life insurance is an expensive cover option and generally, more than a decade will pass before you’ll see signs of a reasonable investment return. Besides this, these returns are not always guaranteed; you might even lose the money you have invested.

Term Life Insurance

Term Life Insurance, also known as life cover or death cover is one of the most popular personal insurance policies available in Australia. Term Life policies generally pay out a lump sum benefit upon your death or when being diagnosed with a terminal illness. Although it does not offer an investment or cash-back option, it is significantly cheaper than a whole life policy.

Most term policies will usually expire at a specific term, set by your insurer, for example, your age 99. However, if you are still alive after the end of your policy term, you can generally either renew your policy or switch to a permanent policy, depending on your insurer.

Difference between term and whole life insurance

Features Term Life Insurance Whole Life Insurance
Cover Expires on a specific date, usually at your age 99, but this depends on your insurer. Covers you for your whole life and can be used as a way to save so you can build cash value.
Best suited A policy best suited if you’re on a tight budget or financially vulnerable, like when you have young children. People gaining the most value from this type of policy usually want to leave an inheritance to their children or have a lifelong dependent, for example, a child with special needs.
Affordability Inexpensive compared to Whole Life, for the same amount of cover. Expensive when compared to Term Life due to hidden fees like management costs.
Payments Generally, you’ll pay a stepped or level premium. Usually provides a fixed premium and a guarantee of little growth.
Inflation The cover will increase slightly to keep up with inflation. The death benefit does not change, despite inflation rates.
Benefits You can link your life cover with other policies, like TPD and Trauma insurance. Can be converted into a permanent policy as long as you meet deadlines. You are generally not taxed on the growth of your cash value until you withdraw or surrender the policy.

Should you buy term or whole life insurance?

Whether you should buy a term or whole life insurance policy depends on your requirements. However, only Term Life Insurance is available in Australia. Offering customers a less complex, more affordable policy with the opportunity to extend their term or in some cases even re-invest some of the capital.

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