24 November 2021

Some financial consultants in the market have strong advocation for term insurance over whole life insurance, citing various advantages such as lower cost of purchase and superior portfolio returns. But is getting a term insurance, and investing the remaining funds really a better option?

In this strategy, we are looking at purchase of a term insurance (with no cash value at the end of contractual term) to protect our family in the event of mishap and reinvest the additional cost that we would otherwise incur from the purchase of a whole life insurance. The rational? To potentially gain higher average return from an investment instrument (e.g. investment-linked policy, unit trust, stocks & shares).

Anyway, that is just in theory. This approach may not always work out as it intended. In reality, we may not be well-disciplined enough to channel the savings (from purchase of a term insurance) into what we ideally planned to allocate them for. Instead, we could be using them for holidays, entertainments or even purchase of a new car? The lack of disciplined saving habit is usually the root of the problem. Purchasing a whole life insurance which comprises both protection and savings elements, may possibly provide the discipline which most people need.

Another potential issue? Investment risk.

Past performance is not indicative of future performance. We have all heard of this somehow, somewhere. It is more so when it comes to allocating your money for investment.

Potential investment returns may swing widely over a short period of time, and especially so for stocks and commodities. It could be a doomsday scenario if we are hit with an economic meltdown, just right before retirement. This could mean significant losses in our investment portfolio as we are coming close to withdrawing from it. A whole life insurance may possibly provide the guaranteed savings which we are promised, at the end of the day.

Both term insurance and whole life insurance provide protection coverage but each with their unique features. In particular, the saving component (which is not available for term insurance). Neither one type of insurance is more superior than the other. It is a matter of which approach is more suitable for you. So, choose your insurance wisely.

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