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Deciding between term and whole life cover. What you should know

Thursday, 3 March 2022

If you want to know how term life insurance differs from whole life insurance, this article provides you with the answer, and more. Both these life cover options enable you to leave your beneficiaries or estate with money that can help them avoid financial hardships should you pass away. At Auto & General, we offer you either term or whole life insurance at affordable premiums. Most importantly, we’d like you to have the answers you need to decide which of these two life cover options is better for you.

Life insurance pays out a lump sum to beneficiaries or the estate in the event the insured person dies. It comes in two versions: term or whole life insurance. 


What is term life insurance?


Term life insurance covers the insured person for a given period of time, meaning that it has defined inception and termination dates. For example, if a 30-year-old healthy man takes a 20-year term life cover policy of R1 million, his beneficiaries will receive R1 million if he dies before age 50.

The insured person has three choices at the termination of term life insurance: re-apply for a new one, apply for whole life insurance, or opt not to take out another policy. The option chosen will depend entirely on the insured person’s needs.

Term life insurance often suits young, middle-aged people who want to cover the cost of their major liabilities. These people typically have home loans, car loans, or young children who depend on them. To illustrate: suppose someone has a 15-year-old son or daughter who is in grade 10. This person could take a term life insurance policy to help cover their son’s or daughter’s university fees in case they die before this child could start working. In this scenario, a 10-year term life cover may be adequate, knowing that when it lapses, your child would have completed his or her university studies, and perhaps a working career.


How does term life insurance work?


The insured person enters into an agreement with an insurer in which they pay a monthly fee in exchange for the cover. This monthly fee is called a premium. This premium depends on factors such as your age, health, gender and the size of the cover. This means that, for the same person, the premium for a R1 million cover policy will be higher than for an R850,000 cover. Premiums for term life insurance remain constant throughout the policy’s life.


What is whole life insurance?


If term life cover does not sound like a good fit for you, why not consider whole life insurance? This is also called traditional or permanent life insurance, and it covers you for the rest of your life, as long as you pay the premium.

Insurance companies offer two types of whole life insurance: level-premium or escalating-premium insurance. Escalating-premium life cover rises at a certain rate annually, which helps offset the effects of inflation. This type of insurance is ideal if you can afford increasing premiums. In contrast, a level-premium policy maintains a fixed premium throughout the life of the policy. It suits a person who prefers a predictable year-to-year budget.


How does whole life insurance work?


Like with term life, the premium of whole life insurance depends on the insured person’s age, gender, health and the amount of cover. The older the person gets without taking life insurance, the more expensive it becomes for the same amount of cover. Taking life insurance while still younger and healthier may make it more affordable than taking it later.

The premium of whole life insurance is divided into two portions: one part is used for life cover while the second part is an investment. An insured person can earn interest or dividends on the investment portion and build cash value in their life insurance. You can use the cash value to pay your future insurance premiums or as a source of funding, which works like a loan. If you take it as a loan, you’ll need to pay it back so that your estate or beneficiaries get the full death benefit on your death. 


Which is better: term vs whole life insurance?


People have different life insurance cover needs partly because they live different lifestyles. Some can afford large premiums, while others can’t afford it.

On the other hand, someone might afford whole life insurance cover but prefer term life cover because it suits their needs better. It’s not unusual for people to pick different insurances. How do you decide which option to choose? Let’s look at the advantages and disadvantages to help simplify your decision-making.


The pros and cons of term life insurance cover


Term life insurance offer pros that might be attractive to you. Some of the most important, besides giving you peace of mind, are:

  • Flexibility: term life insurance allows you to choose the length of cover, making it easy to plan your long-term finances. The term of this insurance allows you to select a premium you can afford. The shorter the term, the lower the premium for the same amount of cover.

  • It’s cheaper than whole life insurance: The reason is that the insurer faces a lower risk because the term is fixed. Your premium can even be lower if you are healthy and young.

  • Some insurers allow conversion of term life insurance into whole life insurance, enabling you to accumulate cash over time.

Term life insurance cover also comes with some cons you should be aware of. The main ones are:

  • It does not have a cash value, meaning that all your premiums are used to cover the death benefit to your estate or beneficiaries.

  • If the policy lapses when you’re still alive this means that all the premiums you would have paid up to won’t financially benefit your estate or beneficiaries. 

The pros and cons of whole life insurance cover

Whole life insurance attracts people because of a couple of pros such as the following:

  • It covers the insured person for the rest of their life. This means that your beneficiaries or estate are guaranteed to receive a death benefit. This is great if there are people who depend on you and will need financial assistance in the event of your death.

  • You can borrow a portion of the cash value, which can help if you ever need money.

This insurance type does have cons you should be aware of. For example:

  • Its premiums are higher than for term life insurance.

  • It requires a long-term commitment. If you’re 20 years old and you live until retirement age, you’ll have to pay premiums for at least 40 years, which demands stable finances for at least that long.

In the final analysis, the choice of life insurance will depend on your needs and budget. Thus, you should decide ahead of time why you need life insurance[1] and how much you can afford to pay monthly. That’s the reason why getting a life insurance quote is a good idea.


Get a life insurance quote from Auto & General


Nobody knows when they will die; You may die while you still have dependents who rely on you for their livelihood. Many people wouldn’t want their dependents to remain struggling financially. Auto & General can help you provide for your loved ones. All it takes is to get a life cover quote from Auto & General.

Auto & General Insurance Company is a licensed non-life insurer and financial services provider. Long-Term insurance policies underwritten by 1Life Insurance Limited, a licensed life insurer and financial services provider.

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