When comparing life insurance online, it's important to consider the difference between whole life insurance and term life insurance. Whole life insurance is still popular around the world, but it has largely disappeared from the Australian market. Here we look at how term and whole life insurance in Australia differ.
For those new to Australia, or returning from a long interlude overseas, it may come as a surprise that whole life insurance is rarely sold here anymore.
Ever since the Australian government introduced compulsory superannuation in 1992, whole life insurance has been largely replaced with term insurance.
So let's explore the differences between the two types of insurance.
What is whole life insurance?
Whole life insurance was designed to cover the policy-holder for their entire life, regardless of when they died, so long as they continued paying premiums.
It typically had two components: death benefit and cash (or surrender) value.
Whole life insurance remains popular in many Asian nations and countries that don't have a superannuation industry like Australia's.
There are also some Australians who still have whole life insurance policies that were put in place before 1992.
Common features of whole life insurance:
Guaranteed payout value Traditionally, whole life insurance policies provided Australian beneficiaries with a guaranteed minimum payout, regardless of how long the policy holder lived.
Fixed premiums Premiums did not rise or fall in line with economic or health factors. This meant, generally, that policy-holders would overpay for insurance in early years, and underpay as they aged and their risk of death increased.
Savings and investment Premiums usually covered more than death benefit insurance. The extra amount paid would go towards a savings account which was typically invested by the insurer with a guaranteed minimum interest rate.
Growth in this account was called the 'cash value' (or 'surrender value'). Certain policies would allow you to collect bonuses or dividends on built-up cash values. Others allowed policy holders to borrow against, or withdraw from, the cash-value.
Generally, those wishing to terminate their whole life insurance could (and still can) do so by surrendering the death benefit and collecting the cash value (which may be subject to surrender charges).
It's worth noting, however, that the cash value of whole life insurance tends to accumulate at a fairly slow rate, especially in times of low interest rates.
Now let's look at term life insurance.
What is term life insurance?
Term life insurance (Term) provides a lump sum payment to your nominated beneficiaries (your spouse and/or children) if you die while holding a yearly renewable Term policy.
Common features of term life insurance:
Adjustable Term insurance can be adjusted to suit your needs and stage of life. Generally, you can dial it up when you have high debts and financial obligations to others, such as mortgages and young children. At that time, term insurance solutions such as TAL's Income Protection Insurance and Total Permanent Disability (TPD) Insurance could be an option for protecting the life you have planned for your family.
Cost-effective Term insurance can be at times more cost effective because you only pay for the cost of the insurance cover, not cover plus a savings and investment plan as you would have for Whole Life Insurance. Term insurance can also be reviewed more regularly, which allows you to review your circumstances to ensure that you're not over- or under-insured. Here we provide a rundown of life events that may prompt a review of your life insurance.
Tax advantages Superannuation has tax advantages that may make it a better vehicle for long-term savings and retirement planning than whole life insurance.
Level or stepped Term insurance can give you the flexibility to choose between level or stepped premiums. Stepped Premium increases your premium every year with your age whereas a Level Premium generally does not change your premium and is based on your age when the policy is taken out.
Any financial product advice is general in nature only and does not take into account any person’s objectives, financial situation or needs. Before acting on it, the appropriateness of the advice for any person should be considered, having regard to those factors. Persons deciding whether to acquire or continue to hold life insurance issued by TAL should consider the relevant Product Disclosure Statement (PDS). The Target Market Determination (TMD) for the product is also available.
TAL acknowledges the Traditional Owners of the lands across Australia as the continuing custodians of Country and Culture. We pay our respect to First Nations peoples and their Elders, past and present.
