Protection

The Case of Term vs Whole Life Insurance: Chapter 5


Article Author - Christopher Tan
By Christopher Tan
Jul 14, 2016

This article is part of The Case of Term vs Whole Life Insurance: A Comprehensive Consumer Guide e-book. The following chapters will be released shortly.

Click on the following links to read earlier chapters of the e-book: Prologue and Chapter 1, Chapter 2 & 3, Chapter 4

Congratulations, for reading up till this chapter. By now, we will begin to understand why term plans are the most suitable plans to use for our higher priority needs. But the question we might have on our mind is: if term is more suitable, why then are there more whole life plans being sold, rather than term plans?


Chapter 5 - Why are More Whole Life plans sold Rather than Term Plans?


To begin answering this question, let us first verify if this statement is indeed true: Are there more whole life plans being sold in Singapore rather than term plans?


Year

Whole Life (%)

Endowment (%)

Term (%)

Others (%)

Total (%)

2000

24.90

34.50

6.70

33.90

100

2001

15.90

57.90

4.90

21.30

100

2002

7.02

18.33

2.15

72.50

100

2003

18.43

36.91

7.29

37.37

100

2004

13.20

38.40

9.50

38.50

100

2005

2.95

5.97

68.91

22.17

100

2006

10.99

23.93

23.51

41.58

100

2007

9.21

20.21

21.70

48.87

100

2008

8.81

23.08

16.3

51.72

100

2009

7.76

19.29

15.29

57.66

100

2010

8.05

19.73

13.18

59.04

100

2011

7.45

20.88

13.29

58.38

100

2012

8.23

18.98

14.59

58.20

100

2013

8.83

21.33

11.26

58.58

100

2014

8.29

22.73

11.02

57.56

100

Table 5.1: Distribution of new individual business (non-linked)
Source: MAS


From the table above, we can see that prior to 2005, there are indeed a higher proportion of whole life plans being sold rather than term plans. In fact, though not shown in this table (but we can refer to MAS website), if we go back even to the mid 90s, we will see that there are also a higher proportion of whole life plans being sold. This is not surprising because term plans weren't popular back then.

In 2005, the data was skewed as we can see a big spike in the proportion of term plans being sold (68.91% of the total non-linked plans). According to Life Insurance Association (LIA), it is understood that the privatisation of Dependent Protection Scheme (DPS) has caused the huge increase. It used to be that DPS was administered under CPF Board. But in 2005, it was privatised and all CPF members who bought DPS would either purchased through Great Eastern Life or NTUC Income. This explain a jump in the proportion of term plans sold in 2005 as DPS are term plans.

But one thing is clear, from 2000 onwards, we see a change in trend, the proportion of whole life plans being sold decreased steadily as term plans picked up pace.

One more thing to note: From 2013 onwards, term plans sales started coming down, with no increase in the proportion of sales of whole life plans. Where did the decrease in proportion of sales in term plans go to? We will notice an increase in percentage in the category “others”, which we could not find an explanation on what it constitutes on the MAS website.



Summary


It is true that more whole life plans (relative to term plans) were sold in the past. However, from 2000 onwards, the proportion of sales of whole life plans started dropping. Instead, the proportion of term plan sales started increasing steadily. We believe the reasons why this is so because:

  1. A lot more were written about term versus whole life insurance. When we started writing about term insurance in 2003, we faced a lot of flak from the industry. At that time, very few, in fact, almost no one in the industry wrote about term insurance. Today, we see journalists, magazine writers, and financial bloggers writing more and more about term insurance. Even some advisers are beginning to see the advantages of term over whole life insurance.
  2. Consumers are more educated today and are beginning to understand the advantages of term plans. Again, since 2003, almost all our clients who passed through Providend and DIYInsurance bought term insurance through us.
  3. The insurers are coming out with better term products with more competitive prices.

So why is it so, that in the past and even now, many people still buy whole life insurance? Besides the fact that many consumers and advisers out there are still not aware of the advantages of term versus whole life insurance, we believe that the key reason is because of compensation. What do we mean?

Using the same case study of Tony and Peter, we look at the various insurance plans that we can use to meet their needs.


Tony

Peter

Death/TPD Coverage Needs

$500,000

$1,000,000

Critical Illness Coverage (Replacement of income)

$130,000

$360,000

Alternative Medicine Payment

$50,000

$50,000

Table 5.2: Summary of coverage needs


1. Tony: Possible insurance plans to cover $500,000 death/TPD

We compared the premium cost using term plans, whole life plans, whole life hybrid plans in order for Tony to meet his shortage of $500,000 coverage in the event of death and TPD and also put up the agent’s first year commission if he has sold each of the plans.

We only show the first year commission because although commissions can be paid over a number of years, the first year commission is typically the highest and it is enough to show the difference without making it overly complicated for readers to understand.

In the tables below, the premium for the whole life and whole life hybrid is over a limited period of 25 years. In order to make this segment more readable, we show the comparison of just one company.

You can go to the Appendix 1 (Table A and B) to see the comparison between other companies.


Term Plans Premium

Traditional Whole Life Plans

Whole Life Hybrid Plans

Company B
(Premium p.a.)

$1,922

$15,670

$7,410

Agent’s First Year Commission

$748

$7,052

$3,335

Table 5.3: Various insurance options for Tony and agent’s first year commission for these options

Conclusion 1: For the same amount of coverage, the premium are a lot higher if you buy traditional whole life plans or whole life hybrid plans. As a result of this, agents get higher commission selling traditional whole life or whole life hybrid plans.



2. Tony: Possible insurance plans to cover $130,000 for replacement of income due to critical illness and $50,000 for alternative medicine and care


We compared the premium cost using term plans, whole life plans, whole life hybrid plans in order for Tony to meet his shortage of $130,000 coverage in the event of critical illness as well as $50,000 in the event Tony wants an option to pay for alternative medicine (due to critical illness) and care.

You can go to Appendix 3 (Table A and B) to see the comparison between other companies.

There are a few options to solve Tony’s problem and the table below shows the various combination.


a. For income replacement need ($130,000)

Option 1
$130,000 Term Plan (till aged 70)

Option 2
$130,000 whole life plan

Option 3
$130,000 whole life hybrid

Company C
(Premium p.a.)

$1,700

$4,884

$2,484

Agent’s First Year Commission

$612

$1,905

$969

Table 5.4: Various insurance options and agent’s first year commission for these options


b. For income replacement ($130,000) and alternative medicine provision ($50,000)

Option 1
$130,000 Term Plan (till aged 70) +
$50,000 whole life plan

Option 2
$180,000 whole life plan

Option 3
$180,000 whole life hybrid

Company C
(Premium p.a.)

$1,700 + $1,986
= $3,686

$6,763

$3,249

Agent’s First Year Commission

$612 + $774
= $1,386

$2,637

$1,267

Table 5.5: Various insurance options and agent’s first year commission for these options

Conclusion 2: If you are just buying critical illness plan for the purpose of replacement of income (higher priority need), the premium (and therefore the commission) for term insurance is lower than whole life plans and whole life hybrid plans. But if you want the additional option of buying critical illness for the purpose of providing alternative medicine and care, buying a whole life hybrid plan makes sense as the premium is slightly lower.



3. Peter: Possible insurance plans to cover $1,000,000 death/TPD


We compared the premium cost using term plans, whole life plans, whole life hybrid plans in order for Peter to meet his shortage of $1,000,000 coverage in the event of death and TPD.

You can go to Appendix 2 (Table A and B) to see the comparison between other companies.


Term Plans Premium (p.a.)
(Term till age 70)

Traditional Whole Life Plans
Premium (p.a.)

Whole Life Hybrid Plans
(Premium p.a.)

Company B
(Premium p.a.)

$2,913

$31,340

$14,720

Agent’s First Year Commission

$1,133

$14,103

$6,624

Table 5.6: Various insurance options for Peter and agent’s first year commission for these options

Conclusion 3: For the same amount of coverage, the premium are a lot higher if you buy traditional whole life plans or whole life hybrid plans. As a result of this, agents get a higher commission selling traditional whole life or whole life hybrid.



4. Peter: Possible insurance plans to cover $360,000 for replacement of income due to critical illness and $50,000 for alternative medicine and care


We compared the premium cost using term plans, whole life plans, whole life hybrid plans in order for Peter to meet his shortage of $360,000 coverage in the event of critical illness as well as $50,000 in the event Peter wants an option to pay for alternative medicine (due to critical illness) and care.

You can go to the Appendix 4 (Table A and B) to see the comparison between other companies.

There are a few options to solve Peter’s problem and the table below shows the various combinations.


a. For income replacement need ($360,000)

Option 1
$360,000 Term Plan (till aged 70)

Option 2
$360,000 whole life plan

Option 3
$360,000 whole life hybrid

Company C
(Premium p.a.)

$4,662

$13,010

$6,242

Agent’s First Year Commission

$1,678

$5,074

$2,434

Table 5.7: Various insurance options and agent’s first year commission for these options


b. For income replacement ($360,000) and alternative medicine provision ($50,000)

Option 1
$360,000 Term Plan (till aged 70) +
$50,000 whole life plan

Option 2
$410,000 whole life plan

Option 3
$410,000 whole life hybrid

Company C
(Premium p.a.)

$4,662 + $1,986
= $6,648

$14,817

$7,110

Agent’s First Year Commission

$1,678 + $774
= $2,452

$5,779

$2,773

Table 5.8: Various insurance options and agent’s first year commission for these options

Conclusion 4: It is cheaper to buy a term plan to cover your need of income replacement due to critical illness. If you want the option of providing alternative medicine and care, buy a term policy and a whole life plan separately. Alternatively, if you are prepared to pay a bit more, you may also consider getting a whole life hybrid instead to take care of both needs.



So what do the 4 conclusions tell us?


For all our higher priority needs, not only does it make sense to buy a term plan (as we have explained in chapter 4, in terms of commission, we also pay (and agents/advisers get) lower commission. You only consider a whole life or a whole life hybrid plan if you want the option of alternative medicine and care.

We want to clarify that we are not saying that all agents and financial advisers out there are simply selling whole life plans/whole life hybrid to consumers because they are paid better. In fact, we know that there are agents and advisers who do the right thing, even though they are paid lesser. These agents/advisers truly look after the interest of the clients and they need to be recognised.
However, the truth is, compensation does drives behaviour. As long as there is a huge difference in commission between term, whole life, and whole life hybrid, there is always that temptation for us to sell products that pay better, especially so, if sales awards, incentives, promotions are tied to the amount of sales we bring in.

As we have painstakingly explained, for our higher level needs, our need for insurance is temporary. And for us to be fully covered, the premium for whole life plans are so expensive that most of us will not be able to afford it. Why then is it so that before 2005, there is a higher proportion of sales in whole life plans rather than term plans? And because a lot more people are sold whole life plans, many would have just bought what they can afford in terms of premiums and as a result, they are not fully covered. Perhaps this explains why we are an underinsured nation.

To read Chapter 6 of The Case of Term Insurance vs Whole Life: Click here



Download The Case of Term vs Whole Life Insurance: A Comprehensive Consumer Guide entire e-book free for a limited time

DOWNLOAD FREE



DIYInsurance (Do It Your-way Insurance) is Singapore's First Life Insurance Comparison Web Portal started in June 2014 by Providend Ltd to empower people to make informed decisions about their own insurance purchases. In addition to ongoing promotions, we rebate 50% of the agent’s commissions back to our clients so that they enjoy greater cost savings.

The Trusted Place to be Insured
MAS-licensed since 2003 | Expert advisers to assist you | Advisers not commission-based | Dedicated after-sales service | Secure and easy process


Share this

Insurance Selfcheck (new)
Man thinking to solve insurance problem

Assess your existing insurance & Discover your needs

Start Selfcheck
Need Help?

Chat with us. We will answer your insurance questions!

Live Chat

Call Us
Call Icon

(65) 6309 2478

Add New Comment


Top