Is Whole life insurance or Term life insurance better, for a 25 year-old?

The following is my answer to a Quora question: “Which do you think is better, whole life insurance or term life insurance, for a person under 25-years-old?”

If you are that young, it would be better for you to buy a whole life policy. The reason is because a whole life policy has level premium, meaning that the premium does not increase as you age. The premium is calculated based on the payment term, which is your expected life expectancy less the age of policy inception. So, for example, if the life expectancy for someone in your region, demographic and gender is 80 years, then your premium term is calculated as 80 less your age of 25, making it 55 years. Your premiums for your that length of time is cheap considering your monthly or weekly cash flow. The whole life policy also gains a surrender value, making it a financial instrument that you can borrow against, as a last resort, or surrender for cash if you absolutely need to.

If you were to get a term plan, the premiums would only be slightly cheaper than a whole life, but it is level only for the duration of the term. So, assuming a term plan of 20 years, when the coverage is up for renewal, your new inception age is 45 years, which means that your premiums suddenly jump by more than 100%. Another disadvantage is that this new term plan, depending on where you are, is sometimes considered new coverage. This means, if you claimed against the previous term, it would be considered a pre-existing condition and not be covered.

I would suggest that you get affordable coverage via a whole life at age 25. As you get older, and your earning increase, plan to top up that with a second whole life plan every three to five years, until you reach age 35, where it starts to get expensive. If you absolutely need an increase in coverage, which is likely against terminal or critical illness, then you may consider a term plan to top it off.

Terence Kenneth John Nunis

[Shared with permission from: https://terencenunisconsulting.blogspot.com/2020/05/quora-answer-is-whole-life-insurance-or.html?m=1 ]

Photo by Mark Csabai from FreeImages

While I agree with Terence in principle, I often find myself adopting a slightly different approach, depending on several variables such as:

  • budget
  • time horizon
  • other financial commitments and obligations

I personally would advise that client gets maximum coverage first, as according to his Financial Needs Analysis.

Hence, for clients on a budget, quite often they would likely take up a Term life insurance while still having budget for wealth accumulation/growth needs.

Client can choose to convert his Term life insurance to a Whole life insurance later on when he can afford, without the need for medical underwriting.

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