Understanding whole life insurance

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October 29, 2018 | 3 min. read

Whole life insurance is available in participating and non-participating form. Find out how each of them work and if they fit your needs.

Key takeaways

  • Whole life policies generally cost more than term insurance as part of the premium is invested to build up cash value.
  • Bonuses projected by participating policies are not guaranteed and may fluctuate.
  • Prepare to commit for the long term. Early termination may result in losses.
  • A non-participating policy only provides guaranteed benefits and it is not entitled to bonuses.
  • If you take a loan from your cash value, it has to be repaid with interest. It will make it harder for your money to grow.

What is whole life insurance?

Whole life insurance provides life-long protection. It is available in different forms, such as participating and non-participating policies.

Participating whole life policies

Participating whole life policies share in the profits of the company’s participating fund. Your share of the profit is paid in the form of bonuses or dividends to your policy.

Bonuses or dividends are not guaranteed as they depend mainly on the investment performance of the participating fund. When you make a claim, bonuses or dividends which have been declared will be paid in addition to the sum assured.

Whole life policies have cash values which will build up after a minimum period, and this differs from product to product.

Non-participating whole life policies

Non-participating whole life policies have guaranteed claims benefits and cash values.

See also: Participating versus non-participating insurance policies

How whole life insurance works

Compare both types of product. Decide what features and benefits match your needs and buy the product that best meets them.

Participating whole life Non-participating whole life
Type Bundled Bundled
Main objective Protection plus investment - accumulation of future bonuses or cash dividends.
Scope of coverage
  • Covers death.
  • Most products cover total and permanent disability and some products cover major illnesses.
  • Payment schedules and definitions of disability vary across products and insurers.
Cash value
  • Cash value comprises guaranteed benefits and non-guaranteed bonuses.
  • When you surrender your policy, you will only receive the cash value of the guaranteed and vested bonuses, which may be less than the total death benefit of the policy.
  • Bonuses have a guaranteed and non-guaranteed component.
  • Bonuses are declared each year, based mainly on the performance of the participating fund. Once declared and added to the policy, it is guaranteed and the insurer cannot take it away or reduce the amount.
  • A policy loan can be taken against the cash value of a policy. The interest charges can be steep. Any unpaid amounts from the loan will be offset from the policy’s cash value or claim payout.
  • Cash value comprises guaranteed benefits only.
  • Not entitled to bonuses.
  • A policy loan can be taken against the cash value of a policy. The interest charges can be steep. Any unpaid amounts from the loan will be offset from the policy’s cash value or claim payout.
Investment risk
  • You will have to bear investment risks as some of the illustrated bonuses are non-guaranteed.
  • Insurers generally try to avoid large fluctuations in the non-guaranteed bonuses from year to year by smoothing bonuses over time.
  • If insurers do not generate sufficient investment returns, your bonuses or cash dividends (i.e. non-guaranteed benefits) may be reduced.
None, as the benefits are guaranteed by the insurer.
Expense risk You will have to bear expense risks whenever there is expense overrun. This will have an adverse impact on the illustrated bonuses which are non-guaranteed. None, as the benefits are guaranteed by the insurer.
Mortality/morbidity risk
  • You will have to bear mortality/morbidity risks whenever the claims experience of the fund is worse than expected.
  • This will have an adverse impact on the illustrated bonuses which are non-guaranteed.
None, as the benefits are guaranteed by the insurer.
Premium level and charges
  • Premiums are typically fixed at the point of purchase and will not increase over the years.
  • Premiums can be paid on a regular basis.
  • Typically requires higher premium than term products for the same level of sum assured*.
Riders
  • Riders can be attached to enhance the benefits provided by the policy.
  • As this may vary from product to product, check with your insurance company for costs and more details.

* There are instances where the premium for a term product may be higher than the bundled product due to differences in the level of death benefit, coverage term and premium term.

Things to note

  • Before buying a whole life product, ask yourself if you need to provide for your dependants for the rest of your life or until they are financially self-reliant.
  • Buying a life insurance policy is a long-term commitment. Early termination causes you to lose money. Can you afford the premium?

Learn more: Your Guide to Participating Policies

Last updated on March 15, 2019