Term Life vs Whole Life Insurance: What’s The Difference?

‘Term Life Insurance’ and ‘Whole Life Insurance’ (also known as ‘Whole of Life Insurance’) are both types of Life Insurance – designed to provide an insurance payout if you become terminally ill or pass away. These insurance products can ensure the people closest to you remain financially supported during a difficult time.

Most Australian insurers only provide Term Life Insurance policies – this article will explain the reasons for this whilst comparing the various features of Term Life Insurance vs Whole Life Insurance.

What is Whole (of) Life Insurance?

Whole (of) Life policies provide coverage for your entire life, as long as you continue to pay the insurance premiums. This means, once your policy has been approved, it won’t change for the rest of your life (unless you want to make a change to certain aspects of your policy, such as the listed beneficiaries).

In addition to the insurance component, it also has an investment component, called cash value (or surrender value). The cash value accrues due to part of the premium being invested in a savings account, and interest accumulated. Typically, the policy could be ‘surrendered’ for the cash.

Why is Whole Life Insurance not sold in Australia?

It’s important to note that Whole (of) Life Insurance in Australia has been replaced with Term Life Insurance.

Up until 1991, Whole (of) Life Insurance (also known as ‘Traditional Life Insurance’) was Australia’s most popular form of Life Insurance. After compulsory superannuation was introduced in 1992, Whole Life Insurance in Australia was effectively replaced by Term Life Insurance.

Today, there are still some people in Australia who hold Whole Life Insurance policies that were issued before 1991. Whole Life Insurance is still popular in some countries where superannuation is not available, or where the superannuation/private pension system is not as developed as Australia.

Main features of a Whole Life Insurance policy

It’s no longer possible to get a whole Life Insurance policy in Australia. However, if you’d like to learn more about how a Whole Life policy works, here are its key benefits:

• Guaranteed payout value: Traditionally, these products gave a guaranteed minimum payout, irrespective of the length of the policy holder’s life.
• Death benefit guaranteed:  Payable unless the policy was surrendered.
• Fixed premiums: These remained the same for the length of the policy holder’s life. Premiums did not alter with health changes. This premium structure meant that the policy holder would overpay during their younger years, then underpay as they got older.
• Investment component: An amount of the premium paid would be invested in a savings account, generally by the insurer, and grew at a guaranteed rate (cash value).
• Included a surrender value: The policy could be terminated, the death benefit ‘surrendered’ and a cash amount collected (although some had surrender charges).

Advantages & disadvantages of Whole Life Insurance

Whole (of) Life Insurance policies provided a mixture of benefits and drawbacks. Here, we’ll compare the advantages and disadvantages of this insurance type:

Advantages of Whole Life Insurance:

• Lifetime coverage: As long as premiums are paid, Whole Life Insurance provided coverage for the life of the entire policy holder (as opposed to a set period of time, such as 10 or 20 years or to age 65)
• Cash value component: This type of insurance accumulated a cash value over time, with a savings component that can be accessed through loans or withdrawals.
• Fixed premiums: The premiums of Whole Life Insurance remained fixed for the duration of the policy.
• Potential dividends: Some Whole Life Insurance policies (typically with mutual insurers) may have paid dividends.

Disadvantages of Whole Life Insurance:

• Higher premiums: Whole Life Insurance premiums tended to be significantly higher (compared with Term Life Insurance premiums).
• Complexity: These types of insurance policies were more complex due to the cash value component, dividends, and other options (and taxation consequences) – making them harder to understand compared with Term Life Insurance.
• Lower investment returns: The cash value growth in Whole Life Policies often provided lower returns compared to other investment options like stocks or mutual funds.
• Less flexibility: Whole Life Insurance was less flexible because you were locked into the policy for life (and faced penalties for cancelling).

What is Term Life Insurance?

Term Life Insurance – often simply known as ‘life cover’ – is designed to provide a payout if the policy holder dies. Some Term Life Insurance products also provide a payout if the policy holder is diagnosed with a terminal illness (NobleOak’s Life Insurance provides this feature).

Some Term Life Insurance policies will also ensure an advance payment is available immediately to cover funeral costs. Most types of Term Life Insurance are automatically renewed on a yearly basis (as long as the premiums are paid) – with many providing cover through to age 99. In the event of a successful claim, the beneficiaries or insured person’s estate will receive a lump sum cash benefit following the insured person’s death.

Term Life Insurance in Australia has been the predominant form of Life Insurance since 1992. Keep reading to see our Whole Life Insurance vs Term Life Insurance comparison table.

Advantages & disadvantages of Term Life Insurance

When comparing Term vs Whole Life Insurance, Term Life Insurance offers a number of important benefits. Here, we’ll look at the main advantages and disadvantages.

Advantages of Term Life Insurance:

• Lower premiums: Term Life Insurance is typically more affordable than Whole Life Insurance,  because the policy holder only pays for the cost of the insurance component, not any additional cash value which makes it accessible to a broader range of people.
• Uncomplicated: Because Term Life Insurance policies don’t come with the complexities of cash value, dividends, or investment options, it tends to be fairly straightforward and easy to understand.
• Flexible: Most Term Life Insurance policies can be adjusted based on your specific needs. Term Life Insurance policies can be adjusted to suit your financial needs and changes in life. Under certain circumstances, you can apply to increase the death benefit when you have greater financial obligations, and you can also decrease as these obligations lessen.
• Regular reviews: As circumstances in life change, adjustments to your sum insured can (usually) be made – to help ensure you’re not over or under insured. Life changes may include marriage, divorce, death of a spouse, starting a family, embarking on education fees, or acquiring a new mortgage.
• No long-term commitment: With a Term Life Insurance policy, you can cancel when the term ends without facing financial penalties.

Disadvantages of Term Life Insurance:

• Coverage is set for a fixed term: Term Life Insurance policies will offer coverage for a specified period of time. If your policy automatically renews, this won’t be a problem, but if it doesn’t, you’ll need to renew your policy to maintain coverage.
• No cash value: Term Life Insurance policies don’t build any cash value, so you can’t borrow against the policy or use it as an investment vehicle.
• Policy renewal premium increases: If premiums are stepped, they increase they as you age.

Can you cash out a Term Life Insurance policy?

No, you cannot cash out or sell a Term Life Insurance policy, although you can reduce, increase or cancel it. If you have a Term Life Insurance policy with NobleOak, your policy will renew up to age 99 unless you cancel it.

Term vs Whole Life Insurance: key differences 

Here, we’ll compare Term Life Insurance (as offered by NobleOak) with a Whole of Life Insurance policy, so you can easily see the key points of difference.

More information about Term Life Insurance vs Whole Life Insurance can be found in the Canstar guide to Life Insurance.

Award-winning Life Insurance

Life Insurance can be one of the most important things you may wish to consider as part of your financial decision making. To find out more, you can use the NobleOak Insurance Calculator or start a quote online.

You can also call our Australian-based team of insurance experts on 1300 014 494 for friendly advice about your Life Insurance options. Any financial product advice is general in nature only and does not take into account your individual circumstances, objectives, financial situation, or needs. Before acting on it, please consider the appropriateness of the information, having regard to those factors. Any third party websites or tools referred to are subject to their own terms and conditions and NobleOak Life Limited makes no representation or warranty as to any information on those websites. Persons deciding whether to acquire or continue to hold life insurance issued by NobleOak Life Limited should consider the relevant Product Disclosure Statement and Target Market Determination for the product. NobleOak Life Limited ABN 85 087 648 708 AFSL 247302.