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Last Updated on 20 June 2019

Whole Life Insurance: Does it Exist?

What is Whole Life Insurance, do I need it, and does it exist? These are all valid questions you may asking yourself. 

While no amount of money can relieve the pain of losing a loved one, life insurance aims to take financial pressure off the family left behind.

The money provided by your fund can be used to clear debts and provide financial support in the event of death or terminal illness of the policy holder.

Key Points
  • Whole life insurance consisted of two components: A death benefit and an investment component.
  • Whole life insurance is no longer sold in Australia. Term life insurance is now considered a popular alternative.
  • Term life insurance is considered more affordable than whole life insurance.

What is Whole Life Insurance

Whole life insurance is a type of permanent life insurance that not only provides a death benefit, but also a savings component, known as the ‘cash value’ or ‘surrender value’. This amount of money, accrued over time, can be withdrawn and used for personal needs. Just as a loan works, you can then repay your fund.

Whole life insurance is designed to cover you for life, hence its name. It is considered more permanent than the current alternatives, lasting a lifetime without requiring renewal, provided the premiums are paid.

Why is Whole Life Insurance Not Sold Anymore?

In short, superannuation can be viewed as a replacement, or alternative for, a permanent life insurance policy.

The government made superannuation compulsory to all workers in Australia in 1992 to ensure all Australians would have enough money to retire on.

Both employers and employees contribute to the super fund by depositing money which is kept aside and used later in life when the individual reaches retirement.

Similarly to Whole Life Insurance, Superannuation now includes a death benefit, which is paid out in the event that the fund member dies before reaching retirement. So, now that superannuation has become compulsory, why do people still take out life insurance policies?

Generally, people might decide to take out a policy because the superannuation death benefit is not sufficient for their family’s needs. Therefore, they may wish to seek a higher amount of coverage by taking out a life insurance policy.

Superannuation and term life insurance policies work hand in hand to deliver what whole life insurance may have provided alone. Therefore, whole life insurance is no longer available for purchase.

Looking for an Alternative to Whole Life Insurance?

Term Life Insurance provides coverage for death and terminal illness. It’s cost effective, making it a popular option for many Aussies. Your family will receive a payout upon death and you have the option of selecting a coverage amount. This payout can be provided in the form of a lump sum or annuity payments (regular payments made over time). The payout will be available provided your policy remains in affect and you pass away within the policy term.

The size of the payout will depend on how much you’re willing to pay for your premium. Generally, the higher your premium is, the higher your lump sum will be, should you require it.

With Term Life Insurance, there is no cash value aspect to the policy. Cash value (also known as surrender value) is an amount of money that has been accumulated over time since taking out your policy. This money is available to you for personal use.

For example, if you have held onto your policy for a number of years, you will have accrued a certain amount of cash. Say, for instance, your children no longer depend on you financially, you may decide to withdraw some of this cash for investment purposes. This benefit is only available for permanent life insurance policies, which include whole life, as well as variable and universal life insurance types.

What Else Should I Know About Term Life Insurance?

One other thing you might want to consider if you decide to take out a term life policy is the difference between stepped and level premiums. The benefit of a level premium? You’ll get the same flat fee premiums for the duration of your policy. With a stepped premium, on the other hand, your premium will increase each year. Typically, premiums will get higher the older you get, as you’re considered more likely to fall ill or experience health related issues.

So, why would anyone invest in a policy that gets more expensive as you age? Good question. People may consider this policy for the following reasons:

  • Stepped premiums provide are cheaper to start with. Although they may be more expensive in the long run, they are more affordable short-term.
  • You are paying for the level of risk associated with your age – no more and no less.

This may be a good option for a younger person, as level premiums can be expensive to start off with.

For middle-aged or older Aussies, while initially more expensive to start with, level premiums average out over time. Therefore, you will generally save more money over time with a level premium.

Term Life Insurance Summary

What Are the Key Differences Between Whole and Term Life Insurance?

In essence, whole life insurance provides more flexibility for the policy holder, allowing them to withdraw money from their fund if they wish. This means that if the policy holder passes away before they have repaid their fund, only the remaining cash (i.e. cash that was not withdrawn), will be provided to the family in the event of death. The downfall is that this amount of money may or may not be sufficient.

While term life insurance is not as flexible, it ensures a certain amount of money will be available to the policy holder’s family should anything happen to them. This is because there is no cash value component, and therefore no option to withdraw cash from the fund.

Generally, whole life insurance was considered more expensive compared with term life insurance. In saying this, term life insurance does not include the investment component that whole life insurance once did.

Are There Any Other Alternatives to Whole Life Insurance?

If you want to ensure you have long-term protection, consider looking into a guaranteed renewable term life policy. This type of life insurance gives you the opportunity to renew your policy again before it expires. Your insurer cannot cancel your policy or decline to cover you due to your health worsening.

What does Term Life Insurance Cover?

Life insurance is used to cover a range of expenses in the event of death or illness. These expenses may include:

  • Children’s education/school fees
  • Any outstanding debts you may have
  • Ongoing income for your partner
  • Funeral expenses

Each Life Insurance policy will vary in types and levels of coverage. Everyone has different needs and preferences, so it’s a good idea to consider what’s important to you, so you can shop accordingly for a policy.

I’m Ready to Shop for Life Insurance. Where Should I Start?

Since you can no longer shop for a whole life insurance policy, shop around for a term policy that covers your needs. Remember to consider:

  • Whether renewal is guaranteed
  • Whether you have stepped or level premiums
  • What the premium costs are
  • What benefits your loved ones will receive if you pass away

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