Below is a summary only of life insurance. This information is general in nature and does not take into account any individual’s financial situation, objective or needs. Further information about the general nature of this article appears in the disclaimer at the end of this article.
When it comes to life insurance term versus whole, you may have found yourself wondering what’s the difference. In Australia, you can now only purchase term life insurance. Whole of life insurance has not been available since 1992, and the only whole of life policies that exist belong to those who took one out prior. Here, we go through the differences between these two types of life insurance.
What is Term Life Insurance
Term life insurance Australia
Term life insurance is designed to pay a lump sum to your loved ones if you are diagnosed with a terminal illness or pass away. It’s a way of protecting your family’s financial wellbeing — a payout can help them manage any debt repayments and living expenses when you’re no longer around or able to provide for them.
You can select your level of cover when you take out your policy, and most insurers offer the flexibility to change your cover amount when you need to.
As long as you continue your premium payments, a term life insurance policy will automatically continue each year and usually covers you till age 99 depending on the policy.
Key features of term life insurance
- Covered for a defined period of time (until cover expiry age, cancellation of policy or claim is made).
- Option for level, stepped or hybrid premiums.
- Flexible cover — option to apply for more (underwriting may be required) or less cover as your needs change.
What is Whole of Life Insurance? (Not available in Australia)
Whole of life insurance Australia
When whole of life insurance was still available, it provided the life insured with cover for their entire life as a form of permanent life insurance. It was also structured differently to term life insurance: it included an investment component designed to build cash (the surrender value) in a savings account, on top of the insurance component. At the time, compulsory superannuation had not been introduced, so many Australians used whole of life insurance policies to help fund their retirement by opting to cash out the surrender value and forgoing their death benefit.
Here’s how it worked: the insurer would invest part of your life premiums, and interest would accumulate in a cash savings component. As the life insured, you had the option to surrender your insurance component and take the cash value component instead.
While you can still find this style of life insurance in some other countries, it’s no longer available in Australia.
Key features of whole life insurance
- Type of permanent life insurance: covered for whole life, unless policy surrendered.
- Portion of premiums invested with guaranteed earnings available to be cashed out where death benefit component surrendered.
- Level premiums only.
Comparing Term Life Insurance and Whole Life Insurance
There are a few key differences between term life insurance versus whole life insurance. For each policy differed below there is a summary of the typical key differences between Term and Whole of Life insurance.
Term vs Whole Life Insurance
Term Life Insurance | Whole of Life Insurance |
Covers you until expiry age (often age 99). | No expiry age — cover provided for whole life. |
Death benefit paid upon death or (for some policies) diagnosis of terminal illness, provided the policy is in force when death or terminal illness occurs. | Guaranteed death benefit. |
No investment component — surrendering the policy does not provide a cashed-out amount. | Included an investment component that could be cashed out where the policy was surrendered. |
Option for stepped, level or hybrid premiums. Premiums may change based on your age or any cover or health changes. | Level premiums only. Premiums remained the same throughout the entire policy. |
Usually relatively lower life insurance cost over the long term. | Usually relatively higher premiums. |
Payouts generally tax free. | Payouts generally tax free. |
It’s been over 30 years since Australian insurers stopped offering whole life insurance. Any policy you take out now is the universal life insurance, that is, a term life policy with no investment component. There are still key differences between individual term life policies though, including premium structures and additional features offered like funeral or financial planning cover. It’s worth comparing term life policies from different life insurance companies so you can choose a product that suits your personal needs.
At Lifebroker, we’ve made it easy to compare life insurance from some of Australia’s leading insurers side-by-side all in the one spot. And if you’d like to chat through your insurance plan options, we’ve got a team of insurance specialists ready to help you in understanding product options at no extra cost to you. So why not try it today?
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