Tuesday, April 29, 2014

Choosing Between Term and Non-Term Life Insurance

If you read personal finance blogs or books long enough, you will surely encounter the "Buy term, invest the difference" phrase. This basically means to buy basic, no-frills insurance and invest the difference of what you would have spent on non-term life insurance (i.e. whole life, universal and their many permutations) in mutual funds or stocks, since that will usually guarantee a better yield than "investing" with non-term insurance.

At first glance this does seem like the correct move, but is it the right move for me? If there's anything I've learned from my Registered Financial Planning (RFP) class is that there is no cookie cutter solution for everyone. Needs are different and so it follows that solutions will likewise differ as well.

For example, I've been thinking of getting life insurance for my husband and so I looked at term insurance  with daily hospital income from PruLife. Here's the table of payments sent to me (this was sent last year, but let's just assume that the price is the same or if there is an increase that it is only minimal):


If I get term insurance of Php1,000,000 (Package 3) for my husband until he turns 65, this is how much we'll be spending:

Year 1= 45y.o. =  Php10,017.00

Years 2- 6 = 46 y.o. to 50 y.o. = Php74,270

Years 7-11 = 51 y.o. to 55 y.o. = Php114,855

Years 12-16 = 56 y.o. to 60 y.o. = Php178,145

Years 17-20 = 61 y.o. to 64 y.o. = Php220,172

Total premiums paid for 20 years= Php597,459

On the other hand, the quotation I got from the same company for basic whole life insurance for the same amount of Php1,000,000, excluding daily hospital income, for my husband is Php34,690 per year. If we avail of that policy and pay for the same 20 year period, the total premiums paid will be: Php693,800 (Php34,690 x 20 years).

That's a difference of Php96,341 between the premiums paid for term and basic whole life, which is honestly quite a negligible amount when spread out over a 20 year period.

Furthermore, a basic whole life policy has a built-in savings component which you can access if you need cash. Term insurance does not have the same advantage and whatever you pay for the year is considered gone if you don't kick the bucket within that year.

I realize though that my analogy isn't exactly apples to apples, because my example for whole life insurance does not have a daily hospital income rider and if it did have the same rider as the term insurance, then the premium will most definitely be higher. But my point is, do not discount non-term insurance right away by chanting "Buy term, invest the difference" like an automaton. See for yourself first if it will indeed be to your benefit to buy term.

From what I see, these are the people who will get the most from term insurance:

1. Those at the start of their careers or married lives, because it's exactly those people who are just starting out in life who need protection more (i.e. mortgages, car loans, young children);

2. Those who cannot afford the higher premiums of a basic or variable life insurance, but want the same degree of protection for their beneficiaries; and

3. Those who will actually invest the difference in stocks or mutual funds.

As always, buy insurance because you want to insure your earning capacity for your family's sake. Never do so for investment purposes. Investing should only be a secondary consideration when it comes to taking out a life insurance policy, because let's be real, there are other vehicles that outpace the returns of insurance funds year in and out, despite what your insurance agent might hint at.

If you have dependents and you want to secure their future, protect them by taking out life insurance on yourself or your spouse. There are no ifs and buts about it.


I do not claim to be an insurance expert by any means, neither am I affiliated with any insurance company. These are just the ramblings of an ordinary person who takes insurance coverage seriously.


  1. Im a bit skeptical now when it comes to any insurance company in Phil. My mom was a member before with Prudential Life but the company got bankcrupt and unfortunately we did not get any small penny from them :(

  2. That's what happened with my mom too with our pre-need educational plans with College Assurance Plan (CAP), she was unable to use them even if she paid for them for many years.

    But what I'm talking about here is life insurance and not pre-need insurance. Unlike pre-need insurance, life insurance is strictly regulated and so there's little to no danger of them closing down like pre-need companies.

  3. Hi Jill, I was back-reading through your posts on life insurance and I came across this, as well as your post on you going over your life insurance policy. Like you, I have a Maxilink Prime policy as well, and I was happy to find out that a savvy financial advisor/planner such as yourself has the same policy. For a while there, I was second guessing my decision and was wondering if perhaps I should have done the oft-quoted "buy term invest the difference strategy" instead (the post of Personal Finance Apprentice in his blog discouraging VULs comes to mind and it made me sweat!). What do you think about the supposedly high fees being charged by the insurance companies for VULs? That's my concern. Enough to consider pulling out of my current policy to cut my losses, if at all.

    But your post above helped in clarifying why whole life can be better long-term than term. That said, my whole VUL vs. term research has also emphasized to me that having investments via VUL shouldn't be enough, and if there's extra money for investment, I should look into doing my own investing through mutual funds and not just relying on the insurance provider to do it for me. Thanks again for the informative posts :)

  4. Hi Judy!

    I've actually developed a new love for my VUL policy after I had to recently withdraw a part of the cash surrender value to tide me over while waiting for my initial pay from my new government job.

    The way I see it now, VULs are a better option than term insurance if you can afford to pay the premiums for at least 3 years, because it is only on the third year that the high fees begin to taper and most of your premium paid now goes towards the investment portion of your plan.

    I think your agent gets the bulk of your first year premium as his commission, then for the second and third year, the fees are no longer as big but are still a substantial amount of your premium paid. The fees get significantly less with time.

    When I crunched the numbers, I figured out that in the 5 years or so that I've been paying for my life insurance, my cash surrender value is pretty much equal the premiums I paid. Of course, that's pathetic as an investment but I have long viewed my life insurance CSV as an addition to my emergency funds/savings, so when seen that way, it's great. Perception lang talaga:p