Whole Life Insurance

What is Whole Life Insurance and is it still available?

As the name suggests, whole life insurance is designed to last your entire life. It was the most popular type of permanent life insurance before superannuation was made compulsory. Whole life insurance now has now been replaced with the advent of term life insurance policy options.

Whole of Life Insurance is no longer available in Australia.

How does Whole Life Insurance work?

Before superannuation was made compulsory, most workers used whole life insurance as a means of providing funds for when they retired, by surrendering their policies so they could access the policy’s cash value. A portion of the premium paid for whole life assurance having been put aside for investment purposes and another to fund the insurance cover.

How much does Whole Life Insurance cost in Australia?

Whole life insurance was considerably more expensive to low cost term insurance, due to the cash value component. However, it is important to note that while the guaranteed earnings you can get with whole life insurance is attractive, often the interest you receive from the investment portion does not pay any more than when you have savings account with a bank.
However, some might still consider whole life to be a worthy investment in Australia, this is because whole life was seen as forced savings and by having a cash value component. Policyholders had the assurance that the life insurance company would have to pay out on whole life insurance one way or another, either in event the life insured’s death or when the policy was surrendered.

What are the advantages and disadvantages of Whole Life Insurance

Whole of Life policies presented a number of benefits and drawbacks to owners of this type of cover. Let’s review these;

  • Peace of mind of having a lifelong protection.
  • Often used as mandatory savings.
  • Access to cash when your circumstances change.
  • Premium remains the same throughout the life of the policy, regardless of your age.
  • Guaranteed death benefit.
  • Your cash value portion will continue to grow each year with guaranteed interest earnings.
  • Possible dividend earnings, which can be used to increase your cash value, reduce premiums, or withdrawn for other purposes.
  • Possibility to save money to fund your retirement.
  • Premiums are much higher compared to term life insurance.
  • Not flexible when you need to increase or decrease your cover.
  • The cover amount does not keep up with inflation, which puts your beneficiaries at risk of underinsurance at the time of claim.
  • Poor investment choice as the interest you earn on the cash value may be lesser than other available investment alternatives.

It is important to note that although whole life insurance policies are generally regarded as “whole of life,” they do in fact expire when you turn 100 years old. This means, if you were to live to 100 or more, the policy would mature and the face value would then become payable.

Is Whole Life Insurance still available in Australia?

Whole life insurance availability ceased in Australia having been taken over by superannuation when the Keating Labor (Federal) government made such protection compulsory in 1992 - as means of providing sufficient retirement funds for a fast aging population. Superannuation contributions by the employer and employee being invested in group amounts are able to attract large returns that allowed fund members to retire independently of government. Superannuation also includes a term life insurance component that pays a death benefit should the fund member die before reaching retirement age.

The forced take up of superannuation within the community saw the demise of whole life insurance as superannuation provides similar protection as did whole life insurance but at far lower cost and far greater returns. However, whole life insurance did provide a much needed insurance cover even though it was never able to provide the large amounts at the same cost as could term insurance.

Can I still obtain Whole Life Insurance quotes online?

As previously mentioned, whole life insurance in Australia has been superseded by the more flexible and cost-effective term life insurance. Therefore, it is no longer possible to request an online quote for whole life insurance policies.

Why is Whole Life Insurance no longer available?

Whole life insurance policies were generally used to serve multiple purposes - to provide a death benefit, investment vehicle and savings for retirement years. However, over the years the confidence in whole life policies began to lack as inflation impacted the benefit amount, and was proven to be inadequate to support a comfortable retirement due to the increased cost of living.

Another reason for the loss of popularity was the poor performance of the investment component of whole life policies, which were focused primarily in fixed interest securities, especially in times of rising inflation and interest rates.

Whole life insurance policies continued to lose support as the commission and expenses incurred from establishing these policies accumulated up to two years worth of premiums, which in turn significantly affected the cash value in the early years.

Therefore, when superannuation became mandatory and term life came into the Australian market, whole life insurance was no longer offered by life insurance companies.

What's the difference between whole life and term life insurance?

Similar to whole life insurance, term life cover provides a lump sum death benefit in the event that the policyholder passes away while the policy is still active. There are some notable differences between whole life and term life insurance. These include:

CharacteristicsWhole Life InsuranceTerm Life Insurance
CostMore expensive, due to the investment portion of the policy.More cost-effective.
Length of CoverCovers you for your entire life, provided that premiums are paid when due.Remains active for the term selected by policy owner at time of application. This can usually be renewed into the future.
FlexibilityNot so much - you can’t change your cover amount when your needs change.Very flexible - you can apply to increase your cover when necessary without having to provide further medical evidence.
InflationDeath benefit stays the same, regardless of the inflation rate, which may result in insufficient cover in the future.Cover is automatically increased each year to keep up with inflation.
Features and BenefitsThe cash value component allows you to borrow funds when required, used as a collateral against a loan, or to pay for your premiums.Greater range of features and benefits that you can tailor to suit your needs. You can also link term life with other types of life insurance to cover temporary and permanent disability.

Financial advisers will often recommend term life insurance for insurance purposes and suggest that you find other ways to invest the remainder of your money, but this depends on how much money you have available for investment purposes and whether you have the capital available to take advantage of the most profitable investments.

How long can term life insurance be taken out for?

You have the power to select a period of cover most suitable for your situation. Applicants usually select terms of 5, 10, 15, 20 and 30 years. Another benefit of term life insurance is that you will continued to be insured in the future as long as you meet the premium payments when due, regardless of any changes to your health, occupation or pastimes.

How are premiums paid for?

You are also in control of choosing the premium structure that best suits your financial situation:

  • Stepped
  • Level
  • Hybrid

How does it work?

Your premiums will stay the same regardless of your age with level premiums, however, it will convert to stepped premiums at the cut-off age, usually between the age of 60 to 65. With stepped premiums, your rates will increase overtime with age and become considerably more expensive in the later stages of life. On the other hand, Hybrid premiums offer the benefits of both level and stepped premiums, so your premiums will increase as you age at the first stage of your cover, and fixed to a specific rate for the rest of the policy life.

Will Whole Life Insurance ever return to the Australian insurance industry?

An important question was raised in a recent MDRT gathering for financial professionals in 2013 on whether the time has come for whole life product to make its comeback to the Australian market. Jeffrey Ranz, a US based adviser, shared his opinion that the major distinction between term life and whole life policies comes down to ‘when’ and ‘if.’ The question with term life insurance is ‘if’ the policy will provide a payout, while whole life is a matter of ‘when’ the policy will be paid. Ranz concluded that whole life insurance is the only cover that can guarantee this 100% of the time, but not so much with term life insurance.

The Australian market may one day see the revival of whole life insurance when the industry sees the merits of bundled life insurance and savings/investment plan.

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Richard Laycock

Richard is the senior insurance writer at finder.com.au and is on a mission to make insurance easier to understand.

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