If you are looking into getting yourself covered for critical illness, you probably have to decide between a Whole life plan, a term plan or even Investment-linked plan (ILP). Which should you choose? Is there a best option amongst the three? Well… spoiler alert, it depends. In this article, we will delve deep into each option, working out the pros and cons and share some insights.

Firstly, why do you need critical illness coverage?

TDLR; You get “pay advancement” from insurance coverage, so you can stop working for a number of years and focus on recovering.

Critical illness coverage is essential because it offers financial protection in the event of severe health conditions that could significantly impact your lifestyle and financial stability. Unlike basic health insurance, which covers hospital bills and medical treatments, critical illness coverage provides a lump sum upon diagnosis of specific conditions like cancer, heart attack, or stroke. This payout can help cover the cost of treatments not included in standard health plans, replace lost income during recovery periods, and assist with any lifestyle adjustments necessary due to illness. As medical advancements increase our lifespan, the likelihood of encountering such health issues unfortunately rises as well. Therefore, having a critical illness plan ensures that you and your loved ones can maintain financial security and focus on recovery without the added stress of monetary constraints.

What are my options

1) Term plan

Term plan, as the name suggests, provides you with coverage for a term. It is almost like renting a house, where you pay for as long as you want to be a tenant. Your coverage ends when you stop paying and whatever that you have paid previously will not be recoverable.

Why choose a term plan?

Pros: A term plan is one of the most cost effective ways to get the coverage that you need. This is because unlike the two other options, you are not paying extra for “savings” or “investment”. Any premium that you put in for the term plan goes directly into giving you the coverage.

Cons Since, there’s no extra premium that goes into “saving” or “investment” you have to pay as long as you want the coverage. If you are looking for a term plan that covers you beyond 65 years old, you will realize that the cost increases exponentially

2) Whole life plan

Unlike a term plan, a whole life plan usually provides protection up to the age of 100 years old. Generally, a whole life plan has a limited payment term and has a saving component embedded into it. This means that you only have to pay for a number of years and you will be covered up till you are 100 years old.

It is almost like buying a BTO in Singapore, you pay for your house mortgage and once it is paid, the house is yours. But for HDB when your 99-year HDB lease is up, your flat value goes to $0 whereas for a whole-life plan a lump sum of cash known as maturity value will be given to you at the end of the whole-life plan or when you choose to surrender before it ends.

Why choose a whole life plan?

Pros: One of the most attractive things about the whole life plan is the limited paying term and cover till 100 years old. Imagine being 40 plus and all your critical illness insurances have already been paid for. It is also good if you wish to have some coverage after 65 years old. Yes, critical illness payout is for income replacement, so technically you wouldn’t need coverage after 65 years old. But it’s a good thing to have, the payout after 65 years old can help to cover some hidden costs of critical illness that aren’t covered by your hospital plan such as hiring a caregiver, home modification, etc.

Cons: It is generally much more expensive than the term on a yearly basis.

3) Investment-linked Plan

Investment-linked plan also known as ILP, is an investment plan that has an insurance component in it. ILP is more similar to a whole life plan, except the cash value is made up of investment rather than savings. What this means is that many of the features of the plan, such as critical illness coverage, surrender value, etc. are relying heavily on how well the investment does.

There are multiple types of ILPs in the market, the ones that we are referring to are those that embeds insurance into it.

Why choose Investment-linked Plan?

Pros: With ILP, the investment component is really a double edge sword. You can stop paying for x number of years during difficult periods and rely on the investment to fund your coverage. If the investment does really really well, you could potentially get the most out of it, compared to getting a term or whole life plan.

Cons: It is the most expensive out of the other two choices. You are heavily relying on the investment for your coverage. If the investment does not do as well as expected, you could potentially lose the policy due to investment poor performance. This is because the cost of insurance for an ILP plan increases as you age (unlike whole life and term plan).

Which should you choose?

Ultimately, every coverage option presents its own set of advantages and drawbacks. Our typical recommendation is to blend the benefits of both whole life and term plans.

This strategy affords you comprehensive coverage without straining your finances, ensuring protection extends into your non-working years.

Generally, we suggest steering clear of Investment-Linked Plans (ILPs) that incorporate insurance, due to their significant dependence on investment performance, which can add an element of uncertainty to your coverage stability.