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Term life versus whole life insurance

by Mark Cluett
11 min read

Let’s face it – no one likes thinking or talking about their own death. But, when it comes to having a financial safety net for your family, life insurance is something that would most definitely cross your mind. 

We all want to ensure our families are financially secure at all times and, most importantly, at a time when we are not around to provide financial support. During such times, life insurance is what provides one with the comfort or assurance that their family is well taken care of upon their passing.

Broadly speaking, there are two main types of life insurance, term life and permanent insurance. While permanent insurance encompasses both whole life and universal life insurance, it is whole life insurance that is more commonly purchased and the simpler form of permanent insurance. Understanding the differences between term life insurance and whole life insurance will help you identify what works best for you and the protection needs for your family.

KEY TAKEAWAYS

  • Both are financial protection products, but work in very different ways
  • A term life insurance policy is more cost-effective
  • Typically chosen by younger applicants with temporary needs (raising children, covering  mortgage)
  • A whole life insurance policy is more expensive
  • Provides lifelong protection from financial impact of one’s death on their dependents, no matter what the situation at that time
  • With the help of an experienced broker you can determine which financial protection product fits your lifestyle and budget
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What is Term Life Insurance?

Term life insurance is life insurance that lasts for a specific period of time known as a Term. The term can be a fixed number of years or until you reach a certain age (e.g. age 65). You pay premiums to the life insurance company until the expiry of the term.

In return, your beneficiaries are entitled to receive a tax-free death benefit if you die within the term of the policy. Once the term ends, your coverage also expires, and you can stop paying premiums.

Term life policies are usually offered for periods ranging from 10, 20, or 30 years to specific ages such as age 65. Some  companies will also allow you to pick-a-term, in which case you can choose your own life insurance coverage period to meet your needs.

Put simply: term life insurance is easier to understand and has lower prices. 

Learn more about term life insurance here.

What is Whole Life Insurance?

Whole life insurance is a form of permanent life insurance that provides you with coverage from the day the policy is settled until the day you die; in other words – for your entire life. As long as you pay premiums into the policy, the coverage never expires – it’s as simple as that.

Additionally, whole life insurance also combines this financial protection with investing. There is a cash value component associated with most whole life coverage. As you pay into a whole life policy over time, part of the premiums are invested and generate cash value. 

This cash value may be accessed during the policyholder’s lifetime either by withdrawing or borrowing against it. Since the coverage extends to one’s entire life and you retain the value you put into it, whole life insurance typically has higher premiums.

Learn more about whole life insurance here.

Differences Between Term and Whole Life Insurance

A Head-to-Head Comparison
Term life insuranceWhole life insurance
Temporary coverage for a fixed period of time e.g. 10 years, 20 years, 25 yearsGuaranteed lifelong coverage
Best suited for temporary needs (mortgage, children's education, lifestyle protection)Best suited for permanent needs (estate planning, retirement income, final expenses)
Guaranteed premiums for the initial term onlyGuaranteed level premiums for life
Affordable cost of insurance, for the initial termPremiums are higher due to lifetime coverage and savings component
Offers death benefit but does not build any cash valueOffers death benefit and access to a growing cash value
No paid-up value or featuresCan be paid-up after a specific period (e.g. 10 or 20 years)
Death benefit is fixed when policy is purchased and doesn't changeDeath benefit may increase with dividends
Loans/withdrawals cannot be taken against term life policiesPolicy loans can be taken and dividends may be withdrawn
Benefits will be received only at policy holder's deathBenefits may be received during lifetime as dividends or loans
Can be converted into permanent or whole life productsNo conversion required
Will lapse 30 days after premium due dateWill continue in force as long as cash value can covers premium
SOURCE: PolicyAdvisor.com

What are the pros and cons of term life insurance?

Pros

  • Simple to understand
  • Inexpensive for the term
  • Can be converted into permanent coverage

Cons

  • Coverage is temporary
  • Premiums increase upon renewal
  • Cannot borrow or cash-in on the policy

What are the pros and cons of whole life insurance?

Pros

  • It’s permanent life insurance so coverage never expires
  • Premiums are guaranteed over life
  • Can borrow or cash-in on the policy

Cons

  • Premiums are expensive
  • Investment returns may be modest versus other opportunities
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How much does term life insurance cost versus whole life insurance?

As we’ve mentioned, because whole life insurance has a cash value and investment component, the monthly premiums are significantly higher than term life insurance.

Please take note – these are representative values based on the average costs of term and whole life insurance from Canada’s best life insurance companies.

Whole Life Vs Term Life Insurance Cost

Coverage Amount: $250,000, Non-smoker

MALEFEMALE
AgeWhole Life20-Year Term LifeWhole Life20-Year Term Life
30$127$19$107$15
40$205$29$174$22
50$328$72$279$52
60$554$226$466$151

Which to choose – term life or whole life insurance?

Now that you know the main differences between term life and whole life, it will be a lot easier for you to ascertain which type of insurance would best suit your given situation.

Why term life insurance may  be right for you

Term life insurance is the best option if your needs are temporary in nature, such as paying off a mortgage debt or providing the funds for education costs of your children or other dependents.

Term life insurance may also be a good option if you have budget constraints. Because of its temporary nature, term life insurance is a less expensive product. However, keep in mind: with term life insurance, the renewal cost increases. Because the cost of insurance increases with age, your new rate upon renewal will be substantially higher than your original premium.

Since insuring older individuals poses a higher risk to insurance companies, they charge a higher premium for taking on that risk. 

Another aspect to keep in mind: it is possible to convert your term life policy into a whole life insurance policy in the future. With term life insurance policies, you do have the option to convert to a permanent insurance policy prior to a specified age (e.g. 70 years), should you require. Typically, this can be done without providing any proof of insurability or requiring a medical exam. 

Of course,  conversion into permanent coverage comes with a higher insurance premium (since you are taking coverage for life), has to be exercised within a certain period of time (that varies by policy and company), and – lastly – has to be taken with the original insurance company you got your insurance with in the first place (as you are converting the policy).

Summarily, term life insurance is a good fit if:

  • Your needs are simple
  • Your needs are not permanent (like a reducing mortgage debt, or providing for dependent children)
  • You have a limited budget
  • You are still deciding on your coverage needs but want the peace-of-mind of protection while you decide to convert your current policy or purchase additional coverage
term life insurance versus whole life insurance

Why whole life insurance may be right for you

While term life insurance is the most commonly purchased coverage due to its affordability, whole or permanent life insurance has a long list of its own benefits. If you are more interested in financial protection for the rest of your life, or are intrigued by the investment component of your policy, then whole  or permanent life insurance may be the right protection for you – especially if the higher cost is not a factor. 

While the premiums are more expensive than what one would pay for term life insurance, that price comes with the ultimate peace–of-mind of lifetime coverage. This is in stark contrast to term life insurance which expires once its term is over (though you have an option to renew at a higher cost, as mentioned) or you reach a certain age. 

Whole life insurance has a cash value with a guaranteed rate of return on the portion of your premium which gets invested. The cash value grows gradually and is tax-deferred, (you won’t have to pay taxes on its gains while they are accumulating). Whole life policies can also pay dividends in the case of participating whole life policies. While a savvy money-mover may be better served handling their own investments, these types of whole life policies present a hands-off approach to money management which you can leave behind for your beneficiaries or estate.

Furthermore, the cash value of a whole life policy can be presented as collateral to a lender for obtaining a loan, mortgage, or line of credit. One can even take a policy loan against the cash value; though keep in mind that the loan will need to be paid back with interest. 

Ultimately, you may also choose to surrender the policy for just plain cash. In this case, surrender charges would apply, subtracting from the value of the policy, and you will no longer have coverage. 

Summarily, whole life policies are a good fit if:

  • You want coverage into your old age
  • You prefer guaranteed premiums for lifetime
  • You need permanent life insurance coverage to meet final expenses (funeral, debts, estate tax)
  • You are looking for built-in cash value that you can access to supplement your retirement income or other financial needs during your life 
  • You’d like future tax-free growth in cash value and an increase in death benefit
  • You need to bequeath funds to a lifelong dependent
  • You want to leave a large amount of money to a charity, group, or association 
  • Budget is not a concern

Which companies offer term and whole life insurance?

Most of Canada’s major insurance companies offer both term and whole life insurance. Companies like BMO Insurance, RBC Insurance, Canada Life, Assumption Life, Industrial Alliance, Canada Protection Plan, and more offer some of the best term life insurance protection in Canada.

Similarly, these companies, as well as others like Wawanesa, Empire Life, Equitable Life, Foresters Financial, SSQ Financial Group, and more offer some of the best whole life insurance plans in Canada. Be sure to read all of your insurance reviews before you make a decision.

Which is better: a whole life or term life insurance policy?

Making the decision between term life insurance versus whole life insurance is no easy task. While budgetary considerations may make the choice obvious for some, the choice between the two is not as simple as reading an article. 

Generally, term life insurance is a more cost-effective choice when you are young, and your needs are temporary (like raising children or paying down your mortgage). In contrast, whole or permanent life insurance policies provide lifelong protection from the financial impact of death on your dependents, no matter what the situation.

Our licensed insurance brokers have years of experience helping Canadians choose what kind of protection is best for the needs of themselves and their dependents, and fits within their budget. Schedule a call today and our experts will walk you through your coverage options and help empower you to make the right decision for your protection needs.

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