Life insurance is one of the most important types of insurance you can buy. It provides peace of mind in knowing that your loved ones will be taken care of financially if something happens to you.
When considering life insurance, there are two main types to choose from: term vs whole life insurance. Both have pros and cons, so deciding which option is best can be challenging. All the best insurance companies in Canada offer term and whole life insurance, so you can easily find and compare quotes online.
In this blog post, we’ll break down the differences between term and whole life insurance, and discuss term vs whole life insurance pros and cons, so you can make an informed decision about what’s best for you and your family.
What Is Term Life Insurance?
Term life insurance is a simple and affordable life insurance policy. It usually lasts for a specified period, maybe 10, 20, or 30 years, or till you reach a certain age. The policy pays out a death benefit to your beneficiary when you die. Your beneficiary can use the payout for everyday living expenses, college tuition fees, mortgage, or other debts.
Your designated beneficiaries only receive a payout from your policy if you die during the policy term. If you outlive your policy and it ends, your beneficiary will receive nothing. When your policy expires or is approaching the term’s end, you can renew the policy without another medical examination. However, this will incur higher premiums.
Some term life insurance policies have a feature that allows a conversion rider. This means you can convert your term life insurance into whole life insurance. But if you stop paying premiums or let your policy expire, your coverage will end automatically.
Simply put, term life insurance is straightforward and has lower prices. Ideally, the policy term should match your financial goal. So, if you are a new parent, you might consider buying a 20-year coverage to cover you until your child no longer depends on you financially.
Benefits of Term Life Insurance
- It has a guaranteed death benefit amount.
- The premiums are more affordable than whole life insurance.
- Your insurance premiums stay the same during the level term period.
- You can convert term life to a permanent policy.
- If you want a policy specifically to cover your income-earning years, term life insurance is a good fit.
- If you want coverage for specific financial concerns with a timeline, such as a mortgage, you should consider term life insurance.
Drawbacks Of Term Life Insurance
- Coverage is temporary and has an expiry date
- No cash value that you can tap into while you’re alive.
- Premiums increase upon renewal
- If you still need life insurance after the term, renewal rates might be unaffordable.
What Is Whole Life Insurance?
Whole life insurance, mostly called permanent life insurance, is a complex policy with many benefits. It offers coverage for your entire lifetime. Your policy doesn’t expire as long as you pay your premiums. Your beneficiary will receive the policy’s death benefit, regardless of when you die.
In addition to your guaranteed death benefit, whole life insurance offers an investment account called a cash value. A portion of your premium goes into the policy’s cash value. The insurance company invests it in a savings account, which grows tax-deferred.
You can borrow against or withdraw from the policy’s cash value while alive. If the cash value is large enough, you can surrender the policy and take out the cash value.
Also, whole life insurance has guaranteed premiums and death benefits. This means your premiums and death benefit remains the same throughout your policy’s lifetime. However, whole life insurance has higher premiums than term life insurance.
Benefits of Whole Life Insurance
- It offers fixed premiums, so there are no surprise costs down the road.
- It offers lifelong protection
- Guaranteed death benefit.
- Some of the policies allow you to earn annual dividends
- It builds cash value at a regular rate.
- The policy offer life insurance riders, including living benefits
- It also offers extra coverage and features, such as accidental death and dismemberment coverage.
Drawbacks of Whole Life Insurance
- More expensive than term life insurance.
- More complex to understand the term life insurance
- It gives you little control over how your cash value grows
- Investment returns may be modest compared to other opportunities
- The death benefit will be reduced if you withdraw from the cash value or don’t repay loans you take on the cash value.
Term Vs Whole Life Insurance: Which Coverage Is Best?
Term life insurance is typically much cheaper than whole life insurance, making it a good option for people on a budget. It can also be a good choice for people who only need coverage for a specific time, such as when they are raising young children or paying off a mortgage.
However, because it is only temporary, term life insurance does not build up cash value like whole life insurance. If you cancel your policy before the end of the term, you will not get any money back.
In contrast, whole life insurance costs more than term life insurance but also provides lifelong coverage and builds up cash value over time. This makes it a good option for people who want peace of mind knowing that their loved ones will be taken care of financially if they die.
Whole life insurance can also be used as an investment tool, allowing you to grow your money while still being insured. However, because whole life policies are more complex than term life policies, they can be more expensive to maintain.
Ultimately, the type of life insurance you choose should depend on your needs and financial goals. If you want the cheapest option with the most coverage, term life insurance may be your best choice. However, if you want lifelong coverage and the ability to grow your money tax-deferred, whole life insurance may be the better option.
Below, I have outlined the more minor differences between term vs whole life insurance.
TERM LIFE INSURANCE | WHOLE LIFE INSURANCE |
Temporary coverage for a fixed time | Guaranteed lifelong coverage |
Premiums are guaranteed only for the initial term | Level premiums are guaranteed for life |
Best for temporary needs such as mortgage, children’s education, lifestyle protection | Best for permanent needs such as estate planning, retirement income, final expenses |
Affordable cost of insurance, for the initial term | Premiums are higher due to lifetime coverage and savings component |
You cannot take loans/withdrawals against term life policies | You can take policy loans and dividends may be withdrawn |
The policy offers death benefit but no cash value | The policy offers death benefit and a growing cash value |
Your policy payout is fixed when policy is purchased and doesn’t change | Your policy’s payout may increase with dividends for some policies |
Your policy’s benefits can only be accessed at your death | Your policy’s benefits may be accessed during your lifetime either through dividends or loans |
Can be converted into permanent policies | It does not require conversion |
Term Vs. Whole Life Insurance: Cost Comparison
Regarding how much life insurance would cost, term life insurance is often more affordable. It offers temporary coverage and has no cash value.
Whole life insurance premiums are typically higher. The coverage lasts your entire lifetime and grows cash value.
Below is the cost comparison from Manulife between term vs whole life insurance for $250,000 for 40-year-old smoking and non-smoking male and females for a 20-year term length.
WHOLE LIFE INSURANCE | TERM LIFE INSURANCE | |
Smoking Male | $330/month | $75/month |
Non-Smoking Male | $220/month | $28/month |
Smoking Female | $264/month | $52/month |
Non-Smoking Female | $183/month | $20/month |
Final Thoughts on Term Vs Whole Life Insurance
Term life insurance is the most affordable option, and it’s a smart choice for people who want to ensure their loved ones are taken care of financially if they die. It’s a good choice for young families who want to ensure their loved ones are taken care of financially if something happens to them.
However, if you’re older or have an enormous estate, whole life insurance may be a better option. It offers lifelong coverage at level premiums and a cash value component that can be useful for your retirement.
It would be best to consult an insurance expert to determine which type of policy is best for your needs. Contact me if you have any questions.
Hi, I'm Adeola Adegoke. I am a licensed Insurance Broker in Manitoba, and I hold a master’s degree in Mathematical Sciences (with a major in Financial Modeling) from the African Institute for Mathematical Sciences (AIMS), Tanzania.
Also, I have a second master's degree in Statistics from the University of Regina, and I am currently pursuing my Ph.D. in Statistics at the University of Manitoba.
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