Term vs Whole Life Insurance - What You Need to Know

By: Updated: December 3, 2021

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Whole life and term life are the two main types of life insurance in Canada. People typically take out life insurance to provide for their loved ones in the event that they die. No one likes to think about their demise, but it’s important to plan for what your spouse and children would do if you are no longer there to provide an income.

Read on to learn about the differences between a whole life policy and term insurance – so that you can determine which is best for you and your family.

 

What is whole life insurance?

As its name suggests, whole life insurance can last for your whole life. It never expires as long as you cover the premiums. When you die, it pays out the benefit amount that you have purchased. In addition, it has a savings component that you can tap into during your lifetime.

 

What is term life insurance?

Term life insurance has a set term, which could range from 5 to 40 years. When the term ends, and assuming you are still alive, it simply expires. You get nothing. There is no savings component like there is for a whole life plan.

 

How does a whole life policy work?

As indicated, a whole life policy lasts your entire life. It never expires as long as you continue to pay the premiums. Part of the premium goes toward goes toward the actual insurance so that your family can be paid the death benefit when you die. The other part of the premium is put into savings for you. Over time, this can accumulate into a substantial sum. This is known as cash value.

The cost of whole life insurance varies. The biggest factor is the death benefit that you are insuring. Obviously, it costs a lot more to purchase $250,000 in insurance than $50,000.

Your age will have a big impact on the premiums you pay. A 30-year-old man has much less risk of dying than someone in his 60s. Therefore, the older man will have to shoulder higher premiums.

In addition, you will likely be asked to take a medical exam. If you have any serious medical conditions, such as cancer or diabetes, you could be required to pay much higher premiums or may be denied a policy.

There are a few advantages of taking out a whole life plan:

  • Your premiums stay the same: Your rate is set when you first purchase insurance. Even if inflation is high and the prices of other goods are soaring, you never see an increase.
  • The savings component means that your policy increases in value every year.
  • It continues for your entire life as long as you pay the premiums.

 

Example of whole life insurance

Nadine is a 40-year-old single mother with a 15-year-old daughter. If she dies unexpectedly, Nadine would like to ensure that her daughter has enough money for university and living expenses. She would also like to save money and leave her daughter an inheritance when she passes away (hopefully at an old age).

Nadine decides to purchase a whole life policy with a $500,000 death benefit. It costs her $334 per month or a total of $4,008 for the year. In addition to the death benefit, it has a savings component that she can eventually tap into.

Knowing that her daughter will have enough money should she die, Nadine sleeps soundly at night.

 

How does a term life insurance policy work?

A term life policy is very straightforward. You select the term and the death benefit you would like your family to receive if you pass away. You then pay the premiums throughout the term of the policy.

A 20-year term policy can cost as little as $47 per month for a $500,000 policy for a 40-year-old man. If you die during the 20-year term and have kept up your premium payments, your family will receive $500,000 – tax free.

At the end of the term, your insurance simply expires. At this point, you have two options. Forgo insurance if you no longer need it; or purchase a new policy. However, if you decide to get a new policy, your rates are likely to be higher. That’s because you have gotten older and are at a greater risk of dying.

 

What is the advantage of term life insurance?

Term life insurance offers a couple of advantages:

  • Cost: This is the biggest difference between whole life and term life. Whole is between five and 15 times more expensive than term. A simple term policy can be affordable for a family on a budget. A whole life plan may be out of reach.
  • You can cancel it: If your kids are grown, your spouse has a solid income and you don’t have any big debts, you may not need life insurance any longer. You can simply let it expire and not renew at the end of the term. Or you can cancel it before the term ends. Unfortunately, you won’t get any premiums back.

 

Comparison chart of whole life and term life insurance

Here’s an example of monthly premiums for a $500,000 life insurance policy for different ages and gender. This assumes that the individual is healthy. Your premiums may vary based on your medical history and current health status. Chart information is courtesy of Rate Hub.

Insured person

Whole Life

Term Life (20 years)

Male, 30 years old

$247

$31

Female, 30 years old

$207

$23

Male, 40

$398

$47

Female, 40

$334

$35

Male, 50

$657

$127

Female, 50

$554

$86

 

As you can see, the term rates are dramatically cheaper than a whole life plan. If you are on a tight budget, it may make sense to go with term insurance. In addition, the rates for women are significantly lower than for men, since they tend to live longer.

 

Should you choose whole life or term life insurance?

It really depends on your current situation and your goals. Analyze your needs and try to imagine what kind of insurance you will need in the future. Term life is definitely simple and straightforward. If you want to put money away without purchasing whole life insurance, there are some great alternatives, including a Registered Retirement Savings Plan (RRSP) or a Tax Free Savings Account (TFSA).

On the other hand, a whole life policy offers the savings component and you can build up a tidy nest egg over time. Only you can answer the question of which insurance type is best for you.

 

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