Term vs Whole Life Insurance: What's Better?

Term vs. Whole Life Insurance: What's Better?

Term life insurance offers coverage for a specific period of time (usually between 10 and 30 years) and is typically more affordable than whole life insurance, which provides lifelong coverage at a far higher cost. 

In most cases, term life insurance is a better option as it aligns with real-world needs and allows you to end your coverage when you no longer have significant financial obligations, like a mortgage or dependent children.

Term vs. whole life insurance at a glance

The most significant difference between a term life insurance policy and a whole life insurance policy is the coverage period, but there are other key differences. Here’s a high-level rundown of how they compare:

How to choose between term and whole life insurance

Generally speaking, term life insurance is the best choice for most Canadians. It’s a good option if you:

• Want affordable premiums. Term life insurance premiums are far less expensive than a permanent policy, especially for adults who are young and healthy.
• Need coverage for a specific period. You can purchase coverage for the number of years you have large financial obligations, such as a mortgage or dependent children, and end your coverage once you no longer need that financial protection. 
• Don’t need to accumulate cash value. Term policies don’t grow in value, but you can invest the money you save with the lower premium elsewhere.

Advice from an advisor:

“[Term insurance] is generally for people who want to have their mortgage covered. If they pass away, they want to make sure that the debt does not fall on the family. Term insurance, 100% is the way to go. If they're a young family and they want to be responsible and look after their kids, term insurance is the way to go. It's going to get you the most coverage and the biggest bang for your buck. Once your kids are all grown up and independent, you don't need to worry about insurance anymore.” — Erik Heidebrecht, Life Insurance Advisor.

On the other hand, whole life insurance might be a good choice if you:

• Have a high net worth. If you’ve maximized your FHSA, RRSP, and/or TFSA contributions and want an additional way to leave a legacy or take advantage of tax-free growth, you might consider a whole life policy.
• Can afford higher premiums. Permanent coverage is 5 to 15 times more expensive than term coverage and lasts your lifetime, so before you purchase a policy, you want to ensure that you can comfortably afford the cost. Cancelling the policy may incur a hefty fee.
• Have lifelong dependents. If you’re caring for a dependent who will still rely on you at the time of your death, this type of policy can provide for their ongoing care and your peace of mind. It’s best to speak to an attorney if you’re interested in setting up a trust for this purpose.
• Want to build cash value. A whole life policy’s cash value grows over time at a rate set by your insurance provider.

Ultimately, the type of insurance that is best for you will depend on your unique financial situation.

Pros and cons of term life insurance

Term life insurance is generally the better choice for most people since the need for life insurance decreases significantly after your main financial obligations (like mortgage and dependent children) end. That said, there are some drawbacks to term life insurance that you’ll want to consider.

‍

Pros

Cons

• Coverage is temporary and policy expires when the term ends
• Premiums can increase significantly upon renewal
• No cash value or savings component 

Pros and cons of whole life insurance

Whole life insurance tends to be more appropriate for wealthy individuals who are focused on estate planning, or those who have lifelong financial obligations or dependents who require lifelong care.

‍

Pros

Cons

• Significantly more expensive than term life insurance
• Policyholders may incur an expensive penalty for cancelling 
• More complicated to understand
• Money will likely grow faster if invested elsewhere

While some people look to whole life insurance to cover funeral expenses, we typically find that self-funding final expenses is significantly more affordable than maintaining a lifelong insurance policy.

How much does term vs. whole life insurance cost?

We’ve noted that term life insurance is typically a lot more affordable than whole life insurance—but sometimes, it’s more helpful to see the numbers laid out in front of you. 

Life insurance premiums can vary significantly depending on your age, health, amount of coverage, and more. Here, we’ve made the following assumptions:

• $500,000 in coverage
• Excellent health
• Non-smoker
• No pre-existing conditions

Remember that these are just averages—to find out how much it might cost for you, get a free life insurance quote.

‍

Applying for term vs. whole life insurance

The application process is similar for both term and whole life insurance coverage. You’ll be required to:

• Complete an application form
• Answer a series of questions about your medical history; a medical exam may be required, especially for lifetime coverage
• Go through underwriting

While it can vary by life insurance company, term life insurance applications are typically simpler and quicker. Whole life insurance policies tend to require more detailed medical evaluations and can take longer to underwrite due to the more complex nature of the policies.

PolicyMe offers some of the best life insurance rates in Canada. Get a free, no-obligation quote in seconds to see just how affordable securing your loved ones’ financial future can be.

FAQs