What's the Difference Between Term and Whole Life Insurance? (2022 Update)

Verified by Tobin Tuff, Certified Life Insurance Advisor

The main difference between term and whole life insurance is:

  • How much the premiums cost on a monthly basis
  • How long these policies cover you for
  • Whether or not they have an investment component
  • Whether or not there's a guaranteed payout (death benefit)

At PolicyMe, we believe that term life insurance is right for most Canadian families who have people who depend on them financially.

Still, whole life insurance is a better option for some. Keep reading to learn about the pros and cons of term life insurance vs whole life insurance in Canada, and how they stack up in terms of cost.

Term vs whole life insurance in Canada: the biggest differences

Let's start with a quick summary of the four biggest differences between term and whole life insurance.

1. Cost:
  • Whole life insurance policies can cost 5 to 10 times more than term life insurance.
  • Term life policies are very affordable.
2. Policy length:
  • Whole life insurance covers you for your entire life. 
  • Term covers you for a period of time, such as 10, 20 or 30 years.
3. Cash value:
  • Whole life insurance policies accumulate cash value.
  • Term life insurance policies don’t have an investment component.
4. Payout:
  • Whole life insurance pays out upon your passing, whenever that may be.
  • Term life insurance only pays out if you pass away within your coverage period.

PolicyMe offers some of the best term life insurance rates in Canada, coupled with a seamless online experience. Get a no-obligation quote online in seconds.

If you're looking for the TL;DR version for the main difference between term and whole, check out the chart below:

Chart detailing the differences between term vs whole life insurance

Who is term life insurance for vs whole life insurance?

Whole life insurance is suited for high-net-worth Canadians who need it for estate planning. And life insurance is only meant to replace your income in the event that you pass away. It's not designed to help you invest your money efficiently.

Canadians are getting wise to this. According to the Canadian Life and Health Insurance Association, term life insurance grew in popularity by 39% in 2020, while whole life insurance only grew by 12%.

Term life insurance best meets the needs of most Canadian families. It's a more affordable product, too.

There are many better, more profitable ways to invest your money other than whole life insurance. Options like an RRSP or TFSA will generate more money for your loved ones after you're gone.

Take a look at this quick explainer video for more information about how term and whole life insurance compare.

Is term or whole life insurance better?

We’ve outlined the difference between term and whole life insurance. But how can you decide which policy is actually best for your family’s needs?

Here are a few things to keep in mind as you make your decision.

When to pick term life insurance

  • Term life insurance can protect your family financially. For example, if you pass away but still have financial debt (like a mortgage), term life insurance acts as additional income to help your family manage those obligations.
  • In Canada, term life insurance is best for those who want an affordable option as it’s typically cheaper than whole life insurance, especially if you’re young and in good health.
  • If you want to save money and reallocate portions of your budget, a cheaper term life insurance policy means you can save what you would have paid for a whole life policy and choose to put that money elsewhere. For example, you can invest the difference.

When to pick whole life insurance

  • Whole life insurance is a lifelong commitment that you need to be able to afford and is best for high net worth individuals. There’s a risk of losing your policy altogether if you fall behind on the payments so make sure it’s a plan you can stay on top of over the long term.
  • If you have dependents that you’ll leave behind when you pass away, the death benefit from whole life policies is a valuable inheritance. Anyone you claim as beneficiaries on your policy will receive direct payouts in the event of your death, ensuring their financial futures.
  • If you’re raising a child with disabilities or supporting an older family member, whole life insurance can establish a trust fund to ensure they will continue to be taken care of after you’re gone. Speak with your attorney about how to set up this type of trust. There may be other, more efficient ways of protecting them financially.

For the average Canadian family's needs, term is often the better option.

Life adds up; if you’re like most families whose monthly pay supports expenses like groceries, debt payments, savings, etc. an affordable term policy might be right for you.

Cost comparison: term vs whole life insurance in Canada

1. Temporary vs. guaranteed life insurance payouts

A whole life insurance policy is guaranteed to pay out eventually, as long as you don't die in a way not covered by your life insurance policy.

Term life insurance only pays out if you pass away during your term length. Because term is meant to help protect you for a “temporary” time period, like while the kids are young or while you’re paying off your mortgage.

2. Higher upfront costs vs. fixed policy rates

You're more expensive to insure when you're older than when you're younger. Insurance companies compensate for this by charging more for permanent life insurance from the beginning.

In a sense, you're paying upfront while you're young and healthy and should be paying lower monthly premiums. This is because the insurance company knows you'll likely need to be covered when you're older and at higher risk of passing away. In fact, they'll probably need to cover you until you pass in your 80s.

On the other hand, you’ll pay a fixed monthly premium with term life insurance as the payments are consistent throughout the entire duration of your coverage.

3. Fixed coverage periods vs. lifetime premiums

Term life insurance works to protect your loved ones during a specific period of time when you actually need financial protection via life insurance.

This could be when you have kids who depend on you or you have large loans such as a mortgage or school loans that you're just starting to pay off.

You're only paying for coverage for 10, 20, or 30 years when you're at a lower risk of passing away as opposed to whole life insurance that sustains throughout your lifetime. As a result, term life insurance is a lot cheaper than whole life insurance.

And better yet, PolicyMe has some of the most affordable term rates in Canada. Check out the comparison table below to see how we stack up against other companies.

Term Vs Whole Life Insurance blog - term life insurance cost comparison table

Get the most affordable term insurance with the same high-quality coverage with PolicyMe. Get $10,000 of free life insurance for each of your children (and kids to be) on top of your policy.

No extra costs or hidden fees.

To make the right decision with coverage, it helps for you to know the meat and potatoes of the differences between term and whole life insurance. Let’s break down exactly what each option entails below!

What is whole life insurance?

Whole life insurance is a kind of permanent life insurance where the policy's coverage lasts for your entire life and the life insurance premium is designed to build cash value. But if your TFSA and RRSPs aren’t maxed out, it’s not a very efficient investment method.

It sounds like a great type of policy in theory, but there are other costs that could make it less beneficial. It’s far more expensive and inflexible than other life insurance policies.

And whole life insurance policies are also full of fine print, making them complicated and difficult to understand. This is an actual example of a whole life insurance contract:

Example portion of a real whole life contract for article on Term Vs Whole Life insurance

You can review our comprehensive guide to whole life insurance to dive into deeper detail about the benefits of whole life insurance, how the cash value system works, and also more information about pricing.

What are the pros and cons of whole life insurance?

There are a few considerations to keep in mind when it comes to whole life insurance.

Whole life insurance pros

  • Permanent policies: Whole life insurance never expires, so you can keep it for your entire lifetime.
  • Guaranteed savings: Even though it's an expensive way to invest your money, it can force you to save funds every month.

Whole life insurance cons

  • Price: Whole life insurance is a lot more expensive than term life insurance, up to 10 times more!
  • Complicated: Permanent life insurance policies are much less straightforward than term insurance. You need to understand all the fine print before buying this kind of policy.
  • Inflexible: There are usually penalties for cancelling early.
  • High interest rates: In most cases, the rate of return you'll receive on the investment component of this policy is lower than what you'd get with alternative options, like RRSPs and TFSAs.

What is term life insurance?

Term life insurance coverage works by providing protection for a predetermined time period, usually between 10 to 30 years. If you pass away during the agreed-upon term, your beneficiaries will get the amount that you’re covered for.

Your loved ones can then use this death benefit to replace your income, pay off debts, support children’s schooling, or cover other living expenses.

In Canada, term life insurance policies have much lower annual premiums than whole life insurance policies. But the premiums will probably increase if you renew the policy. Even with higher annual premiums, it's still a better financial investment than whole life insurance.

Term policy contracts are also easier to understand and transparent, like this sample policy from PolicyMe:

Example portion of a real term life insurance contract for article about Term Vs Whole Life insurance

What are the pros and cons of term life insurance?

Let's take a look at some of the advantages and disadvantages of term life insurance.

Term life insurance pros

  • Straightforward: Term life insurance is straightforward and the policies are easy to understand. You don't have to worry about cancellation charges, hidden fees, or other risks, like the things that are usually buried in fine print.
  • Price: Term life insurance can be 6 to 10 times cheaper for the same amount of coverage. The average cost is about $30 a month for term versus over $150 a month for whole life policies.
  • Flexibility: You can cancel term life insurance at any time.

Term life insurance cons

  • Expiration: Term life insurance eventually expires. If you still want coverage after that point, you'll need to shop around for a new policy. The good news is that most term life insurance products offer features that let you continue your coverage after the term ends, without having to show proof of good health, or go through additional medical underwriting. This gives you some protection against getting sick, because your renewal is guaranteed.

PolicyMe removes cost barriers to term life insurance, with the same high-quality coverage at a better price.

And by cutting out inefficient steps from the admin and application process, we’re able to offer the lowest rates in Canada.

Key takeaways: term vs whole life insurance

At a high level, these are the major distinctions between term and whole life insurance:

  • Term life insurance lasts a fixed period of time, typically ranging between 10 to 30 years
  • Whole life insurance is considered a permanent form of coverage that lasts for your entire life
  • Term life insurance is typically the more affordable option for families

The bottom line is that we believe that term life insurance is the right choice for most Canadian families. Whole life insurance is more suitable for those with permanent dependents or who are wealthy individuals.

FAQs: Term and whole life insurance 101

Which is better for seniors, term or whole life insurance?

Which is better for seniors: term or whole life insurance? Well for starters, term life insurance is the more affordable option and you can also receive coverage into your golden years if you renew it in time.

Term life insurance will also help your loved ones pay off debts, maintain their lifestyle and support them in a tough time.

Can I convert my term life to whole life?

Most term insurance policies have something called a ‘term conversion rider' included in the terms of your agreement, which would allow you to convert your policy from term to whole life insurance.

But watch out: there are extra costs associated with this (and most other riders, too).

Can you switch from whole to term life?

You can switch from whole life insurance to term. But in most cases you have to cancel your existing policy to do this. There might also be penalty fees you'll have to pay out of any earned cash balance, resulting from cancelling your policy early. These fees will be taken out of any value in your account, prior to it being paid out to you.

Unfortunately, because you need to cancel your whole life policy before you can switch to a term policy, your costs will need to be reevaluated at the time that you create your new term agreement. This means, your premiums will likely be higher than they would have been if you had just signed up for a term policy in the first place.

What is the difference between long-term care and whole life insurance?

A long-term care life insurance policy helps cover the cost to administer long-term care to senior citizens who require assistance throughout their day-to-day lives. This includes costs to assist with routine daily activities like bathing, dressing, or getting in and out of bed.

Unlike whole life insurance, which has more of a cash value investment attached to it, long-term care insurance reimburses senior citizens for the cost to help them get through their days.

Is whole life insurance a scam?

No, whole life insurance is not a scam. But it is a far more expensive life insurance policy than term life insurance because it provides lifelong coverage and also includes the cash value component.

And caution: commissioned life insurance advisors often push it because it’s the more expensive option.

Do I need both term and whole life insurance?

No, you do not need to acquire both life insurance policies for your own needs. But your needs will likely change over time.

And as those changes become apparent you may require multiple policies that hybridize both term and whole life insurance incentives to provide the best possible protection for your loved ones at the most affordable price.

What type of life insurance should I avoid?

The type of policy that works for you depends on your family’s specific needs. The policy that works for you will depend on your specific needs that include details about your lifestyle, your current health, and any dependents you may ultimately be responsible for supporting.

The bottom line is that you should avoid buying more life insurance than you need.

Helene Fleischer

About the Author

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