Term vs Whole Life Insurance: What's Better?

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

Term life insurance is the best option for most Canadian families and individuals.

Term is the best option because it offers coverage for a specific period of time, usually between 10 and 30 years. Term life is a safety net to protect against the unlikely event that you die when you’re still young—and because that outcome is unlikely, insurance companies don’t charge much for the protection.

The result: You get affordable coverage during the years when your family’s financial situation is more vulnerable, but don’t have to pay for coverage you don’t really need once your debts are paid off and your children are financially independent.

Whole life insurance, on the other hand, covers your entire life—which means your life insurance company will pay out a guaranteed benefit when you die, regardless of when it happens. Insurance companies charge much higher rates for this permanent coverage, meaning that you’ll still be paying higher premiums even after your family is financially settled. 

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:

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.
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Pros and cons of whole life insurance

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

But if you don’t fit into those groups, whole life insurance may not be the most cost-effective match for your budget financial goals.

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.
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What about universal life insurance?

Universal life insurance—including variable and indexed universal life insurance—is another type of permanent life insurance. Unlike whole life insurance, which is charged at a fixed rate over the life of the policy, universal life insurance has variable premiums and may be a better fit for individuals comfortable with more flexible and hands-on policy structures.

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 set 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 5–15xmore 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.

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

Let’s compare how these two life insurance options could impact your finances over time.

For instance, a 35-year-old woman opting for a 20-year term life insurance policy over whole life insurance could save just over $4,800 over 20 years, with no obligation to keep paying after the 20-year term expires. If she took the $240 she saved each month and invested it in a high-yield savings account with a return rate of 4.5%, that savings could grow to over $92,000.*

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

* Illustrative example only. Assumes contribution of $240/month at 4.5% annual return over 20 years. Actual returns vary.

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 quicker and more streamlined. 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.

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