Life insurance is an important component to wise financial planning, and bringing peace of mind to your loved ones. However, it can be challenging to sift through all the information and determine which life insurance policy is right for you and your needs.
Here are some important factors to keep in mind and guide you as you consider your life insurance plan.
Comparing Term and Whole Life Insurance
What is whole life insurance
This life insurance policy is considered a “permanent policy" because it guarantees that your family, the beneficiaries, will receive money, known as a death benefit, when you pass away. Because of this guarantee, these plans are typically much more expensive than alternate life insurance options – usually hundreds of dollars more per month. Regardless of whether you die young or old, with a whole life insurance policy your insurance company will still pay out.
It’s common for insurance brokers and advisors to earn very high commissions when selling these policies since they generate the most recurring revenue for insurance companies. However, whole life insurance policies aren’t necessarily the best option for most adults. By the time many Canadians are approaching or reached retirement, they’ve accumulated enough savings and assets to take care of themselves and their beneficiaries in case they passed away.
Term life insurance, on the other hand, is an alternative to expensive whole life insurance which is a happy medium between providing financial security for your loved ones, without costing a high monthly premium and leaving financial wiggle room to save and invest in your nest egg.
What is term life insurance
The simplest and most affordable form of life insurance, the monthly premium for a term life insurance policy is paid over a fixed term, usually over 10, 20, or 30 years. For the majority of Canadian families, around 95%, this solution is much smarter than buying a whole life insurance policy. Particularly for younger families with children and other dependents.
Let’s talk about the main differences term and whole life insurance:
1. The price
The most notable difference between whole and term life insurance policies is how much more expensive whole life monthly premiums are - up to 10x more expensive than a comparable term life policy.
|$250,000 20-year term life insurance||$250,000 whole life insurance|
|Male, aged 30||$18/month||$135/month|
|Female, aged 30||$15/month||$121/month|
|Male, aged 40||$28/month||$204/month|
|Female, aged 40||$22/month||$178/month|
|Male, aged 50||$72/month||$327/month|
|Female, aged 50||$51/month||$279/month|
2. Choice of policy length
The length of your insurance policy is also a key difference between whole and term life insurance policies. This factor also affects the cost of your monthly payment. With term life insurance, you’re only covered over the length of your term, which is why the premiums are far less expensive than whole life insurance. But, if you pass away after your term policy expires, your beneficiaries don’t receive anything outside of the assets in your estate. With whole life insurance, there are no fixed terms or expiry on your plan. You pay the monthly premiums indefinitely, until you die.
3. Accumulates cash value
It’s important to consider that life insurance shouldn’t be considered “an investment", in the traditional sense. It’s more like a security blanket to fall back on and to replace your income for your dependents after you pass away. Think of it more like a home security plan - you pay monthly for the service to protect your home in case someone breaks in. It’s for yours and your family’s peace of mind, not to make money.
This is why term life insurance is inexpensive - it’s temporary and has no cash value; if you live past the end of your policy term, in most cases, your family won’t receive a payout.
Whole life insurance premiums, on the other hand, last for a lifetime. This is why they are much more expensive than a term policy. And, since you’ve been paying hundreds of dollars into it per month, it’s built up cash value over time, with a guaranteed rate of investment return on a portion of the money that you pay. However, the typical rates of return are far less than what you could earn if you put that same amount of money into a well balanced growth or income portfolio in your registered retirement accounts.
Term vs. Whole life: Which to Choose
Every individual and family is different. When choosing between a term or whole life insurance policy, ask yourself, “what are my goals for life insurance?" Are you looking for extra financial security for your family in addition to your savings? How much do you think you’ll be able to “self-insure" with your own estate? If you have a structured monthly savings and investment plan, like most Canadians, you are likely on track to have plenty to protect and provide for your family upon the time of your death.
Also, ask yourself, “how much can I afford?". This is an important factor to keep in mind as you plan your payments in the context of your current monthly expenses and budget. If you can afford a high monthly payment for the rest of your life, and want the lifetime coverage of a whole life insurance policy, then perhaps the best option for you. However, if you’d prefer to pay less every month, will have enough saved up by the end of your term, and your family will no longer depend on your income, then a term life insurance policy is the best route for you.