Term Life vs. Whole Life Insurance

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Term Life vs. Whole Life Insurance

Written by Caitlin Wood

Term Life vs. Whole Life Insurance

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Life Insurance Term Life Insurance Whole Life Insurance

You may have family members who depend on you to help pay the bills and cover mortgage payments. Now, imagine the predicament they would be in if you were to pass away early in life. Unless you take certain precautions, you could be leaving them with major financial obligations that they may not be able to handle on their own.

Luckily, you can protect your loved ones with a life insurance policy. With coverage in place, your financial responsibilities will be covered in the event of your early passing. As long as you keep up with timely premium payments, your policy will remain in effect and your dependents will be paid out a death benefit that can be used to cover life’s biggest expenses. 

So, you’ve decided to take out a life insurance policy. Should you opt for a term or whole life insurance policy? Both will offer protection, but they have some major differences that need to be considered before making your choice.

In this article, we’ll differentiate between term and whole life insurance to help you determine which of the two suits you best.

What Is Term Life Insurance?

Term life insurance provides coverage for a temporary amount of time, rather than for life. Common term lengths include 10, 20 and 30 years. Ideally, you should choose a term that will end around when your term life insurance policy expires. By then, your children will be all grown up and independent, your mortgage will be paid off, and you’ll have enough savings to fall back on if you need it. 

While you could pass away before your term life insurance policy expires, this type of plan is not designed to last an entire lifetime. Instead, it’s meant to provide coverage during your working years when your dependents rely on your income to pay the bills. 

If you pass away at any time during the term of your policy, your named beneficiaries will receive a benefit payout.

Term life insurance policies are more affordable than whole life insurance because there is no cash value for the policy until you pass away. Unless you die during the term of the policy, it won’t be worth anything after it expires

You can always increase or decrease your coverage at any time. If you do, your premiums will reflect the changes and the new amount of insurance. It should be noted, however, that any increase in coverage may require a medical exam and must be approved by your insurer.

If you decide that you want longer-lasting coverage at some point, you can convert your term life insurance into a permanent policy. Keep in mind that your premiums may be affected by any changes to your health, lifestyle, or employment.

If you want a cost-effective policy that offers temporary protection during your working years, then term life insurance may be a great option.

What Is Whole Life Insurance?

Unlike term life insurance, whole life insurance offers lifetime coverage. No matter your lifespan, you’ll always be covered, as long as you are up-to-date with your premiums

Also known as permanent life insurance, whole life insurance requires premiums to be paid to ensure coverage. Premiums are typically at a fixed rate, no matter what your state of health may be. 

This variation of life insurance also features a cash value component, which grows in value on a tax-deferred basis. That means the gains made will not be taxed while they’re increasing. The cash value component of your whole life insurance policy can be tapped into if you ever need to borrow money. However, you will be reducing your death benefit if you borrow against the cash value of your policy, which is something to consider before tapping into these funds. 

You can also surrender your policy for cash. But if you do, you will no longer be covered. 

Some whole life insurance policies also allow you to earn annual dividends. In this case, you’ll be paid based on the insurance provider’s profits. You can either take those dividends in cash, use them to reduce your premiums, leave them to earn interest, repay policy loans, or purchase more coverage. 

Whole life insurance is more expensive than term life insurance because of its lifetime coverage and the cash value that builds over time. Your death benefit is guaranteed until you pass away, rather than just for a term. As such, whole life insurance gives you peace of mind knowing that your loved ones will be cared for financially even after you pass on.

If you like the idea of having coverage that never expires and has an investment component to it, then a whole life insurance policy may be worth looking further into.

Term Life Insurance vs. Whole Life Insurance

Term Life InsuranceWhole Life Insurance
Term LengthTemporary (usually between 10 to 20 years)Lifetime coverage
Death BenefitsGuaranteed up until the end of the term (with up-to-date premiums)Guaranteed for life (with up-to-date premiums)
Stable PremiumsNoYes
Cash Value NoYes
CostMore affordable to start offMore expensive, but there’s a potential for savings over the long run

Cost Of Term vs. Whole Life Insurance

As mentioned, the premiums associated with a term life insurance policy are usually more affordable compared to a whole life insurance policy. That’s because there is no investment component to the former. If you live beyond the end of the term, your dependents will not receive a payout. 

Whole life insurance is more expensive because it includes a cash value and coverage for a lifetime. However, you could save more money with whole life insurance if coverage is extended over a lengthy period of time. 

Initially, whole life insurance comes with more expensive premiums compared to term life insurance. However, you can save money over the life of the policy if it’s in effect for a significant number of years. For instance, if you choose to renew your term policy after your 20-year term is up, you could be faced with higher premiums compared to taking out a whole life insurance policy from the start. 

Pros And Cons Of Term Life Insurance

Pros

  • Lower premiums to start. Initially, the premiums associated with a term life insurance policy are much more affordable than whole life insurance. 
  • Coverage when you need it most. Your dependents rely on you most during your working years when you are paying your mortgage and other household bills. Term life insurance can provide you with coverage during the years when your family needs your financial help the most.
  • Can be converted to whole life insurance. If you decide to take out a permanent life insurance plan at any time, you can convert your term policy.

Cons 

  • Temporary coverage. A term policy only lasts for a limited amount of time, after which coverage ends. If you pass away after your term ends, your dependents will not receive a death benefit.
  • Must re-qualify if you renew. If you choose to renew your policy after it ends or convert to a permanent policy, you may require medical evidence. 
  • No cash value. Unlike a permanent policy, there is no investment component to a term life insurance policy, so you don’t have anything to cash out of.
  • Premiums can increase when you renew. If you choose to take out a new term after your initial one expires, you could be looking at more expensive premiums. 

Pros And Cons Of Whole Life Insurance

Pros

  • Lifetime coverage. No matter your lifespan, your coverage will remain in effect as long as your premiums are up-to-date.
  • Accumulates cash value. A whole life insurance policy comes with a cash value that increases in value over time at a guaranteed rate. You can use this investment to borrow against if you ever need to, or you can altogether surrender it to cash it out. 
  • Fixed premiums. The premiums you pay on a whole life insurance policy remain fixed, which makes budgeting easier. 

Cons

  • More expensive than term life insurance. Since there is a cash value component to whole life insurance and lifetime coverage, your premiums may be more expensive than a term policy. That said, you could save more than you would with a term policy that is renewed for another term.
  • Little investment control. You won’t have much input in the investment choices made that your life insurance company makes compared to other types of investments. 

The Death Benefit: Difference Between Term And Whole Life Insurance

The reason why life insurance exists in the first place is to provide financial coverage to your beneficiaries if you pass away. Both term and whole life insurance offer a death benefit that your loved ones can use to cover financial obligations. The payout is guaranteed as long as you continue making your premium payments on time. 

Regardless of what type of life insurance policy you take out, your life insurance provider will not alter your death benefit. This lump sum of money is typically untaxed, so your beneficiaries won’t be stuck having to pay taxes on the monies paid out.

If you have a whole life insurance policy and borrow against the cash value, your death benefit amount will be reduced by the amount you withdraw. If you take out a loan on your policy and pass away before paying the money back, the death benefit could be used to repay the outstanding balance. That means your beneficiaries will not receive the full amount.

And if you surrender the entire cash value, your beneficiaries will be left with no death benefit at all.

Should You Get Term Or Whole Life Insurance?

The choice between a term and a whole life insurance policy can be a daunting one given the benefits and potential drawbacks of each. The policy you choose ultimately comes down to your specific needs, budget, and long-term benefits.

Term life insurance may be an ideal option if you have young kids at home who depend on your income and need temporary protection while you’re still paying off your mortgage and saving up for their future. 

It’s also a great option if you are on a tight budget, as term life insurance is more affordable than a whole life insurance plan. This type of policy allows you to maximize your savings while still ensuring that your dependents are protected. 

Just be aware that the cost to renew your term policy can be a lot higher compared to when you first take it. This is mainly because life insurance is more expensive when you sign up when you’re older.

Whole life insurance, on the other hand, may be a great option if you like the idea of having your premiums go towards building cash value. You can also add to the death benefit or tap into your cash value if you need to borrow money. 

If you want assurance knowing that your loved ones will be financially protected for your entire life, then a whole life insurance policy may be a consideration. While you may have to pay more upfront, you may see savings over the long run if you want a policy that’s in effect for many years. 

Carefully consider your current financial needs and your future goals. Compare term versus whole life insurance policies to make a more informed decision about the type of policy that is best for you.  

Final Thoughts

Being prudent with your finances is always recommended. Not only do you want to build a comfortable retirement nest egg for yourself when your working days are over, but you may also want to consider setting up a plan that provides your family with a financial cushion to fall back on if you pass away earlier in life. And a term or whole life insurance policy can provide you with that assurance. Be sure to weigh your options when choosing between the two types of plans.


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