Term Life vs Whole Life Insurance: What’s the Difference?

Term Life Insurance
Term Life Insurance

Having to consider your own mortality is a sensitive subject. It’s made even more complicated when you consider the financial well-being of your dependents.  Luckily, there’s life insurance, which provides you with the assurance that upon your passing, your family and dependents will be taken care of.

When it comes to life insurance, there are many options available. The two most common types of life insurance are term life insurance and whole (or permanent) life insurance.  But what kind is right for you? When looking for life insurance quotes, it’s helpful to understand what each type offers, and what the cost to you will be.

Term Life Insurance
Life Insurance

What Is Term Life Insurance In Canada?

Term life insurance provides coverage for a set period of time, such as 10, 20, or 30 years.

In order to keep your term life insurance active, you have to pay a monthly fee known as a premium. 

If you purchase term life insurance in Canada, you choose the term length and amount of coverage you want based on your needs.

Upon your death, your insurer will pay the beneficiary of your life insurance policy an amount equal to your coverage. 

Suppose you purchase a $1,000,000 life insurance policy for 20 years. Your husband is named as the beneficiary.  The life insurance company will pay $1,000,000 to your husband if you die before the end of those 20 years.

The payment is known as a death benefit. Your beneficiaries will receive your death benefit in the form of a tax-free lump sum.

This money can be used in many different ways: to pay for your children’s college tuition, to pay your mortgage, to buy groceries, etc.

Your monthly premiums and coverage amount will be locked in for the entire term of your policy, no matter how long it lasts. 

In other words, your health status will not affect how much you pay per month during your term. Now that’s a relief.

How Much Does Term Life Insurance Cost In Canada?

The cost of a term life insurance policy in Canada depends on: 

  • Your age
  • Your biological sex/gender identity
  • Whether you smoke
  • Your health status

Your base rate is determined by the first three factors. Depending on your health status, your base rate may increase. If you have diabetes, for instance, your monthly premiums will likely increase.

Eligibility For Term Life Insurance
Eligibility For Term Life Insurance

What Is Whole Life Insurance?

Whole life insurance, or permanent life insurance, is coverage for an entire lifetime, paid out upon your death. Most whole-life policies require you to pay annual premiums, but these premiums are usually at a fixed rate regardless of your health. The rate is set when you buy your policy. Whole life is the opposite of term life insurance in that it costs more, and premiums are due as long as you’re alive.

However, some whole life insurance policies allow you to convert your policy to a paid-up status where you don’t have to pay any more premiums.

You can only do this when you have a significant amount of money and the life insurance company can use dividends from your policy to pay the premium. Alternatively, if you get to paid-up status, you can also get a cash surrender value which will be about 10% of the overall value of your policy.

How Much Does Whole Life Insurance Cost In Canada?

The cost of a term life insurance policy in Canada depends on: 

  • Your age
  • Your biological sex/gender identity
  • Whether you smoke
  • Your health status

Your base rate is determined by the first three factors. Depending on your health status, your base rate may increase. If you have diabetes, for instance, your monthly premiums will likely increase.

average cost of insurance

When To Choose Term Life Insurance

In general, term life insurance is an excellent option if you’re looking for an affordable policy that provides temporary protection.

For instance, do you need life insurance when you’re older, your debts and mortgage are paid, and your kids are university graduates?

In another example, a colleague recently purchased term life insurance when his wife went back to school. If anything were to happen to him, he wanted to ensure that her education and expenses were covered until she re-entered the workforce. They bought an inexpensive 5-year-term.

It’s also a good option if you’re a business owner who is looking for key person protection – or insurance coverage for individuals that play an invaluable role in a company. With businesses experiencing turnovers in staff and unpredictable longevity, it’s a safe way to get coverage while not making long-term commitments.

In term life vs. whole life, term insurance is a more affordable option than whole life insurance, it’s important to reiterate that term policies are only valid for a limited amount of time.

Term life insurance can be looked upon as an option if you’re looking to create replacement income for your dependents in case of death, as it provides a tax-free payment to your beneficiary. If, on the other hand, you want to ensure that you’re covered for your entire life, you might want to consider whole life insurance.

When To Choose Whole Life Insurance

If you’re looking for a life insurance policy that will be beneficial for estate planning, or you want to make a significant charitable donation upon your death, then whole life insurance may be for you. With the policy being guaranteed until the time of your death – not just for a term – whole life insurance provides assurance that your dependents will have financial security at the time of your death (as long as you keep up the premiums).

Many whole life insurance policies lapse, meaning the owner failed to pay the premiums. You can buy whole life insurance when you’re young to save on fees, but at 80 years old, and living off your RRSP and investments, it may be hard to see the value in continuing to pay.

For that, you can use viatical settlements, where someone buys out the policy from you for less than the value, pays the premiums, and receives the death benefit.

So, if the price may be an issue, let’s look at the cost of whole life insurance vs. term.

The Difference Between Term Life And Whole Life Insurance: 

Cost comparison

Below are monthly cost comparisons between term life vs. whole life insurance for a $500,000 policy. Because there’s no direct comparison, we chose the most common length of term: 20 years.

Policy owner Whole life policy 20-year term life policy
Male, age 30 $247.05/month $31.35/month
Female, age 30 $206.70/month $22.80/month
Male, age 40 $398.53/month $47.48/month
Female, age 40 $334.39/month $35.16/month
Male, age 50 $657.08/month $126.78/month
Female, age 50 $553.70/month $86.05/month

*Pricing based on non-smoking, healthy men and women and the average of the 3 cheapest life insurance options. You can save on life insurance by paying annually.

Insurance premium

Should I get term or whole life insurance?

As you can see, the differences between life insurance policies are much about the cost, but age plays a critical factor.

When thinking about life insurance, you have to consider both your present financial situation and the long-term benefits of the policy. As with any decision, it’s important to look at the options available to you and to consider what is best for your given situation.

Term life insurance tends to be a good option for young families who require temporary protection while paying off mortgages and saving for the future. In other words, protect your assets while you’re building your wealth.

However, if you choose a term life insurance policy, be aware that, should you want to renew your policy at the end of the term, the cost of renewal can be substantially higher than when you first signed up for it. This is because it is more costly to insure older individuals than it is younger ones because the risk is higher for the life insurance companies.

Whole life insurance is an investment for life where premiums build cash value. With most policies offering a guaranteed cost for life, you may find yourself paying more upfront, but in the long term, you will see cost savings and efficiencies.

For instance, unlike term life insurance, whole life policies can provide individuals with tax-free income through leveraging. This works by borrowing money against your own policy, which will need to be paid back with interest, but usually at a much lower rate than bank loans or credit cards. These policies could be substantially more expensive on a month-to-month basis initially, but you will also know that the premium will most likely remain unchanged for your lifetime.

Another way to look at life insurance

If you’re still trying to decide what is better term life or whole life, consider this. When you reach retirement age, your assets should be able to pay for your funeral expenses and leave something for your beneficiaries.

However, your beneficiaries will have to pay capital gains on inheritance. If it’s of concern, consider a 10-year term policy to cover any money the CRA wants to keep. It’s much cheaper than life, but it can afford you the peace of mind knowing they’ll get the full value you want for them.

The bottom line

Should I buy term life insurance or whole life? By considering your present financial needs and long-term goals, and by comparing the term life insurance and whole life insurance policies that are available, you’ll be able to make an informed decision about what type of life insurance is right for you. Planning for your financial needs and those of your dependents after your death is painful, but the right insurance policy can help ensure a positive future for your loved ones.

Which is the best term life insurance policy for me?

The answer to this question isn’t found in the back of the book. Life insurance is a deeply personal purchase and there are many factors to consider. In addition to taking into account your current family’s financial needs, you should also account for future expenses like tuition, funeral arrangements, estate taxes, and any other debts you would like settled if you died. (If that sounds complicated, there are insurance calculators). 

When you search for insurance quotes, there are a multitude of options to choose from. Nevertheless, you should only purchase a policy you can afford and that makes sense for you and your family.

Thankfully, AG Group Enterprise Ltd, is here to help! Our mission at AG Group is to provide a wide range of life insurance policies, including term coverage, permanent coverage, RRSPs, RESPs, and more! 

With AG group’s insurance policies, you can protect the future of your family and your finances. A good policy ensures a bright future!

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