Term Life vs. Whole Life Insurance: What’s the Difference?
Life insurance is not the most pleasant topic to talk about. It forces you to acknowledge your mortality and plan what would happen if you had to leave someone behind.
But facing reality is essential if you want to create a secure financial plan for your loved ones. Life insurance policies can be broken down into two main types — term life and whole life.
Continue reading to learn the pros and cons of each and see which one suits your needs the best.
What is Term Life Insurance?
Term life insurance is the simplest, purest form of life insurance. It is also the cheapest, often costing less than buying a cup of coffee per day.
Term life insurance provides protection for a specific number of years. The most common policies are for 10, 20, and 30 years, or until you reach a specific age, like 65. Your beneficiaries receive a death benefit if you pass away during the policy term. Your family is free to use the payout as they like, for everyday living expenses, mortgage, other debts, or college tuition fees.
If you let the policy expire or stop paying premiums, the coverage ends.
As your policy approaches the end of its term, you can renew the policy without a medical exam. However, you’ll have to pay higher premiums at each renewal since the cost of insurance goes up as you get older.
All term life insurance policies have a guaranteed death benefit. That means the death benefit amount will remain the same throughout the contract. Most term life policies have level premiums, meaning your premiums will neither increase nor decrease during the term.
Pros and cons of term life insurance
Pros
- Easy to understand: A term life policy is a simple contract. The insurer promises to pay your family a specified amount if you die within a set period in exchange for premium payments.
- Affordable: Term life insurance can be five to 15 times cheaper than comparable whole life policies.
- Flexibility: You can cancel a term life policy at any time without cancellation fees.
Cons
- Expiration: Term life policies have an expiry date — hence the name. However, the good news is most term life policies include a feature called guaranteed renewability. This provision obligates the insurer to renew your coverage without a medical exam. So even if your health has deteriorated significantly since you first bought the policy, you can rest assured knowing you can renew your same coverage (though for a higher premium rate).
Term life insurance is considerably cheaper than a comparable whole life policy. That’s because it neither builds cash value nor offers lifelong protection. Premiums for term life insurance can be five to 15 times lower than those for a whole life policy with the same death benefit.
What Is Whole Life Insurance?
Whole life insurance doesn’t have an end date. The coverage lasts as long as you do. Your family will receive a payout, whether you die 10 years from now or 30. Whole life policies are sometimes referred to as permanent life insurance.
In addition to providing a specified death benefit amount upon your death, a whole life policy also includes an investment account. The insurer uses part of your premiums to cover the cost of insuring you. The remainder gets funnelled into the in-built savings account, which grows on a tax-deferred basis
As the policy’s cash value grows, you can withdraw or borrow from it. If the policy has built enough cash value, you can even surrender it and take out the cash value.
Whole life insurance features guaranteed level premiums and a guaranteed death benefit. This basically means your premium and death benefit amount will remain the same throughout.
Pros and cons of whole life insurance
Pros
- Lifelong protection: Whole life insurance doesn’t have an expiry date, provided you pay the premiums on time.
- Accumulates cash value: Whole life insurance policies include a savings account.
- Potential to earn dividends: Some of these policies give you a chance to earn annual dividends. You can take out dividends as cash, use them to pay future premiums, or reinvest them in your policy.
Cons
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- More expensive: Whole life premiums can cost 5 to 15 times more than comparable term life policies.
- More complex: Whole life insurance is more complex than term life. That’s because it is a combination of two financial components — life insurance and investment.
- Little control over how the cash value grows: You have no control over how the insurer invests your cash value. Also, the rate of return on a whole life policy is typically lower than what you can get with other investment options, like TFSAs and RRSPs.
- Higher fees: Fees for whole life investments can exceed 3%.
- Inflexible: You may have to pay a high cancellation fee if you terminate the policy within a few years.
As a rule of thumb, whole life insurance is more expensive than term life. That’s because it provides lifelong coverage and accumulates cash value.
Term Life vs. Whole Life: Policy Features
When it comes to policy features, which is better, term or whole life insurance?
To find out the answer, we did a term vs permanent life insurance analysis.
| Policy Features | Term life insurance | Whole life insurance |
| Lifelong coverage | No | Yes |
| Choice of term length | Yes | No |
| Low premiums | Yes | No |
| Level premiums | Yes | Yes |
| Level death benefit amount | Yes | Yes |
| Builds cash value | No | Yes |
| Potential to earn dividends | No | Yes |
This should give a clear idea on the features that come with each policy.
Whole Life Insurance vs Term Life Insurance: Cost Comparison
Term life is more affordable because it comes with an expiry date and doesn’t build cash value. If you outlive the term, your family won’t receive a payout.
Below is the monthly price comparison between whole life and term life insurance for a $250,000 policy. These rates are for, non-smoking and smoking males and females. We picked the most term length — 20 years — and calculated the coverage for a 40-year-old male in good health.
|
Non-Smoking Male |
Non-Smoking Female | Smoking Male |
Smoking Female |
|
|
Whole life insurance |
$220/month | $183/month | $330/month | $264/month |
| Term life insurance | $28/month | $20/month | $75/month |
$52/month |
Looking for a personalized quote for term life or whole life? We’ve got you covered. Simply answer a few questions, and our insurance calculator will find you the best coverage at the best price.
How Much Term Life Insurance Should You Purchase?
Experts recommend buying a term life policy for 10 to 15 times your annual income. While this method is better than coming up with a random number, it has certain obvious limitations.
The most obvious one is that it doesn’t take your current savings into account. Also, it doesn’t work for someone who is a homemaker.
A much better approach is to consider your annual income and then multiply it by the number of years for which you need protection. Next, to this number add all your current debts (mortgage, credit card bills, etc.) and future needs (college fee, funeral cost, etc.).
Finally, from this number subtract liquid assets (current savings, any other life insurance, etc.). The figure you get is a rough estimate of how much life insurance you need.
Annual Income x Years you will require financial support + Current assets – Any expenses = Coverage amount requirement
For example: Let’s say your annual income is $50,000 and you’re going to need 10 years of support. Also, you have a car that’s worth $10,000 and your annual expenses are $40,000.
$50,000 x 10 + $10,000 – 40,000 = $470,000 (Coverage amount requirement)
Keep in mind you should buy life insurance for both you and your partner.
That’s true even if your partner is not working. Think about the services your partner provides for free — caring for kids, cleaning the house, cooking meals, etc. If he or she dies suddenly, you may have to pay someone to perform those services. And that would mean a lot of extra expenditure.
Conclusion
Term life insurance provides sufficient coverage for most families, but whole life can prove useful in certain situations.
The best way to understand which one of them is for you is to consider your financial needs and budget. If you want the most affordable coverage or life insurance to act as an income replacement over a certain period, consider term life. By contrast, if your financial needs don’t have an expiry date, or if you want your life insurance policy to also act as an investment tool, whole life could make sense for you.
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