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

A term life insurance policy is the simplest type of life insurance. A term life policy is also the cheapest, often costing less than buying a cup of coffee per day.

For individuals on a budget, whole vs term life insurance decisions are often guided by affordability and the need for temporary coverage.

Term life provides protection for a specified number of years. The most common policies are for 10, 20, and 30 years, or till 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 this benefit payout as they like, for everyday living expenses, mortgage (or mortgages), college tuition fees, or any other debts.

If you let the life policy expire or stop paying premiums, the coverage ends and your beneficiaries will no longer receive a death benefit.

As your policy approaches the end of its term, you can renew the life 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. Some policies allow conversion riders meaning that you can convert your term life insurance into whole life insurance.

Term life insurance offers a guaranteed death benefit and level premiums, meaning the benefit amount and premiums stay the same throughout the policy term.

Pros and Cons of Term Life Insurance

Pros

• ‍Simple: A term life policy is easy to understand. The insurer promises to pay your family a specified amount called a death benefit, if you die within a set period in exchange for premium payments. ‍
• Affordable: Term life insurance options 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.‍
• Adaptability: You select the time period frame for you policy for a set number of years based on your needs. Once the policy expires you can re-evaluate your situation a commit to a new policy which meets your new needs.

Cons

• Expiration: Term life policies have an expiry date — hence the name. This means that if you survive the policy, your family will not receive a death benefit. 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).‍
• No cash value: It does not build up a cash value component, which you can access to borrow funds from in the future.

A term life policy is considerably cheaper than a comparable whole life policy. That’s because it neither builds up a cash value component 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 benefits.

What Is Whole Life Insurance?

Whole life insurance doesn’t have an end date. Unlike term life insurance, permanent life insurance policy lasts for your lifetime and builds cash value. Your family will receive a payout, whether you die 10 years from now or 30. A whole life insurance policy is sometimes referred to as permanent life insurance. Another option for permanent life policy that while similar is different from whole life is a universal life insurance policy. Universal life insurance has different policies, including an indexed universal life insurance plan that offers more flexible premiums, as well as death benefits and cash value accumulation while whole life offers more consistency with fixed premiums and guaranteed death benefits.

Whole life insurance not only provides a death benefit but also includes a cash investment account. Part of your premiums covers the insurance cost, while the rest funds the savings account, which grows tax-deferred. You only pay taxes on it when you withdraw funds.

As the policy’s cash value account grows, you can take withdrawals or borrow money from it. If the insurance policy has built enough cash value, you can even surrender it and take out the cash value.

When weighing the pros and cons of term vs whole life insurance, consider how the cash value component of a whole life policy could align with your long-term financial plans

Permanent 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 policies, just like any kind of permanent life policy, don't have an expiry date. It lasts your entire lifetime, provided you pay the premiums on time, and will always result in a death benefit for your beneficiaries.

• Cash value: Permanent life insurance policies include a savings account and a cash value account.

• 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

• More expensive: Whole life insurance premiums can cost 5 to 15 times more than term policies for the same death benefit amount.

• More complex: A whole life policy is more complex than term insurance. That’s because it is a combination of two financial components — life insurance and investments.

• Little control over how the cash value grows: You have no control over how even the best life insurance companies invest your cash value. Also, the rate of return on a permanent life insurance 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, a permanent life insurance is more expensive than a term life insurance. That’s because it provides lifelong coverage and accumulates cash value. Cost is definitely something to keep in mind when considering term vs permanent life insurance.

Term Life vs. Whole Life Insurance: Policy Features

Which type of insurance plan has better policy features? Again, this all depends on your needs.

To help you compare the two types, we did a term life vs whole life insurance analysis, including the cost, death benefit, and cash value. This should give a clear idea on the policy features that come with term and whole life insurance plans.

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Term Life vs Whole Life Insurance: Cost Comparison

Regardless of your chosen life insurance company, 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 the death benefit.

Whole life policies, on the other hand, cost more because the insurance companies knows they will have to provide the benefit to your beneficiary when you die.

To help you understand the costs, below is an example showing the monthly premiums for a both a whole life insurance and term life insurance policy. These quotes are are for a policy with a $250,000 death benefit, for a 40 year old in average health.

Sample amounts are for a $250,000 policy, for a 40 year old individual in good health. Term life premiums are based on a 20 year term length.

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As you can see, whole life policies can cost over five times as much per month compared to term life policies. Also note that your gender and smoking status will affect your rate when choosing a life insurance company for either option.

Looking for a personalized quote for term policies or whole life insurance policies? We’ve got you covered. Simply answer a few questions, and our insurance calculator will find you the best coverage at the best price.

Which is better?

The type of life insurance that is best for you depends on your specific situation and financial needs.

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Who should pick a term life insurance policy?

Who should pick a whole/permanent life insurance policy?

• Inheritance Guarantee: Whole life insurance ensures your heirs receive a benefit, regardless of when you pass.
• High Net Worth: Worth the cost for those who can afford higher premiums.
• Funeral Expenses: Covers end-of-life costs even if you outlive a term policy.
• Cash Value: Ideal for those maxing out savings accounts or preferring hands-off investing.
• Lifelong Dependents: Provides financial security for dependents like a child or spouse with a disability.

How Much Term Life Insurance Should You Purchase?

Since it can be difficult to know exactly how much life insurance you need, we recommend using one of these methods to help you get started.

Method 1: Using your annual income

Experts recommend buying a term life policy for 10 to 15 times your annual income. Using this estimate is quick and easy, making it a good place to start. However, it has certain limitations.

Annual income x 10 = Coverage amount required

The most obvious limitation is that it doesn’t take your current savings into account. It also doesn’t work for someone who is a homemaker.

Method 2: Using your current financial assets

A more accurate approach is to consider your current debts and assets.

1. First, take your annual income and then multiply it by the number of years for which you need protection.
2. Next, to this number add all your current debts (mortgage, credit card bills, etc.) and future needs (college fee, funeral cost for seniors, etc.).
3. 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.

Using the formula from above, we get: $50,000 x 10 + $10,000 – 40,000 = $470,000

In this example, your required coverage amount would be $470,000.

Remember, you should buy life insurance for both you and your partner, even if one is not working. Consider the unpaid work, like childcare, cleaning, and cooking. If one of you passes away, the surviving partner may need to pay for these services, leading to added costs and financial strain.

Conclusion

Term life insurance provides affordable coverage for most families, while whole life is useful for permanent coverage or investment purposes. Consider your financial needs and budget when choosing between them. Term life is best for income replacement, while whole life suits long-term needs and investment goals.

Frequently Asked Questions (FAQs) about Term vs. Whole Life Insurance

What are the key differences between whole life and term life insurance?

Whole life policies are permanent, meaning they do not expire and offer permanent coverage. As long as you continue to pay your whole life premiums, your coverage will remain in force and build cash value.
Term life insurance policies, on the other hand, only remain in force for a set period of time, typically 10, 20, or 30 years. After that, the policy expires and you are no longer covered.

Is term life insurance better than whole life?

No policy is better than the other, it all depends on a person's needs. If someone is looking for cheaper coverage for a set number of working years then term life is more suitable. On the other hand, if someone is looking for more security, the more expensive nature of whole life is worth it as it provides additional benefits such as lifelong coverage, fixed premiums, and cash value. 

Which type of policy is right for me?

There is no one-size-fits-all answer to this question, as the type of insurance policy that is right for you will depend on your specific circumstances. However, some general guidelines that you may want to consider include the amount of coverage you need, how long you need coverage for, what your budget looks like, and whether you're interested in a cash value or savings component.

How do the premiums for whole life insurance compare to the premiums for term life insurance?

The whole life insurance costs for a whole life insurance policy are generally higher than the premium for term life insurance because whole life insurance provides coverage for the policyholder's entire life, and includes a cash value component, while term life insurance only provides coverage for a set period of time. The premium for whole life insurance is typically based on the policyholder's age, health, and life expectancy, while the premium for term life insurance is typically based on the policyholder's age and health.

When can you stop paying premiums on whole life insurance?

Most whole life policies require you to pay premiums for your entire life to keep the policy in force. There are some paid up options for whole life insurance policies where you only pay for a certain amount of time and still get life coverage after the cash value has built up over time. That said, these policies are quite expensive and are not very popular choices for life insurance.

Can I convert my term life to a whole life policy?

In most cases, there are ways in which you can convert your term life to a whole life policy once a certain time period has passed. This is usually after a year since the policy has come into effect. These types of policy conversions are great for people who have certain health conditions which would make buying a new permanent policy more expensive. For more information on policy conversions, book a call with a Dundas Life broker today.