Term life insurance vs. whole life insurance – what’s the difference? Updated 2023
Term life insurance protects you for a specific number of years known as a term while whole life insurance protects you for your whole life and has a cash value accompanying the coverage. Most Canadians are best served by term life insurance, but both types of life insurance have their advantages and disadvantages. Term life insurance is typically less expensive than whole life due to its temporary coverage.
- What is term life insurance?
- What is whole life insurance?
- Head-to-head comparison of term life vs whole life insurance
- The pros and cons of term and whole life insurance
- How much does term life insurance cost versus whole life insurance?
- Which to choose?
- Which is better between term and whole life insurance?
Let’s face it – no one likes thinking or talking about their own death. But, when it comes to having a financial safety net for your family, life insurance is something that would most definitely cross your mind.
We all want to ensure our families are financially secure at all times and, most importantly, at a time when we are not around to provide financial support. During such times, life insurance is what provides one with the comfort or assurance that their family is well taken care of upon their passing.
Broadly speaking, there are two main types of life insurance, term life and permanent insurance. While permanent insurance encompasses both whole life and universal life insurance, it is whole life insurance that is more commonly purchased and the simpler form of permanent insurance. Understanding the differences between term life insurance and whole life insurance will help you identify what works best for you and the protection needs for your family.
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What is term life?
Term life insurance is life insurance that lasts for a specific period of time known as a Term. The term can be a fixed number of years or until you reach a certain age (e.g. age 65). You pay premiums to the life insurance company until the expiry of the term.
In return, your beneficiaries are entitled to receive a tax-free death benefit if you die within the term of the policy. Once the term ends, your coverage also expires, and you can stop paying premiums.
Term life policies are usually offered for periods ranging from 10, 20, or 30 years to specific ages such as age 65, after which the coverage expires. Some companies will also allow you to pick-a-term, in which case you can choose your own life insurance coverage period to meet your needs.
Put simply: term life insurance is easier to understand and has lower prices.
What is whole life?
Whole life insurance is a form of permanent life insurance that provides you with coverage from the day the policy is settled until the day you die; in other words – for your entire life. As long as you pay premiums into the policy, the coverage never expires – it’s as simple as that.
Additionally, this type of life insurance also combines this financial protection with investing. There is a cash value component associated with most whole life coverage. As you pay into a whole life policy over time, part of the monthly premium is invested and generates cash value.
This cash value may be accessed during the policyholder’s lifetime either by withdrawing or borrowing against it. Since the coverage extends to one’s entire life and you retain the value you put into it, whole life insurance typically has higher premiums.
What is the difference between term life and whole life insurance?
The main difference between term life insurance and whole life insurance is the benefit period. Term insurance offers coverage for a specific period of time determined by the applicant. Whole life insurance lasts for one’s entire life, or until they cancel or surrender the policy. This one difference also leads to many smaller differences which are detailed below.
|Term life insurance||Whole life insurance|
|Temporary coverage for a fixed period of time e.g. 10 years, 20 years, 25 years||Guaranteed lifelong coverage|
|Best suited for temporary needs (mortgage, children’s education, lifestyle protection)||Best suited for permanent needs (estate planning, retirement income, final expenses)|
|Guaranteed premiums for the initial term only||Guaranteed level premiums for life|
|Affordable cost of insurance, for the initial term||Premiums are higher due to lifetime coverage and savings component|
|Offers death benefit but does not build any cash value||Offers death benefit and access to a growing cash value|
|No paid-up value or features||Can be paid-up after a specific period (e.g. 10 or 20 years)|
|Death benefit is fixed when policy is purchased and doesn’t change||Death benefit may increase with dividends|
|Loans/withdrawals cannot be taken against term life policies||Policy loans can be taken and dividends may be withdrawn|
|Benefits will be received only at policy holder’s death||Benefits may be received during lifetime as dividends or loans|
|Can be converted into permanent policies||No conversion required|
|Will lapse 30 days after premium due date||Will continue in force as long as cash value can covers premium|
What are pros and cons of term life insurance?
- Simple to understand
- Inexpensive for the term
- Can be converted into permanent coverage
- Coverage is temporary
- Premiums increase upon renewal
- Cannot borrow or cash-in on the policy
What are pros and cons of whole life insurance?
- It’s permanent life insurance so coverage never expires
- Premiums are guaranteed over life
- Can borrow or cash-in on the policy
- Premiums are expensive
- Investment returns may be modest versus other opportunities
How much does term life insurance cost versus whole life insurance?
As we’ve mentioned, because whole life insurance has a cash value and investment component, the monthly premiums are significantly higher than term life insurance.
Please take note – these are representative values based on the average costs of term and whole life premiums from Canada’s best life insurance companies. They do not take into account the price of additional life insurance riders.
Whole Life Or Term Life Insurance Cost Comparison
Coverage Amount: $250,000, Non-smoker
Looking for your own quotes for whole life or term life insurance? Use our quoting tool for instant results or read more about how much whole life insurance costs.
Is term life or whole life better?
Now that you know the main differences between term life and whole life, it will be a lot easier for you to ascertain which type of insurance would best suit your given situation.
Why term life insurance may be right for you
Term life insurance is the best option if your needs are temporary in nature, such as paying off a mortgage debt or providing the funds for education costs of your children or other dependents.
Term insurance policies may also be a good option if you have budget constraints. Because of its temporary nature, term life insurance is a less expensive product. However, keep in mind: with term life insurance, the renewal cost increases. Because the cost of insurance increases with age, your new rate upon renewal will be substantially higher than your original premium. Learn more about renewing your life insurance.
Since insuring older individuals poses a higher risk to insurance companies, they charge a higher premium for taking on that risk.
Another aspect to keep in mind: it is possible to convert your term life policy into a whole life insurance policy in the future. With term policies, you do have the option to convert to a permanent insurance policy prior to a specified age (e.g. 70 years), should you require. Typically, this can be done without providing any proof of insurability or requiring a medical exam.
Of course, conversion into permanent coverage comes with a higher insurance premium (since you are taking coverage for life), has to be exercised within a certain period of time (that varies by policy and company), and – lastly – has to be taken with the original insurance company you got your insurance with in the first place (as you are converting the policy).
Summarily, term policies are a good fit if:
- Your needs are simple
- Your needs are not permanent (like a reducing mortgage debt, or providing for dependent children’s cost of living or college tuition)
- You have a limited budget
- You are still deciding on your coverage needs but want the peace-of-mind of protection while you decide to convert your current policy or purchase additional coverage
Why whole life insurance may be right for you
While term life insurance is the most commonly purchased coverage due to its affordability, whole or permanent life insurance has a long list of its own benefits. If you are more interested in financial protection for the rest of your life or are intrigued by the investment component of your policy, then whole or permanent life insurance may be the right protection for you – especially if the higher cost is not a factor.
While the premiums are more expensive than what one would pay for term life insurance, that price comes with the ultimate financial security and peace-of-mind of lifetime coverage. This is in stark contrast to term life insurance which expires once its term is over (though you have an option to renew at a higher cost, as mentioned) or you reach a certain age.
Whole life insurance has a cash value with a guaranteed rate of return on the portion of your premium which gets invested. The cash value grows gradually and is tax-deferred, (you won’t have to pay taxes on its gains while they are accumulating). Whole life policies can also pay dividends in the case of participating whole life policies. While a savvy money-mover may be better served handling their own investments, these types of whole life policies present a hands-off approach to money management which you can leave behind for your beneficiaries or estate.
Furthermore, the cash value of a whole life policy can be presented as collateral to a lender for obtaining a loan, mortgage, or line of credit. One can even take a policy loan against the cash value; though keep in mind that the loan will need to be paid back with interest.
Ultimately, you may also choose to surrender the policy for just plain cash. In this case, surrender charges would apply, subtracting from the value of the policy, and you will no longer have coverage.
Summarily, whole life policies are a good fit if:
- You want lifelong coverage into your old age (learn more about life insurance for seniors)
- You prefer guaranteed premiums for a lifetime
- You need permanent life insurance coverage during your entire life to meet final expenses (funeral expenses, debts, estate taxes)
- You are looking for built-in cash value that you can access to supplement your retirement income or other financial needs during your life
- You’d like future tax-free growth in a cash value component and an increase in death benefit
- You need to bequeath funds to a lifelong dependent
- You want to leave a large amount of money to a charity, group, or association
- Budget is not a concern
Companies that offer term life or whole life coverage
Most of Canada’s major insurance companies offer both term and whole life insurance. Companies like BMO Insurance, RBC Insurance, Canada Life, Assumption Life, Industrial Alliance, Canada Protection Plan, and more offer some of the best term life insurance protection in Canada.
Similarly, these companies, as well as others like Wawanesa, Empire Life, Equitable Life, Beneva (formerly SSQ/La Capitale), Foresters Financial, and more offer some of the best whole life insurance plans in Canada. Be sure to read all of your insurance reviews before you make a decision.
Should I get a whole life or term life insurance policy?
Making the decision between term versus whole life plans is no easy task. While budgetary considerations may make the decision obvious for some, the choice between the two is not as simple as reading an article.
Generally, a term life insurance plan is a more cost-effective choice when you are young, and your needs are temporary (like raising children or paying down your mortgage). In contrast, whole or permanent life insurance policies provide lifelong protection from the financial impact of death on your dependents, no matter what the situation.
Our licensed insurance brokers have years of experience helping Canadians choose what kind of protection is best for the needs of themselves and their dependents, and fits within their budget. Schedule a call today and our experts will walk you through your coverage options and help empower you to make the right decision for your protection needs.
The information above is intended for informational purposes only and is based on PolicyAdvisor’s own views, which are subject to change without notice. This content is not intended and should not be construed to constitute financial or legal advice. PolicyAdvisor accepts no responsibility for the outcome of people choosing to act on the information contained on this website. PolicyAdvisor makes every effort to include updated, accurate information. The above content may not include all terms, conditions, limitations, exclusions, termination, and other provisions of the policies described, some of which may be material to the policy selection. Please refer to the actual policy documents for complete details. In case of any discrepancy, the language in the actual policy documents will prevail. All rights reserved.
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- Both are financial protection products, but work in very different ways
- A term life insurance policy is more cost-effective and typically chosen by younger applicants with temporary needs (raising children, covering mortgage)
- A whole life insurance policy is more expensive and provides lifelong protection from financial impact of one's death on their dependents, no matter what the situation at that time
- With the help of an experienced broker you can determine which financial protection product fits your lifestyle and budget