Is Term Life Insurance Better Than Whole Life Insurance?

Term life insurance or whole life insurance? The age old question rages on, but most of us are still left wondering which one is better. You already know you need life insurance because all the real grown-ups have it. But maybe you’ve procrastinated getting it because the whole process seems complicated and overwhelming. Mix in the pros, cons, and complexities of term life insurance versus whole life insurance and you might be struck with an acute case of decision paralysis; you don’t know what do to, so you just do nothing. 

On top of that, trying to figure out what type of life insurance is right for you and how much coverage you need can feel like a one-way ticket to stress city; the migraine is included, but the Advil is extra. You can stop massaging your temples because we’ve got great news for you! Choosing between a term life insurance policy or a whole life insurance policy has never been easier. You just need to understand the key differences between the two so you can determine which one is best. For most Canadians, there is a definitive winner. Let’s talk about term life insurance, whole life insurance, and which one is actually better. 

What is life insurance?

If you understand how car insurance works, you’ll understand the basic principle of life insurance too. It is a legally binding contract between you and a provider that states as long as you pay your premiums, the provider will pay a specific amount of money to your beneficiaries if you pass away. So long as the nature of your death is covered under the policy. All life insurance policies outline the causes of death they will or will not cover, along with any other caveats.

Who are my beneficiaries?

Pretty much whoever you want them to be. You can name anyone you care about, who may be financially affected by your death, as your beneficiary. For many people that would be their partner, children, or both. But it could also be a sibling, best friend, business partner or even a Non-Profit Organization.

Why should I buy life insurance?

Well, if you care about the financial well-being of the people you love, then you should probably buy life insurance. I say probably because in some circumstances the cost of a life insurance policy may not be justified. If there is no one in your life who depends on you financially, and you have enough assets to cover the cost of your funeral and settle your financial obligations, then who are you trying to protect from financial hardship after you pass? 

If you have young school-aged children, children with disabilities or a partner who depends on your income life insurance will provide the necessary financial support to meet their needs and maintain their standard of living. You’ll also want life insurance if you share property with someone, have a high net worth that could incur estate taxes, or if your family would not be able to afford the cost of a funeral.

You should also consider getting a life insurance policy while you are young and healthy so you can lock in the lowest possible rates. While there are countless reasons to take out a life insurance policy, the most important one is to protect your loved ones from any financial trauma caused by your death.

Who sells life insurance and where can I buy it?

There’s no shortage of life insurance providers or policies to suit even your most obscure needs. There are well over 32 life insurance providers in Canada alone. There’s a smorgasbord of coverage options more customizable than your annoying Starbucks double-tall, non-fat, extra foam, decaf latte with sweetener on the side.

So where are these insurance providers and how can you buy the perfect policy? Look no further than the device you’re reading this on. The perfect policy is only a few clicks away. Online comparison sites are a great place to start when shopping for a life insurance policy. You can compare prices across dozens of providers. 

Policy Me

We suggest using an online insurance provider, like PolicyMe. They’re a web-based insurance company on a mission to make life insurance more accessible to Canadians like you. And since they’re a bonafide insurance provider, not a broker, you’ll get the coverage you need at the best possible price.

PolicyMe is your one-stop-shop for calculating how much coverage you need, the right type of policy for your situation, instant online quotes, and transparent service.

What is term life insurance?

Term life insurance only covers you for a specific period of time, anywhere from 5 to 30 years, or to a specific age like 85, for example. Since term life insurance does not cover you indefinitely until you die, the policy will likely expire before you pass away. The provider is far less likely to take a loss on your death which makes the insurance premiums significantly lower than a permanent, whole life insurance policy. 

The more coverage you ask for, the more likely you will have to submit to a health exam. In which case, your health status will dictate how much your premiums will actually cost. So for some people, term insurance isn’t always cheaper depending on their current health status and how much coverage they’re asking for.

With term life insurance, the payments will remain the same throughout the term you’ve chosen. While term insurance is cheaper than whole life insurance at first if you choose to renew after your term expires you could get hit with higher premiums. There’s good news though. Many term life insurance policies offer the option to convert to a permanent, whole life policy without having to medically qualify. If you are unsure if you will want to need a permanent whole life policy in the future, you can opt for a convertible term life insurance policy. 

The older you are the more likely you are to experience serious health issues which affect your level of risk in the eyes of the insurance providers. The older you are, the more life insurance costs, period.  And if your health condition has worsened since your original term, you’ll get charged more for that too. Term life insurance policies run the risk of costing more money down the road if you choose to renew. 

Having said that, there is quite a bit of flexibility with term life insurance policies. If you renew, you can adjust the amount of coverage to suit your changing needs and the nature of your budget. Many term life insurance policies will let you convert to a permanent policy at the end of the term. While the premiums will still be higher simply because you are older, at least they will be locked in until you die. For a lot of people, this option is still quite a bit more cost-effective than renewing a term life insurance policy multiple times.

With a term policy, there is no cash benefit. You won’t be able to borrow against the policy or access any equity you would have accumulated by paying your premiums each month as you would have with a permanent, whole life cash value policy. And you cannot use your term life insurance policy as an investment policy, or as a way to tax shelter your estate.  If you renew your term policy, you’re still paying higher premiums even if you don’t reduce your coverage. Think of a term life insurance policy like renting an apartment, whereas a permanent, whole life insurance policy can be compared to buying a house, metaphorically speaking. 

What is permanent life insurance?

Permanent life insurance, commonly called whole life insurance, does exactly what the name suggests; it covers you for your whole, entire life. Unlike term life insurance, there is no maximum age at which you are no longer covered and it never expires. While many providers offer no-medical-exam policies, the more coverage you ask for, the more likely you will need to submit to a medical exam or at least a health questionnaire.

Of course, since the insurance company knows they will eventually take a loss on you when you die, the premiums are quite a bit higher than term policies with comparable coverage. Most permanent life insurance policies provide constant premiums throughout the life of the policy, guaranteed to never increase. Having said that, there are some permanent life insurance policies that offer adjustable premiums, in which case, your payments could fluctuate over time.

Permanent life insurance is a great option for you if you want long-term protection that will cover the cost of your funeral, help shelter your beneficiaries from estate taxes, and give you peace of mind knowing your loved ones will be taken care of no matter when you pass away. It’s also a good option for those who want a consistent payment that won’t change even as they age or if their health status deteriorates.

Most permanent, whole life insurance policies also offer something called a cash benefit or value. It acts kind of like an investment portfolio that grows as you make your payments. Some will let you borrow the available funds from within the policy or let you use it to secure a loan. Keep in mind that whatever you withdraw or borrow from your policy will reduce the death benefit payout to your beneficiaries.

Term life insurance or whole life insurance: which one is better? 

According to the Government of Canada, the average Canadian household owes $1.77 for every $1 they earn. In fact, 3 in 4 Canadians have used a payday loan at least once in the last year, and one-third of us feel like we are carrying way too much debt. So what do those statistics have to do with term life insurance versus whole life insurance? Everything.

Most Canadians are struggling just to get by. Many of us have been priced out of the housing market, and the rising cost of living is making it almost impossible to save for retirement, let alone find money in the budget for a life insurance policy. If you’re an average Canadian, like me, then term life insurance is almost always best. It’s the most budget-friendly way to secure the protection you need, like covering our mortgage and replacing part of your income during your prime working years. 

Term life insurance is a preferable option for that part of your life when expenses and debt balances tend to be the highest. But it’s also a great choice for anyone just starting out, or on a tight budget with others depending on them financially.  It is less expensive initially, which is good for those just starting out in their careers, juggling student loans and starting families.

The premiums are lower and remain the same throughout the term which offers an affordable option during the period of your life when most people have lower-incomes, fewer assets and a lot of debt. It’s also a great option for those who are self-employed or own their own business and only need protection for a period of time. 

However, there are scenarios when permanent, whole life insurance is better. Whole life insurance is often best suited for wealthy individuals who want to grow, protect, and pass on that wealth to the next generation in the most tax-efficient way. If your long-term goals are to accumulate wealth and leave a sizable estate for your heirs, then a permanent life insurance policy can help cover the larger tax bills that come with estates and inheritances. Permanent, whole life insurance may also be more appropriate if you have long-term, persistent financial commitments that would be impacted no matter when you die, such as a spouse with a long-term chronic illness or a child with a disability, for example. 

This article is the shortened version of an article originally published on Hardbacon.ca by Heidi Unrau under the title "Is Term Life Insurance Better Than Whole Life Insurance?".