Term Life Vs. Whole Life Insurance: Which One Is Right For Me?
A post-Covid study revealed that 72% of Canadian consumers are worried about their finances (source) – and thanks to inflation, it’s likely this number has only gone up.
If you’re finding yourself worried about your financial well-being, you may be surprised to learn how important it is to have life insurance as part of your financial plan. Not only will it ensure that your loved ones are taken care of in the event of your death, but the right policy can even act as investment that you can dip into over your lifetime.
But choosing the right life insurance policy can be overwhelming, especially with so many options available in the market. Two common types of life insurance policies in Canada are term life insurance and whole life insurance. In this article, we’ll be talking about:
• the difference between term life versus whole life insurance
• the pros and cons of both term life and whole life insurance
• what you should consider when comparing term life versus whole life
Term Life Insurance
Term life insurance is a straightforward and affordable life insurance policy that provides coverage for a specific term. The typical time periods offered by most carriers are ten years (term 10 life insurance), 20 years (term 20 life insurance), and 30 years (term 30 life insurance).
As a policyholder, you would pay a premium (i.e., the amount you pay for an insurance policy) to the insurance company, and in return, your beneficiaries (i.e., the person(s) you choose to receive your life insurance payment in the event of your death) will receive a death benefit (i.e., a payment made to designated family members or other loved ones) if you were to pass away during the selected term.
Once the policy term ends, the coverage ends – which means you would need to renew or purchase a new policy if you still require coverage.
Pros of Term Insurance Versus Whole Life:
- Affordable: Term life insurance is generally the most affordable type of life insurance because it offers coverage for a limited period.
- Customizable: Term life insurance policies can be customized to suit your needs, whether you’re looking to cover a short-term debt or a long-term mortgage.
- Simple: Term life insurance policies are easy to understand, and do not have complicated terms and conditions.
NOTE: Read more about the top reasons to consider family term life insurance.
Cons of Term Insurance Versus Whole Life:
- No opportunity for growth: Term life insurance policies do not offer dividends (i.e., an investment component that allows policyholders to share in the insurer’s profits and choose how to spend their earnings), nor do they have a cash value, which means you would not be able to access your funds in the event of a costly life event (e.g., a wedding) or emergency.
- No lifelong coverage: Once the policy term ends, you would need to renew or purchase a new policy if you still require coverage. This can end up being more expensive if you have a new health condition – not to mention prices go up with your age. (Learn why life insurance is more affordable when you are young and healthy.)
Whole Life Insurance
Whole life insurance is a permanent life insurance policy that provides coverage for your entire lifetime, as long as you continue to make your payments. The policy also has the potential to earn dividends that can be used in different ways. For example, they can be used to:
- buy an additional layer of life insurance
- earn more interest on your earnings, or
- withdraw your money as cash
Not to mention, whole life policies also come with a cash value component that can be:
- borrowed to help pay for life events (e.g., tuition fees, wedding, down payment on a home), or
- used to pay premiums while the policyholder is still alive
Pros of Whole Life Versus Term Life Insurance:
- Lifelong coverage: Whole life insurance provides coverage for your entire lifetime, which means you would not have to worry about the costs associated with renewing or purchasing a new policy as you age or in the event of a new diagnosis. Even better, a 20-pay whole life policy gives you lifetime coverage, but payments stop after 20 years.
- Cash value: Whole life insurance policies have a cash value component that grows over time. This money can be used as an “emergency fund” or can be borrowed against to make your policy payments.
- Tax advantages: The cash value component of a whole life insurance policy can grow tax-deferred. Plus, you can typically withdraw the cash value, tax-free. (As always, there are some exceptions, but it’s best to speak with a tax specialist if you have questions.)
Cons of Whole Life Versus Term Life Insurance:
- Expensive: Whole life insurance policies are generally more expensive than term life insurance policies because they provide coverage for the entire lifetime of the policyholder.
- Complex: Due to extra features, like access to a cash value and the potential to earn dividends, whole life insurance policies are more complex than term life insurance policies, and may have more complicated terms and conditions.
- Limited investment options: The dividend component of a whole life insurance policy acts as a low-risk investment option, which means it may not provide maximum returns, compared to higher risk investment options.
Comparing Term Life Versus Whole Life Insurance
When comparing term life versus whole life insurance, it’s essential to consider your short- and long-term needs as well as your financial situation. Here are some key factors to think about:
- Cost: Term life insurance is generally more affordable than whole life insurance, making it an attractive option for those on a budget. However, if you can afford the higher premiums, whole life insurance may be a better option due to its guaranteed cash value, the potential to earn dividends, and guaranteed coverage for life.
- Coverage: If you only need life insurance for a specific period (e.g. to cover the mortgage on your home), term 20 or term 30 life insurance may be the better choice. If you want coverage for your entire life (e.g., to leave a legacy behind for your loved ones), whole life insurance may be the right option for you.
- Growth: In addition to the death benefit, whole life insurance act as an investment option – thanks to dividends and a cash value. Both of these savings components can accumulate over time, giving you the ability to save and grow your money. Term life insurance policies do not have an investment component.
- Flexibility: Whole life insurance policies provide more financial flexibility than term life insurance policies, thanks to dividends and the cash value. Not only can you use your dividend earnings in a number of different ways, you can also use the cash value to help pay for big life events or unexpected emergencies, providing an additional level of financial security that is not available with term life insurance.
So, Which Is It? Is Term Life or Whole Life Better for Me?
When comparing term life versus whole life insurance, it ultimately comes down to your individual needs and budget. If you are looking for affordable coverage for a limited period, term life insurance may be the best option for you. However, if you want lifelong coverage and the ability to build up your savings over time, whole life insurance may be a better choice. It is important to weigh the pros and cons of each policy type and consult with an expert before deciding.
