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The main difference between term and whole life insurance is:
Let's start with a quick summary of the four biggest differences between term and whole life insurance.
If you're looking for the TL;DR version for the main difference between term and whole, check out the chart below:
Whole life insurance is suited for high-net-worth Canadians who need it for estate planning. And life insurance is only meant to replace your income in the event that you pass away. It's not designed to help you invest your money efficiently.
Canadians are getting wise to this. According to the Canadian Life and Health Insurance Association, term life insurance grew in popularity by 39% in 2020, while whole life insurance only grew by 12%.
There are many better, more profitable ways to invest your money other than whole life insurance. Options like an RRSP or TFSA will generate more money for your loved ones after you're gone.
Take a look at this quick explainer video for more information about how term and whole life insurance compare.
We’ve outlined the difference between term and whole life insurance. But how can you decide which policy is actually best for your family’s needs?
Here are a few things to keep in mind as you make your decision.
For the average Canadian family's needs, term is often the better option.
Life adds up; if you’re like most families whose monthly pay supports expenses like groceries, debt payments, savings, etc. an affordable term policy might be right for you.
A whole life insurance policy is guaranteed to pay out eventually, as long as you don't die in a way not covered by your life insurance policy.
Term life insurance only pays out if you pass away during your term length. Because term is meant to help protect you for a “temporary” time period, like while the kids are young or while you’re paying off your mortgage.
You're more expensive to insure when you're older than when you're younger. Insurance companies compensate for this by charging more for permanent life insurance from the beginning.
In a sense, you're paying upfront while you're young and healthy and should be paying lower monthly premiums. This is because the insurance company knows you'll likely need to be covered when you're older and at higher risk of passing away. In fact, they'll probably need to cover you until you pass in your 80s.
On the other hand, you’ll pay a fixed monthly premium with term life insurance as the payments are consistent throughout the entire duration of your coverage.
Term life insurance works to protect your loved ones during a specific period of time when you actually need financial protection via life insurance.
This could be when you have kids who depend on you or you have large loans such as a mortgage or school loans that you're just starting to pay off.
You're only paying for coverage for 10, 20, or 30 years when you're at a lower risk of passing away as opposed to whole life insurance that sustains throughout your lifetime. As a result, term life insurance is a lot cheaper than whole life insurance.
And better yet, PolicyMe has some of the most affordable term rates in Canada. Check out the comparison table below to see how we stack up against other companies.
Get the most affordable term insurance with the same high-quality coverage with PolicyMe term life insurance. Get $10,000 of free life insurance for each of your children (and kids to be) on top of your policy. No extra costs or hidden fees.
To make the right decision with coverage, it helps for you to know the meat and potatoes of the differences between term and whole life insurance. Let’s break down exactly what each option entails below!
Whole life insurance is a kind of permanent life insurance where the policy's coverage lasts for your entire life and the life insurance premium is designed to build cash value. But if your TFSA and RRSPs aren’t maxed out, it’s not a very efficient investment method.
It sounds like a great type of policy in theory, but there are other costs that could make it less beneficial. It’s far more expensive and inflexible than other life insurance policies.
And whole life insurance policies are also full of fine print, making them complicated and difficult to understand. This is an actual example of a whole life insurance contract:
You can read our comprehensive guide to whole life insurance to dive into deeper detail about the benefits of whole life insurance, how the cash value system works, and also more information about pricing.
There are a few considerations to keep in mind when it comes to whole life insurance.
Term life insurance coverage works by providing protection for a predetermined time period, usually between 10 to 30 years. If you pass away during the agreed-upon term, your beneficiaries will get the amount that you’re covered for.
Your loved ones can then use this death benefit to replace your income, pay off debts, support children’s schooling, or cover other living expenses.
In Canada, term life insurance policies have much lower annual premiums than whole life insurance policies. But the premiums will probably increase if you renew the policy. Even with higher annual premiums, it's still a better financial investment than whole life insurance.
Term policy contracts are also easier to understand and transparent, like this sample policy from PolicyMe:
Let's take a look at some of the advantages and disadvantages of term life insurance.
PolicyMe removes cost barriers to term life insurance, with the same high-quality coverage at a better price. And by cutting out inefficient steps from the admin and application process, we’re able to offer the lowest rates in Canada.
The application process for both term life insurance and whole life insurance is relatively similar, if not completely the same. It will depend on the particular company you're sending an application to. The reason the application process is so similar because life insurance companies will require the same amount of information from an applicant, regardless of the type of life insurance they're applying for. Of course there are exceptions to this, for example: simplified issue life insurance or funeral expense insurance.
But strictly looking at term and whole life insurance, the main difference in the application process will come down to the point where you choose policy specifics (like term length, riders, investment components, etc.) Otherwise, you can expect almost the same course of action when applying for either.
At a high level, these are the major distinctions between term and whole life insurance:
The bottom line is that we believe that term life insurance is the right choice for most Canadian families. Whole life insurance is more suitable for those with permanent dependents or who are wealthy individuals.
Which is better for seniors: term or whole life insurance? Well for starters, term life insurance is the more affordable option and you can also receive coverage into your golden years if you renew it in time.
Term life insurance will also help your loved ones pay off debts, maintain their lifestyle and support them in a tough time.
Most term insurance policies have something called a ‘term conversion rider' included in the terms of your agreement, which would allow you to convert your policy from term to whole life insurance.
But watch out: there are extra costs associated with this (and most other riders, too).
You can switch from whole life insurance to term. But in most cases you have to cancel your existing policy to do this. There might also be penalty fees you'll have to pay out of any earned cash balance, resulting from cancelling your policy early. These fees will be taken out of any value in your account, prior to it being paid out to you.
Unfortunately, because you need to cancel your whole life policy before you can switch to a term policy, your costs will need to be reevaluated at the time that you create your new term agreement. This means, your premiums will likely be higher than they would have been if you had just signed up for a term policy in the first place.
A long-term care life insurance policy helps cover the cost to administer long-term care to senior citizens who require assistance throughout their day-to-day lives. This includes costs to assist with routine daily activities like bathing, dressing, or getting in and out of bed.
Unlike whole life insurance, which has more of a cash value investment attached to it, long-term care insurance reimburses senior citizens for the cost to help them get through their days.
No, whole life insurance is not a scam. But it is a far more expensive life insurance policy than term life insurance because it provides lifelong coverage and also includes the cash value component.
And caution: commissioned life insurance advisors often push it because it’s the more expensive option.
No, you do not need to acquire both life insurance policies for your own needs. But your needs will likely change over time.
And as those changes become apparent you may require multiple policies that hybridize both term and whole life insurance incentives to provide the best possible protection for your loved ones at the most affordable price.
The type of policy that works for you depends on your family’s specific needs. The policy that works for you will depend on your specific needs that include details about your lifestyle, your current health, and any dependents you may ultimately be responsible for supporting.
The bottom line is that you should avoid buying more life insurance than you need.