How to Pick Between Term vs Whole Life Insurance

The main benefit of term life insurance is its simplicity. Term policies are usually easier to understand – you’re covered for a set number of years, then the policy expires. You need to renew the policy if you want protection beyond the term.

Term policy costs are also more affordable and predictable. Your premiums are guaranteed to stay the same for the entire term. A term policy is also very flexible because you can either renew it with another term policy or convert it into a permanent policy during the term (before it expires), depending on your insurer.

The most prominent disadvantage of term life insurance is its temporary coverage. You lose the protection when the term ends, and you don’t renew. You might also get higher premiums when renewing the policy due to age and any health issues you may have developed since you took the policy.

Another disadvantage of term life insurance is that it doesn’t build value. You get nothing but your policy’s death coverage while the policy is active. Contrast this with permanent or whole life insurance that builds value as you pay premiums.

Term life insurance is best if you have temporary needs to cover. Temporary needs can be anything from paying off your mortgage to funding your child’s education.

Term policies are also great if you want to save money. They’re usually cheaper than whole-life policies because of their temporary nature. But the lower costs now might translate into more expensive renewal later because you’ll be older and potentially less healthy.

Can’t decide which type of policy to get, but still want insurance? Term policies give you flexibility in that regard. Your insurer may allow you to convert a term policy into a permanent policy when it expires.

The main benefit of a permanent policy is its whole-life coverage. You’re guaranteed death benefits when you pass away as long as you keep paying premiums.

These death benefits aren’t taxable, so your loved ones will receive them in full. However, there are some cases where your death benefit might be subject to tax. Check our guide on the tax consequences of life insurance in Canada for more details.

Another important benefit is its cash value. As you pay premiums, your policy’s cash value will increase. Once you have enough built up, you can borrow against this cash value or withdraw it as an extra source of funds.

Curious about how life insurance can be an investment vehicle? Learn more about investing with life insurance.

You can still benefit even if you don’t use the policy’s cash value. If you have enough cash value in your policy, you can convert it to a paid-up policy. This means you don’t need to pay any more premiums, as you may be able to convert your policy into a paid-up policy using accumulated cash value or dividends, depending on the policy

The most prominent disadvantage of whole life insurance is its high costs compared to term policies. Whole life policy premiums are higher because you pay for your insurance coverage and the cash value.

Another disadvantage is opportunity cost. Whole-life policies build up cash value through investments, but the returns may be modest compared to other investing methods. For instance, you might get more returns by taking a term life policy and investing the remaining money into stocks or real estate.

Permanent life insurance is a better option if you want whole life insurance coverage or to take advantage of its investment component. Permanent policies are also a good way to cover your funeral costs. You don’t want to leave your loved ones with a large bill when they find out you passed away, after all.

Permanent life insurance premiums are more expensive, but it comes with better peace of mind because you have lifelong protection. That means you don’t have to worry about re-qualifying at a higher price when your policy term expires.

Some investment vehicles have higher returns, but some whole life policies offer guaranteed cash value growth, while others (like universal life) depend on investment performance. It’s the right choice if you prefer a hands-off approach to investing. The gains from your policy’s cash value aren’t just useful for you – the cash value is typically absorbed into the death benefit paid to beneficiaries.

You also have a way out if you’re having second thoughts about permanent life insurance. You can surrender the policy and lose your protection to gain a certain amount of cash based on how much value your policy has accumulated.