There’s no one type of life insurance that’s right for everyone. The right insurance policy for you is the one that best suits your needs.
Term insurance often works best for temporary needs, while whole life may fit a quantified lifelong need when its higher premiums and guarantees are suitable.
We looked into the federal life-insurance guide, FSRA’s life-policy guide, and CISRO’s life-insurance replacement guidance.
Should You Choose Term Or Whole Life Insurance?
Term insurance is usually the clearer starting point when your shortfall has an expiration date and substantial coverage must fit a limited budget. At the same time, whole life makes sense when the shortfall is expected to be lifelong, and you can comfortably afford the premium. Whole life also makes sense when its guarantees meet needs that term insurance and independent saving can’t meet.
Start With The Need, Not The Product
| Need | Likely duration |
|---|---|
| Income or caregiving replacement | Until dependants are self-sufficient or survivor resources are sufficient. |
| Mortgage or other debt | Until repayment or another survivor plan is in place. |
| Lifelong support for a dependant | Lifelong. |
| Final expenses or legacy | At death. |
| Estate or business liquidity | A quantified liability may remain at death. |
Figure out the actual insurance need: how much coverage you need after accounting for savings, employer-provided insurance, survivor income, and other reliable sources of support, and how long that need will last. A need with a 15-year end date may not require lifelong coverage.
What Is Term Life Insurance?
Premiums are level for an initial term, but the policy may provide for higher premiums upon renewal at the end of that term.
Term life insurance pays the contract’s death benefit if you die while coverage is in force during the stated period.
Term life insurance doesn’t build up cash value.
Read More: Explore Term Life Insurance Options
Pros Of Term Life Insurance
Lower initial premiums. Term life insurance policies cost less than permanent life insurance policies. Lower premiums mean you can buy more insurance when you need it.
Flexible policy length. The length of the policy can be tailored to fit a need such as the term of your mortgage, a dependency period or business obligations.
Renewable policies allow the policyholder the option to maintain coverage at the premium schedule stated in the policy without evidence of insurability, such as a physical exam. Convertible policies allow the policyholder the option to convert to an eligible permanent product without evidence of insurability before the contractual deadline.
Cons Of Term Life Insurance
Coverage expires unless converted, renewed, or replaced.
New insurance might require current medical and financial underwriting.
With guaranteed-renewal options, premiums may be very high depending on the attained age in the contract. However, you won’t need to provide new health information.
Check the contract’s conversion options, deadline, eligible products, and amount permitted.
Read More: See How Renewable and Convertible Term Life Insurance Work
When To Take Term Life Insurance
Choose term insurance if your coverage need is temporary. Choose it if affordability is important. Take it if you want to separate the insurance and savings component.
Make a note of the policy’s term end, renewal schedule, and conversion deadline when you receive your insurance policy. Do not leave a conversion decision until after expiry.
What Is Whole Life Insurance?
Cash value is not an investment account that receives a fixed portion of each premium.
Access to cash value may be available, such as via policy withdrawal or surrender, direct policy loan or collateral loan, and each has different implications for your remaining cash value, death benefit, interest, and taxes.
Whole life is one kind of permanent insurance. Whole life insurance policies are intended to stay in force for the insured’s entire lifetime, provided the insured meets all policy requirements and makes premium payments.
Many whole life insurance contracts offer guaranteed premiums, guaranteed death benefits and guaranteed cash values. Some whole life insurance policies are participating and may pay dividends. Dividends are not guaranteed.
Read More: Explore Whole Life Insurance Options
Pros Of Whole Life Insurance
Provides coverage for a measurable, lifetime need. It has no expiration date as long as you maintain the policy.
The contract can provide guaranteed values that are known in advance.
Some contracts offer paid-up or other non-forfeiture options if you stop paying. Values and options vary by policy.
Cons Of Whole Life Insurance
Higher cost: Whole life insurance is usually more expensive than a term policy for the same initial death benefit. Higher premiums may prevent policyholders from saving money to pay off debt, build an emergency fund, or meet other financial goals.
Limited access to cash: Some policyholders find it disappointing that the cash value isn’t much, or anything, compared to the premiums they’ve paid during the first few years of coverage. Surrendering the policy or making a withdrawal may result in a taxable policy gain. Policyholders also pay interest on policy loans, which can reduce the amount beneficiaries receive.
Dividends aren’t guaranteed: Be cautious about counting on high returns from a whole life insurance policy based on illustrations. Some people mistakenly believe that illustrated values are guaranteed.
Read More: Consider Whether Whole Life Insurance Is a Good Investment
When To Take Whole Life Insurance
Consider whole life after identifying permanent needs, quantifying the value of meeting them after death, testing whether you can afford the premium in a difficult cash-flow month for a long time, and comparing the guaranteed column with reasonable alternatives.
Retirement income and higher returns alone aren’t good reasons to buy whole life. A TFSA, RRSP, debt repayment, non-registered savings, and a coverage-only term policy might be good alternatives to compare against whole life, taking into account management fees, liquidity, taxes, risk, etc.
Term Vs Whole Life Insurance: What’s The Difference?
| Feature | Term life | Whole life |
|---|---|---|
| Coverage period | Term lasts for a certain term or to a specified age. | One is meant to cover you for life as long as the policy is in force. |
| Initial premium | Generally, for the same death benefit, a term life insurance policy costs less than whole life insurance. | Generally higher for the same death benefit. |
| Cash value | None | While dividends may not be guaranteed, the policy frequently provides a guaranteed cash value. |
| Renewal | Renewal is possible only when permitted in the contract and at the premium rate specified. | There is no term renewal; required premiums follow the contract. |
| Conversion | Some term policies may allow conversion to eligible permanent coverage before a specified date. | Not applicable in the same way |
| Main fit | Term life insurance is an option when you have an insurance need with a foreseeable end. | It can suit a quantified, lifelong need. |
| Main risk to test | One potential drawback is that you may need coverage beyond the term and find it too expensive to renew your policy. | Potential premium strain, early surrender risk and reliance on non-guaranteed values. |
Term Vs Whole Life Insurance: Cost Comparisons
Obtain written quotes keeping the following constant: the person being insured, health/underwriting class, amount of coverage, payment frequency. Fill out the following worksheet.
| Comparison item | Term quote | Whole-life illustration |
|---|---|---|
| Insurer, product and quote date | ||
| Face amount and insured person | ||
| Guaranteed premium and payment period | ||
| Total guaranteed premiums at years 5, 10, 20 and planned end | ||
| Guaranteed death benefit at those dates | ||
| Guaranteed cash surrender value | Not applicable | |
| Non-guaranteed dividend or illustrated value | Not applicable | |
| Renewal and conversion terms | Not applicable | |
| Result if premium stops |
Which Type Of Insurance Is Right For Me?
| Question | If yes, investigate |
|---|---|
| Does the uncovered need end on a reasonably known date? | If you have an end point that matches up with your timeline, and need adequate coverage right away, a term insurance may be worth comparing. |
| Would a permanent premium reduce necessary coverage or strain the budget? | Compare term insurance, a smaller permanent layer, or postponing optional cash-value goals. |
| Is there a lifelong dependant, final expense, estate-liquidity or business need? | Looking at legal, tax, and policy aspects of permanent insurance choices. |
| Do you understand which values are guaranteed? | Look at policy contracts and guaranteed/non-guaranteed illustrations. |
| Could you keep paying after a job loss, disability, rate change or lower investment return? | Stress-test both the insurance option as well as a separate savings plan. |
Which Companies Offer Term And Whole Life Insurance In Canada?
Carefully consider all features in the insurance contract, including:
- Cost of insurance and related charges
- Quality of service
- Financial strength indicators
- Guaranteed benefits
- Renewal provisions
- Conversion options
- Policy wording
Many licensed Canadian insurers sell term or permanent products. Insurance products change over time. Confirm that the insurance company and the representative that sells you life insurance are licensed in your province.
Before Replacing Existing Coverage
Do not cancel your existing policy until the replacement has been issued, delivered, examined, and is in effect.
When comparing policies for replacement, consider the contestable period, suicide clause, guarantees, exclusions, cash values, surrender charges, outstanding loans, tax implications, and the possibility of losing conversion privileges.
Ask your agent for the replacement form required in your jurisdiction, and keep a signed copy. CISRO lists its life-insurance replacement declaration for every province except Quebec. See separate provincial guidance for Quebec and British Columbia.
Read More: See Your Options When Term Life Insurance Is Expiring