Term vs Whole Life Insurance: What’s the Difference?

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You’ve heard that whole life insurance is the one where you “get your money back,” but you’ve also heard that there’s a catch.

As for term life insurance, you may not be sure if temporary coverage is enough to protect your family.

In this article, we’ll lay out the differences between term versus whole life insurance in Canada so you can make the best decision for you and your family.

Term vs whole life insurance in Canada: the biggest differences

The biggest differences between term and whole life insurance are:

This chart sums up the differences.

Term life insurance Whole life insurance
Low prices
Choice of policy length
Never expires
Rates locked in
Guaranteed death benefit
Accumulates cash value

Sounds like whole life insurance is the way to go? Hold up one moment.

Whole life insurance is best suited to high-net-worth Canadians who need it for estate planning. 

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 or even pay for funeral expenses. 

Thankfully, many 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.

Cost comparison: term vs whole life insurance

So, why can whole life insurance be up to 10 times more expensive than a similar term life policy? 

1. A whole life policy means the insurer likely has to pay out

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 die during your term length.

2. A whole life policy means you need to be covered even when you’re older and high risk

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 up front 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 70s or 80s.

3. Term life insurance typically covers you when you’re lower risk

Term life insurance is meant 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.

That difference makes term life insurance a lot cheaper than whole life insurance.

The chart shows how expensive a 20-year whole life policy is versus a term life policy in Canada

$250,000 20-year term life insurance $250,000 whole life insurance
Male, aged 30 $18/month $135/month
Female, aged 30 $15/month $121/month
Male, aged 40 $28/month $204/month
Female, aged 40 $22/month $178/month
Male, aged 50 $72/month $327/month
Female, aged 50 $51/month $279/month

Across the board, younger people and women pay less for their monthly premiums as, statistically, they are at a lower risk of passing away prematurely.

Now let’s explore further the differences between term and whole life insurance, beyond price.

What is whole life insurance?

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. 

On the surface, this might seem like a great deal. After all, everyone dies at some point. Wouldn't you want to protect your family for as long as possible? It also seems like a great investment opportunity. 

But don't be fooled, this isn’t a cost-free financial investment. It actually turns out to be much more expensive and inflexible than other forms of investment.

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:

Example portion of a real whole life contract for article on Term Vs Whole Life insurance

Our comprehensive guide to whole life insurance dives into detail about whether whole life is a good investment option, how the cash value works and pricing.

Pros and cons of whole life insurance

When it comes to whole life insurance, there are a few considerations to keep in mind.

What is term life insurance?

Here's how it works: term life insurance coverage provides protection for a predetermined time period, usually between 10 to 30 years.

Your loved ones can then use this death benefit to replace your income, pay off debts like mortgages or loans, pay for schooling for your children, or cover other living expenses.

If your policy expires, or you stop paying the premiums, the coverage and the contract ends.

Term life insurance policies have much lower annual premiums than whole life insurance policies because they have no cash value, unless you die during the course of the policy. 

The premiums for term life insurance usually increase each time you renew the policy. However, even with higher annual premiums, it's still a better financial investment than whole life insurance.

Term life insurance contracts are also typically easy to understand and transparent, such as this sample policy from PolicyMe.

Example portion of a real term life insurance contract for article about Term Vs Whole Life insurance

Pros and cons of term life insurance

Let's take a look at some of the advantages and disadvantages of term life insurance.

At PolicyMe, we believe that term life insurance is the right choice for the vast majority of Canadians. 

We want to empower you with genuine advice that’s specific to your real-life financial and family needs. We don’t use jargon or industry terms that could confuse you into buying more than you actually need. Instead, we help you proceed with confidence, not caution, and provide you with tips, tools, and resources that guide you towards making the best financial decisions for you and your loved ones.

Who should buy term vs whole life insurance in Canada?

The type of insurance that will work best for you really depends on the needs of your family. 

An extremely wealthy individual with no kids will have very different needs from someone who’s just purchased a home and has young children.

At PolicyMe, we believe that 99% of Canadians would be best suited for term life insurance, but we also know that there are some situations where it makes sense to choose whole life insurance.

Who should buy term life insurance

Term life insurance is the best option for you if:

  • You have dependents
  • Your childrens’ education needs to be paid for
  • You have a mortgage
  • You have a substantial amount of debt 

Who should buy whole life insurance

You may want to consider whole life insurance if:

  • You have permanent dependents, and you’ve run out of time to build your wealth
  • You’re ultra-wealthy and have maxed out your TFSA contribution

How do I choose a term life insurance policy?

The two most important factors to consider when you’re evaluating potential term life insurance policies are: the length of your term, and the amount of coverage that you want.

Here are a couple of factors you should take time to consider, which will help you find the right term life insurance policy for you.

1. How much money does your family need a year

Many financial experts recommend purchasing a term life insurance policy that’s equal to at least 10 to 15 times your annual income. 

If your beneficiary invests this amount of money in safe stocks and lives off the interest, the death benefit they receive should help replace your income indefinitely

2. Covering both partners versus just one

It's smart to purchase life insurance for both partners in a relationship, even if one stays at home with children. 

At first, this may not seem to make sense. After all, if one partner isn't earning an income, what source of money is there to replace? 

Consider how much you'd have to pay in childcare, and other ancillary costs, if the stay-at-home spouse passed away. Depending on your situation, these costs could be very substantial.

Of course, your long-term goal should be to pursue financial stability. When your term life insurance policy expires, you’ll want to be able to live comfortably off of your savings and investments. 

As you become more financially stable, you’ll have less of a need for life insurance. That's exactly why term life insurance may be your best option.

Our sophisticated life insurance calculator allows us to identify and recommend the right amount of life insurance for your specific situation. This way, you won't end up overpaying on your monthly premium. 

Get a quote in seconds, all online, with the calculator below.

Buying a life insurance policy in Canada

There are several ways to buy a life insurance policy. But no matter how you get it, you’ll want honest and unbiased advice when talking to a local life insurance broker.

Why is this so important? Life insurance companies pay their agents significant commissions for selling whole life policies. 

In fact, all of your first year's premiums can go towards the agent's commission. That means it’s often in their best interest to get you to spend as much as possible, even if that’s more than you actually need.

The commission percentage for selling term policies is often the same, but term life insurance costs much less. 

As a result, agents make up to 10 times more by selling whole life insurance policies than by suggesting a term life insurance plan. 

Always be conscious of these biases when you’re taking to brokers about their suggestions for your personal situation.

Should I get a medical exam?

Medical exams: no one wants them, especially not for life insurance. And some companies are offering a no-medical option, but often for much higher monthly premiums. Here we’ll look at when a medical isn’t necessary and when it’s actually a good idea.

1. Term policies without a medical exam

It's possible to buy a term life insurance policy without providing detailed personal information or getting a medical exam. This may seem like an attractive option, especially if you have a busy schedule or hate visiting the doctor. 

However, if you purchase a no-medical term life insurance policy, you can expect to pay higher monthly premiums.

Some insurance companies sell life insurance policies without asking any questions about your medical history, but they tend to have higher monthly premiums and lower coverage amounts. 

This is because they’re taking on a lot more risk, by insuring people without knowing their risk factors. They protect themselves from this risk by charging you more for coverage.

2. Term policies with a medical exam

Even though it seems inconvenient, there are many benefits to completing a medical exam for your life insurance policy. 

The insurance company uses the medical exam to assess your overall risk of dying prematurely, and then sets your premiums based on risk. So, if you're healthy, completing a medical exam will likely help you get a lower rate.

You can often schedule the medical exam to take place at your home or workplace, which makes it much more convenient than having to visit another location, or take excessive time away from your work commitments.

The exam typically lasts about 30 minutes. It includes things like a blood test, urinalysis, and general health assessment. 

The good news is that several insurance companies are now forgoing blood and urine tests for policies under $1,000,000 of coverage. There's no downfall to this. You'll still be eligible for very low life insurance rates, even without an exam.

In summary: term life insurance is the best option for most Canadians

With all of that said, what’s the best choice for you?

Term life insurance policies focus on protecting loved ones after you’re gone. This is accomplished by allowing them to maintain their quality of life, ensuring debt and education costs are covered, and protecting them against future financial challenges. 

Term policies are designed to protect you only for the amount of time you’ll actually need it, and because of that, they’re much more affordable than whole life insurance policies.

At PolicyMe, we believe that term life insurance is the right choice for the vast majority of Canadians, and that whole life insurance is only suitable for those with permanent dependents and wealthy individuals who have maxed our their other investment opportunities.

With our streamlined, online process, you can select your own coverage amount and term length without the hassle of upselling or pressure. We'll even tell you if we think you don't need life insurance at all!

FAQ: Term vs whole life insurance

Which is better, term or whole life insurance?

The right answer depends on your income, the needs of your loved ones, and any sizable, outstanding debt that you might need to cover in the event of your passing.

We believe that for the vast majority of Canadians, term life insurance policies are their best, most affordable option. Whole life insurance policies are the best option for high-net worth individuals who need help with estate planning.

Can I convert my term life to whole life?

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.

However, this option will be a lot more expensive than your term life policy, which will cause a substantial increase in your monthly premiums.

Can you switch from whole to term life?

You can switch from whole life insurance to term. That said, you must cancel your existing policy in order to do this. There will also very likely 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.

Laura McKay

COO & Co-Founder

About the Author

Laura brings 7 years of experience working in insurance & strategic operations as a management consultant at Oliver Wyman, after experiences at Manulife and Munich Re. In 2017, she launched a successful initiative for the World Economic Forum focused on innovation in insurance, working closely with insurers, tech pioneers, and policy-makers.

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