Term vs. Whole Life Insurance in Canada: What’s Better?
What is the difference between term and whole life insurance?
There are three main differences between term and whole life insurance: the length of the insurance coverage, the cash value component, and the cost of coverage.
Length = Term is more customizable
- Term: Term policies cover you for a set period of time.
- Whole: Whole life policies are permanent.
Cash value = Whole life policies only
- Term: Term policies do not accumulate any cash value.
- Whole: Whole life policies slowly grow a cash value through investments.
Cost of coverage = Term is around 7.5x more affordable
- Term: Term policies cost less, starting between $20-30 per month.
- Whole: Whole life policies are more expensive, around $250-$500 per month.
Term life insurance is the best option for most Canadian families and individuals. Whole life insurance is only a good choice if lifelong coverage is truly necessary because of permanent dependents or estate planning concerns.
Term vs. whole life insurance at a glance
The most significant difference between a term life insurance policy and a whole life insurance policy is the coverage period, but there are other key differences. Here’s a high-level rundown of how they compare:
Regardless of the policy type you choose, your monthly premium will depend on your age, health, and the coverage amount you select. Choosing the right coverage amount ensures your beneficiaries are protected without overpaying for unnecessary insurance.
Benefits of term life vs. whole life insurance
The biggest difference between term and whole life insurance is what they were designed to do. Term life insurance offers affordable coverage for a set number of years, while whole life insurance provides lifelong coverage and builds cash value. The better choice depends on whether you need temporary financial protection or lifelong coverage.
Benefits of term life insurance
The biggest trade-off is that term life insurance eventually ends. If you still need coverage when your term expires, renewing your policy usually costs more because you're older.
Things to consider:
- Coverage isn't lifelong
- Renewals can become expensive
- No cash value
Benefits of whole life insurance
Whole life insurance provides benefits that term insurance doesn't, but those benefits come with much higher premiums. For many families, the extra cost isn't necessary if their financial obligations are temporary.
Things to consider:
- Premiums are much higher than term life insurance
- Cash value grows slowly
- Cancelling early can reduce the value you receive
- Policies can be more complex to compare
Universal life insurance (including variable and indexed universal life insurance) is another type of permanent life insurance. Unlike whole life insurance, which is charged at a fixed rate over the life of the policy, universal life insurance has variable premiums and may be a better fit for individuals comfortable with more flexible and hands-on policy structures.
How to choose between term and whole life insurance
Generally speaking, term life insurance is the best choice for most Canadians. It’s a good option if you:
- Want affordable premiums. Term life insurance premiums are far less expensive than a permanent policy, especially for adults who are young and healthy.
- Need coverage for a set period. You can purchase coverage for the number of years you have large financial obligations, such as a mortgage or dependent children, and end your coverage once you no longer need that financial protection.
- Don’t need to accumulate cash value. Term policies don’t grow in value, but you can invest the money you save with the lower premium elsewhere.
A practical solution is to buy term coverage and then invest the difference.
Term coverage saves you a ton of money on monthly premiums. But you still have affordable protection when you’re financially vulnerable due to a mortgage and dependents.
If you invest the money you save on premiums into a registered account like an FHSA, RRSP, and TFSA, this can provide long-term financial security and cash value comparable to a permanent product like whole life insurance.
“[Term insurance] is generally for people who want to have their mortgage covered. If they pass away, they want to make sure that the debt does not fall on the family. Term insurance, 100% is the way to go. If they're a young family and they want to be responsible and look after their kids, term insurance is the way to go. It's going to get you the most coverage and the biggest bang for your buck. Once your kids are all grown up and independent, you don't need to worry about insurance anymore.” —Erik Heidebrecht, Life Insurance Advisor.
On the other hand, whole life insurance might be a good choice if you:
- Have a high net worth. If you’ve maximized your FHSA, RRSP, and/or TFSA contributions and want an additional way to leave a legacy or take advantage of tax-free growth, you might consider a whole life policy.
- Can afford higher premiums. Permanent coverage is 5–15x more expensive than term coverage and lasts your lifetime, so before you purchase a policy, you want to ensure that you can comfortably afford the cost. Cancelling the policy may incur a hefty fee.
- Have lifelong dependents. If you’re caring for a dependent who will still rely on you at the time of your death, this type of policy can provide for their ongoing care and your peace of mind. It’s best to speak to an attorney if you’re interested in setting up a trust for this purpose.
- Want to build cash value. A whole life policy’s cash value grows over time at a rate set by your insurance provider.
Ultimately, the type of insurance that is best for you will depend on your unique financial situation.
How much does term vs. whole life insurance cost?
Whole life insurance is far more expensive than term coverage with a monthly premium around $250-$400 per month compared to $20-$30 per month for a term policy, according to the Financial Consumer Agency of Canada.
Below are approximate monthly life insurance premiums for sample Canadian applicants:
- $500,000 in coverage
- Regular health
- No pre-existing conditions
- Non-smoker status
How premiums change over time
Premiums work differently depending on the type of life insurance you choose.
Term life insurance premiums: Term premiums start low and stay low for the term. But if you renew, rates will be much higher since you will be older.
Whole life insurance premiums: Whole life premiums start high and stay high for life, though some have limited pay options where you pay more upfront to stop paying premiums later while coverage continues.
The way your premiums are structured can have a major impact on the long-term cost of coverage.
Hidden long-term costs of whole life insurance
Whole life policy costs are high but more predictable over time. However, the extremely high cost of whole life insurance may prevent you from saving and investing elsewhere, ultimately costing you far more than the cost of coverage alone.
Example scenario
A 35-year-old woman opting for a 20-year term life insurance policy over whole life insurance could save just over $4,800 over 20 years, with no obligation to keep paying after the 20-year term expires. If she took the $240 she saved each month and invested it in a high-yield savings account at 4.5% annual interest, her savings could grow to over $92,000.*
Remember that these are just averages! To find out how much it might cost for you, get a free life insurance quote.
* Illustrative example only. Assumes contribution of $240/month at 4.5% annual return over 20 years. Actual returns vary.
Applying for term vs. whole life insurance
The application process is similar for both term and whole life insurance products. You’ll be required to:
- Complete an application form
- Answer a series of questions about your medical history; a medical exam may be required, especially for lifetime coverage
- Go through underwriting
While it can vary by life insurance provider, term life insurance applications are typically quicker and more streamlined. Whole life insurance policies often require more detailed medical evaluations and take longer to underwrite because of their complexity.
PolicyMe offers some of the best life insurance rates in Canada. Get a free, no-obligation quote in seconds to see just how affordable securing your loved ones’ financial future can be.
FAQs: Term vs. whole life insurance in Canada
Kathleen Flear is the Director of Content Marketing at PolicyMe. With seven years’ experience creating insurance and financial-planning content and leading editorial teams, she focuses on clear, helpful guidance that empowers Canadians and strengthens their financial well-being.
Kathleen Flear is the Director of Content Marketing at PolicyMe. With seven years’ experience creating insurance and financial-planning content and leading editorial teams, she focuses on clear, helpful guidance that empowers Canadians and strengthens their financial well-being.