Whole life is more expensive than term insurance if you are purchasing life insurance for defined periods of time such as 20 years. Whole life is less expensive than term if you are purchasing life insurance over long periods of time (such as your entire lifetime). The key is to look not just at the first year premium, but instead the total cost of each policy over different time periods.
Let’s have a look at some numbers. We’re going to compare a traditional whole life policy against a term 20, for a 40 year old male non-smoker in standard health, for 100,000 of life insurance. Note that numbers are approximate.
Total Cost Over 1 Year
End of Year 1:
Total Term premiums: $173.00
Total Whole Life premiums: 2907.50
In the first year, whole life is far more expensive than term life insurance.
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Total Cost Over 20 Years
Note that the whole life policy has a ‘cash surrender value’ which returns some amount of premiums if you cancel the policy. For the comparison, we are assuming 3% return, and comparing the total cost of premiums for the term policy, versus the total cost of the whole life policy less the cash surrender value.
End of Year 20:
Total Term Premiums: $2651
Total Whole Life Premiums less CSV: $9129
Over 20 Years, Whole Life Is More Expensive Than Term Life Insurance.
Total Cost Over 40 Years
At the end of a ‘term’ your life insurance policy will automatically renew at a higher premiums. So for this next comparison the term policy has premiums of $173/year for the first 20 years, but then premiums increase to $1622/year for the next 20 years. Using the same assumptions as the total cost over 20 years:
End Of Year 40:
Total Term premiums: $16,412
Total Whole Life premiums: $10,241
Notice that after 40 years, Term Life insurance is more expensive than Whole Life insurance!
What’s happening here is that term premiums increase over time. Initially term premiums on an annual basis will be less expensive that whole life. But as term premiums increase over time, eventually the total cost of the term policy will be higher than the total cost of a whole life policy.
Is Whole Life Better Than Term Life Insurance?
Based on total cost alone, the answer to this question depends entirely on how long you intend to keep the life insurance. If you plan on keeping a life insurance policy for a defined period of time such as 20 years, then term life insurance will be cheaper than whole life. However if you intend to keep the life insurance policy for an extended period of time, eventually the total cost of the whole life policy will actually be less expensive.
The unanswered question then is, how long do you need your life insurance policy for? For most Canadian families, the assumption is that they need life insurance during their income earning period and that they’ll cancel the life insurance at some point near retirement. Thus a term policy will be cheaper than whole life over that period of time (generally 20 or 30 years), and as a result, most Canadian families should look at term life insurance to meet their life insurance needs.
You Can Do Both Whole And Term Life Insurance!
It’s possible to blend both term and whole life into one coverage. For example you can purchase $650K of 20 year term life insurance and $100K of whole life. This gives you total coverage of $750K for 20 years. At that point you would cancel the term portion of the policy and reduce your coverage to the $100K of whole life which then provides coverage for the rest of your life.
If you choose not to combine coverage types like this and just purchase a term life insurance policy, you should ensure that your term insurance policy is Renewable and Convertible Term. The convertible feature in some term life policies allows you to exchange your term for a permanent (often a whole life) policy in the future without a medical exam.