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Which is Better? Term or Whole Life Insurance?

This is a question that confuses many consumers. There are different types of life insurance products available to purchase in Canada and they each have different attributes. The most commonly purchased type of life insurance in Canada is term life insurance. The other type of life insurance is permanent life insurance. There are three different permanent life insurance products available which are whole life insurance, universal life insurance and term to 100 life insurance. Whole life insurance is a very popular type of permanent life insurance and we are commonly asked about the differences between term life insurance and whole life insurance. Which one is the best fit for you?

It is important to understand a couple of the fundamental differences between the two styles of coverage:

  1. Premium amounts. Whole life insurance will provide you with a level premium for the entire contract (your entire life). Term life insurance has renewals based on time frames built into it. This means if you keep the same term life insurance policy through the renewals, the premium you pay will increase. The premium costs with term life insurance are not level for life, unlike whole life insurance.
  2. Expiry date. Term life insurance will have an expiry date. Many term life insurance policies cover you until you reach a maximum of age 85.  After age 85, term life insurance doesn’t provide coverage. Whole life covers you for exactly that, your whole life. There is no expiry date for whole life coverage.

Understanding these basic differences help you figure out which is the best coverage for you. Most often we work with clients to figure out if a need is temporary or permanent. For example, if you are looking for an insurance policy that will help pay the capital gains taxes on a family cottage then term insurance isn’t the best fit. This is a permanent need; term doesn’t fit because it has an expiry date and the increasing cost of the insurance make it unlikely that coverage will still be in place when the need for money arises. An example of a temporary need would be to cover your outstanding mortgage balance, or to provide your family with an income until your children are financially independent.

How long you need the coverage for is important as well. Typically what you will see is that for a similar death benefit amount, the whole life premium is higher than the term premium until you reach the renewal after twenty years. It is at this point that the premium flips and term is the more expensive plan. Looking at this is helpful because it changes the discussion to how long do you need the coverage? If you are looking at covering a mortgage or a young family you’re probably in that 20 to 25 year window for how long you need the coverage. If this is the case then term life insurance is likely the best choice because it doesn’t make sense to pay extra up front for coverage you will cancel when the need doesn’t exist any more. 

This decision is often based on what you are covering. If it is permanent (funeral, tax offset at death), then whole life insurance is your best path. If it is temporary (mortgage, student loans), then term life insurance is often the best fit. Making sure that the type of insurance you get today fits the need you have is the key element in deciding what is best for you.

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