Term Life Vs Whole Life Insurance: What's the Difference?
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Discover the methodologyWhen comparing term vs whole life insurance in Canada, term life insurance is the more affordable option but provides coverage only for a set number of years and doesn’t include a savings component.
Whole life insurance, on the other hand, offers lifelong protection and includes a cash value account that grows tax-free over time, which you can borrow against or withdraw while you’re alive.
Both types cater to different financial needs. But what's right for you? Should you get term or whole life insurance? Let’s explore the key features of each to help you make an informed decision.
Term vs Whole Life Insurance Canada: Key Points
- Cost Difference: Term life insurance is much cheaper than whole life insurance.
- Lifelong Protection: Whole life insurance provides coverage for your entire life, while term life ends after a set period.
- Cash Value: Only whole life insurance builds cash value you can borrow or withdraw.
- Flexibility: Term life can often be converted to whole life without medical exams.
- What's better: Term life is ideal for short-term goals like a mortgage, while whole life suits long-term goals like estate planning.
Term vs Whole Life Insurance: A Quick Overview
Here is a concise table that highlights the key differences between term and whole life insurance for quick comparison.
| Term Life Insurance | Whole Life Insurance |
|---|---|
| Provides coverage for a specific term (e.g., 10, 20, or 30 years). | Offers lifelong coverage as long as premiums are paid. |
| More affordable with lower premiums. | Higher premiums due to lifelong coverage and cash value. |
| Does not include a cash value component. | Includes a cash value account that grows tax-free over time. |
| Pays out only if you pass away during the term. | Guarantees a death benefit no matter when you pass away. |
| Ideal for temporary needs like paying off a mortgage or raising children. | Best for long-term goals like estate planning or leaving a legacy. |
You can quickly compare term life and whole life insurance policies using our free tool. Get multiple life insurance quotes online for free using our special comparator below.
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What is term life insurance?
Term life insurance provides coverage for a set period, such as 10, 20, or 30 years, or until a specific age. If you pass away during this term, your beneficiaries receive a tax-free death benefit. However, if you outlive the term, the policy expires, and no payout is made.
For example
If you purchase a 20-year term life insurance policy with $500,000 coverage at age 35, your family will receive the payout if you pass away during those 20 years. If you’re still alive at 55, the policy ends, and no benefits are paid.
What are the benefits of term life insurance?
- Affordable Premiums: Term life insurance is cost-effective, with lower premiums compared to whole life insurance.
- Flexible Coverage Periods: You can choose a term that aligns with your needs, such as covering a mortgage or your children’s education.
- High Coverage Amounts: You can secure substantial coverage at a lower cost, making it ideal for young families or those with temporary obligations.
For example
A 30-year-old non-smoker can get $500,000 in coverage for as little as $30/month for a 20-year term.
What are the drawbacks of term life insurance?
- No Cash Value: Term life insurance does not build savings or investment value.
- Policy Expiration: If you outlive the term, there is no payout, and you may need to renew at a higher cost due to age and health changes.
- Temporary Coverage: It only provides protection for a specific time frame, not lifelong coverage.
For example
If your 20-year policy expires and you still need coverage, renewing at age 55 could cost significantly more than when you first purchased it.
Is term life insurance right for you?
Term life insurance is perfect for young individuals looking for guaranteed coverage at an affordable price. It is ideal when you want coverage for a mortgage or other life expenses that you don’t want your dependents to have to fight to pay in case you pass away unexpectedly.
Term life insurance is ideal if you:
- Have temporary financial obligations like a mortgage or dependents.
- Need affordable, high coverage during your working years.
- Don’t need a cash value or lifelong protection.
What is Whole life insurance?
Whole life insurance is a type of permanent life insurance that provides coverage for your entire life, as long as you pay the premiums. It also includes a cash value component, which grows tax-free over time and can be borrowed against or withdrawn while you’re alive.
For example
If you buy a whole life policy at age 40 with a $250,000 death benefit, your family will receive the payout whenever you pass away, even if you live to 90. Meanwhile, the policy’s cash value grows and can be used for financial needs.
Learn more about how the cash value of life insurance works in our full step-by-step guide.
What are the benefits of whole life insurance?
- Lifelong Protection: Coverage lasts for your entire life, offering peace of mind for long-term planning.
- Cash Value Growth: The policy builds a savings component you can borrow or withdraw from tax-free.
- Tax-Free Death Benefit: Your beneficiaries receive the death benefit without any tax deductions.
For example
After 20 years of paying premiums, your whole life policy may have built $50,000 in cash value. You can borrow $20,000 for a home renovation while keeping the policy intact.
What are the drawbacks of whole life insurance?
- Higher Premiums: Whole life insurance costs significantly more than term life insurance.
- Lower Returns: The cash value growth is slower compared to traditional investment options like mutual funds or TFSAs.
- Complexity: Policies are harder to understand and less flexible compared to term life insurance.
For example
A $500,000 whole life policy for a healthy 35-year-old could cost $300/month, compared to $30/month for a term policy with the same coverage.
Is whole life insurance right for you?
Whole life insurance is the perfect insurance plan for anyone planning for their long-term financial future and can afford a higher premium. It is a good estate planning and inheritance preservation tool that can guarantee that an amount of money will pass to your heirs after you pass away. It is more suitable for mature individuals with little debt and stable incomes.
Whole life insurance is ideal if you:
- Want lifelong coverage and guaranteed protection for your family.
- Need a tool for estate planning or leaving a legacy.
- Value the tax advantages and cash value growth.
Term vs Whole Life Insurance in Canada: Which is better?
Cost: Term Life vs Whole Life Insurance
There is a large discrepancy in cost between term life insurance vs whole life insurance because a policyholder may outlive the length of the term life insurance without receiving a payout, whereas the insurer is all but guaranteed to pay out on a whole life insurance policy. This makes term life insurance cheaper than whole life insurance.
The table below shows the potential costs of a 20-year term life insurance policy and a whole life insurance policy for healthy, non-smoking Canadian residents with a death benefit of $250,000. It shows how whole-life policies can cost many multiples of their term-life counterparts.
| Age | 20-year Term Life Insurance (Female) | 20-year Term Life Insurance (Male) | Whole Life Insurance (Female) | Whole Life Insurance (Male) |
|---|---|---|---|---|
| 30 | $15.03 | $18.95 | $117.00 | $130.96 |
| 35 | $17.42 | $22.05 | $142.21 | $163.46 |
| 40 | $23.45 | $30.56 | $175.75 | $204.50 |
| 45 | $35.73 | $49.39 | $217.83 | $257.62 |
| 50 | $56.03 | $79.36 | $272.42 | $313.46 |
| 55 | $97.18 | $140.87 | $346.79 | $412.21 |
| 60 | $173.14 | $247.88 | $466.79 | $543.46 |
If you want to compare policies and find out the perfect fit for you, use our free tool below. Compare over 20 life insurance policies and get free quotes online using our comparator.
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How to choose between whole and term life insurance?
When deciding between term or whole life insurance it is important to consider where you are in life and why you are in the market for life insurance. This is because the type of life insurance policy which is most suitable to you is often linked to your specific needs.
For example, if your sole focus is to ensure that your mortgage is covered if you pass away unexpectedly then you don’t need to spend the money on a whole life policy. A whole life insurance policy may be more suitable if you want to leave a legacy for your children and grandchildren.
Aspects in your personal life that influence which life insurance policy you should buy include:
- Age
- Marital situation
- Dependents (if any)
- Financial situation
- Income
- If you own property
- How far along you are in your career
- Employment stability
We recommend you use our free comparator below to compare the best whole life insurance and term life insurance policies based on your unique needs. You can compare multiple plans and get free personalized quotes in seconds.
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When to choose term life or whole life insurance?
Due to the various variables that influence whether you should choose term life or whole life insurance, it is never easy to find a simplified source of information or recommendation. The table below can be used as a checklist to help you decide when to choose term life or whole life insurance depending on your situation.
| Your Personal Situation | Term Life Insurance | Whole Life Insurance |
|---|---|---|
| Low to mid-income household | ||
| Limited financial responsibilities | ||
| No or few dependents | ||
| Mid to high-income | ||
| Several financial responsibilities (incl. mortgage, childcare, tuition, etc.) | ||
| Specifically wanting to leave a legacy for heirs | ||
| Unstable employment | ||
| Stable employment | ||
| Individuals in need of flexibility | ||
| Mature individuals looking to protect their estate | ||
| Looking to include life insurance as part of a long-term financial plan | ||
| Small business owners |
How to convert term life to whole life insurance?
One of the main advantages of a term life insurance plan is that it is sometimes possible to convert the policy into whole life insurance. The benefit of converting term life insurance to whole life insurance is that you can buy affordable term life when you are younger and then upgrade to whole life insurance later in life without any new medical tests or health declarations.
However, converting term life insurance into whole life insurance can only be done if you bought your term life insurance policy with an insurance provider that offers the upgrade as a benefit. You may also have to fulfill certain other criteria to change the policy such as applying for the upgrade before a specific age.
A non-exhaustive list of life insurance providers in Canada that allow you to convert your term life insurance to whole life insurance can be seen below.
- Manulife life insurance
- RBC life insurance
- Empire Life insurance
- Canada Life insurance
- Sun Life life insurance
- BMO life insurance
- Ivari Life insurance
- Desjardins life insurance
- CIBC life insurance
You can look at the plans from these insurance providers mentioned above and more using our free comparator below. Compare multiple plans and get free personalized quotes in a few moments right here.
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What is the difference between term 100 vs whole life insurance?
A Term 100 life insurance policy, aka T100, is similar to whole life insurance as both insurance products guarantee lifetime cover. Since both are permanent life insurance policies you will also not have to worry about your premium increasing or coverage changing throughout the policy term.
However, unlike whole life insurance, Term 100 life insurance does not accrue a cash value, provide the policyholder with dividend payments, nor does the T100 plan have a cash-out option. This makes a T100 policy cheaper than whole life insurance and easier to understand.
Term 100 life insurance policies are perfect for individuals looking for the simplicity of term life insurance but with the guaranteed lifetime coverage offered by whole life insurance policies.
How to cancel term life insurance vs. whole life insurance?
Cancelling a life insurance policy is incredibly easy. In most cases, you can cancel your plan by simply not paying the premiums. There is, however, a slight difference between term life vs whole life insurance when it comes to cancellations.
When cancelling a term life policy all you normally have to do is write a letter of cancellation to your insurance provider and stop premium payments. Since term life insurance does not provide the insured with a cash value, the insurance policy will simply cease to be in effect.
Cancelling a whole life insurance policy can be slightly more complex since the policy accrues a cash value component and may also come with a surrender fee. While the policy's cash value may give the policyholder a payout upon cancellation, the surrender fee will often decrease the payout significantly if the policy is terminated soon after inception.
The surrender fee usually decreases significantly after 5 or 10 years, so it is important to consider this charge when comparing whole life insurance options. It is always best to contact your whole life insurance provider before ceasing premium payments as you may be entitled to a cash value redemption.
FAQs on Term Vs Whole Life Insurance in Canada
It depends on your needs. Term life insurance is affordable and ideal for temporary coverage, like protecting your family while paying off a mortgage. Whole life insurance costs more but offers lifelong coverage and a savings component. If you want flexibility or a long-term financial tool, whole life may be better.
No, term life insurance does not build cash value, so there’s nothing to cash out. Its purpose is purely protection during the term. Once the policy expires, there’s no payout or refund unless you convert it to a permanent policy.
Switch to whole life insurance if your financial goals change, like wanting lifelong coverage, building cash value, or estate planning. It’s also worth switching if you can afford higher premiums and need insurance for long-term needs, such as leaving an inheritance.
Whole life insurance is more expensive than term life insurance, with premiums often 5–10 times higher. It’s less flexible for short-term needs, and the cash value growth is slower compared to traditional investments. It’s best suited for long-term goals, not quick returns.
If you outlive your term life insurance, the coverage ends, and no benefits are paid. At that point, you can choose to renew the policy (at a higher cost), convert it to whole life insurance, or purchase a new policy if needed.
