Term or whole life insurance?

What is the difference between term and whole life insurance?

Term life pays a death benefit if you die within a fixed period — commonly 10, 20 or 30 years — at a premium guaranteed for that period. It has no cash value: if you cancel, or outlive the term, there is nothing paid back.

Whole life is permanent. It covers you for life and usually builds a guaranteed minimum cash value you can borrow against or receive if you cancel, though that amount is less than the premiums you paid in.

Both pay the death benefit tax-free to your beneficiary in Canada. That is not a feature of one over the other.

Which one do most families need?

Term, in most cases, because the need it covers is temporary. A mortgage gets paid down, children become independent, and savings grow. The years when your family could not absorb losing your income are a defined stretch, and term is built for exactly that.

Because it costs a fraction of permanent cover for the same death benefit, term also lets you buy enough. A family that can afford $300,000 of whole life can usually afford considerably more term — and being underinsured is a worse outcome than not having a cash value.

When does whole life make sense?

When the need genuinely is permanent rather than temporary. The usual reasons:

• Final expenses and estate costs, which do not expire.
• Leaving a planned amount to children or a charity regardless of when you die.
• Covering a tax liability that will fall on an estate, such as capital gains on a property or a business.
• Insuring a dependant whose need for support does not end, such as a child with a disability.

What happens when a term policy ends?

Coverage stops. Most term policies can be renewed, but at a premium based on your age at renewal, which is substantially higher than the original.

Many are also convertible to permanent cover without a new medical, usually up to a certain age. That matters more than people expect: if your health changes during the term, convertibility may be the only way to keep cover at all. Ask whether a policy is convertible and until when, before you buy.

How much life insurance do you need?

A reasonable starting point is the remaining mortgage, plus other debts, plus several years of the income your family would lose, plus anticipated costs such as education. Then subtract savings and any existing group coverage.

Count group coverage carefully. It usually ends when the job does, and it is often set as a multiple of salary rather than calculated from what your family would actually need.

Is a medical exam required?

Often, and it can include a nurse visit, bloodwork and questions about your history and your family’s. Non-medical policies exist and are useful where a medical is impractical or a health history makes underwriting difficult, but they generally cost more for the same coverage and may limit the amount available.

Answer the health questions accurately. A policy issued on an inaccurate application can be contested at claim time, which defeats the purpose of buying it.

Term and whole life compared

General product characteristics, drawn from the Financial Consumer Agency of Canada. Specific features vary by insurer and policy, and the terms of the policy contract prevail. General information, not advice on a specific policy.

Common questions

What is the difference between term and whole life insurance?

Term life covers a fixed period, commonly 10, 20 or 30 years, at the lowest cost, and has no cash value. Whole life covers you for life and usually builds a guaranteed minimum cash value, but costs considerably more for the same death benefit.

Is term or whole life better?

Neither is better in general. Term suits a temporary need such as a mortgage and dependent children, and lets you buy a larger death benefit for the same budget. Whole life suits a permanent need such as final expenses, an estate tax liability, or a dependant whose needs do not end.

Is a life insurance payout taxable in Canada?

The death benefit is generally paid to the beneficiary tax-free in Canada, for both term and permanent policies.

What happens when my term life policy expires?

Coverage stops. Most policies can be renewed at a premium based on your age at renewal, which is much higher. Many are also convertible to permanent coverage without a new medical up to a certain age, which matters if your health has changed.

Does term life insurance have any cash value?

No. Term policies have no cash value, so you cannot borrow against one and nothing is returned if you cancel or outlive the term.