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What's The Difference Between Term and Whole Life Insurance?

There are so many varieties of life insurance that it’s easy to sign up for a plan that may not be the best fit for your situation. When comparing life insurance online, be sure you’re picking the one that’s right for you.

If you don’t know the difference between term and whole life insurance, don’t worry! It isn’t as complicated as it might seem. Here are the differences between different forms of life insurance.


Term Life Insurance

When you buy a term life insurance policy, you’re purchasing a specified amount of money for a certain length of time. A term can either be a duration, such as 10 years, or until a certain age, like term to 65. If you die within your term, your beneficiaries receive the stated amount, and if you don’t die, you get nothing.

Term life insurance is generally enough coverage for most people’s needs, and is the also the cheapest. There are no tax benefits and no cash value that you can redeem, but they cost a lot less than other forms of life insurance.

When your term expires, you have the choice to renew it or stay uninsured. Depending on what you wanted life insurance for, you may decide that remaining uninsured is fine – but if you want to stay insured, you’ll face much higher premiums.

Term policies don’t get more expensive during your term, but a new term can cost double or triple what you were paying before. As you get older, naturally your risk of death increases, which causes the premiums to rise.


Whole Life Insurance

Whole life insurance is what it sounds like – insurance for your whole life. As long as you pay the premiums (which will remain the same for as long as your policy is active), you will build your policy’s cash value.

The death benefit of a whole life insurance policy will be smaller initially than a term policy, but has the potential to grow huge over time.

As the cash value grows, you’re also able to borrow against it or even cash it out. This won’t reduce your fixed death benefit but it will reduce the amount of money your beneficiaries get after you die. On the bright side, you can use that money to invest or pay down debt before you pass away.


Why is term life insurance best for most people?

The biggest advantage of term insurance is the cost. It is several times cheaper than a permanent life insurance policy, especially at younger ages. Young families that aren’t quite set in their careers or are working their way up don’t have a lot of wiggle room in their budget for a whole life policy that can cost upwards of $200 a month.

By comparison, a term life insurance policy for a 30-year old man with a death benefit of $500,000 can cost as little as $27/month for a 20-year term. They can then use that money to invest themselves or pay bills.

The second reason term is better for many is because it doesn’t need to build up a cash value for the payout to be large. You get exactly the coverage you pay for, which can be ten times or more your annual salary.

Unless you make enough money to have maxed out both your RRSP and TFSA (and any RESPs if you have any children), it doesn’t make sense to use a whole life policy as an investment vehicle. Your TFSA is especially good at sheltering you from tax, and every year you’re able to contribute more.

Unlike a whole life policy, you can withdraw from your TFSA from any time and for any reason with not tax repercussions. Your RRSP can’t be easily withdrawn from before your retirement, but is still preferable to a whole life policy as you can use it while you’re still alive.

Whole life policies are good for estate planning when your estate (your finances and property) are complicated or vast. Until your current tax shelters are full, you shouldn’t worry about the cash value of a whole life policy. You could get similar results by investing it yourself in your own TFSA.


No-medical Life Insurance

There’s a special kind of term insurance policy called no-medical insurance. Just as it sounds, it’s life insurance you can get that doesn’t require any medical questions or examination. This may also be called guaranteed life insurance, as you can’t be turned down as long as you’re younger than 75.

Normal life insurance policies require certain knowledge about you, such as your family history of disease, any pre-existing conditions, and whether or not you’re a smoker. It may be hard or impossible for you to qualify if you’re already ill or have a family history of serious disease.

Since no-medical insurance doesn’t ask you those questions, it doesn’t take your health into consideration when deciding your monthly premiums. The only thing that increases the cost is your age.

The downside to no-medical life insurance is that the death benefit is much smaller than a normal policy. Guaranteed life insurance is usually capped at $25,000, while term policies can be as high as $1 million. Whole life policies can go beyond even that, given enough time to accumulate a cash value.

No-medical insurance won’t be enough to provide for your family for a few years like a term policy can, but it can help allay funeral costs or help them for a little while. If death is accidental, many plans will increase your death benefit.

Is guaranteed insurance really guaranteed?

Mostly, yes. You can’t receive coverage if you’re older than 75, as most plans don’t allow for that as the risk of death is too high, but otherwise they don’t ask questions that could disqualify you.

Chris Chris 01/26/2019
Canadian personal finance buff and all-around writing enthusiast, Chris loves breaking down complicated money ideas to show that they're really not so complex. 
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