This blog article compares and contrasts term life insurance with whole life insurance plans.
We finish the article by suggesting several situations where one type of life insurance is better suited than the other.
Life Insurance Basics
The primary purpose of life insurance is to provide financial protection in case the insured person passes away unexpectedly.
Life insurance plans are either medically underwritten or they are guaranteed issue in nature. Plans that are medically underwritten involve answering medical questions as well as a visit from a nurse who takes specimens (blood and/or urine) from you for testing.
Guaranteed issue plans also tend to have low face amounts and may have restricted benefits during the early years of the policy.
The “premium” is the money paid out by the insured persons for coverage, and can be paid monthly or annually.
The “face amount” is the amount of money that will be paid out by the insurance company to the beneficiaries upon the death of an insured person.
Finally, there is “term life insurance” and “permanent life insurance” policy types. “Whole life insurance” is the most popular type of permanent life insurance.
Term Life Basics
Term life is the simplest and cheapest form of life insurance.
The “term” is the amount of time for which the insurance premium is guaranteed. The policy will be in -force at that price as long as premiums are paid. Common term lengths are 10 year, 20 year, Term to 65 or Term Life. Term Life (pays out upon death or becomes fully paid up if the insured reaches the age of 100 and all premiums are paid).
After the term is up the contract is void and the coverage ends (with the exception of the Term to Life plan). Note that many (but not all) term plans are renewable and/or convertible (i.e. can be converted over to a whole life plan) for a specific number of terms or up to a certain age. Also, most term plans expire at age 80 or 85.
Whole Life Basics
Whole life insurance is the most common type of permanent life insurance. As the name suggests, coverage is permanent for life.
Whole life insurance offers financial protection upon death of the insured and also has an investment component that builds up a cash value.
Unlike some other permanent life plans (e.g. many universal life insurance plans), premiums are guaranteed for life.
To summarize: whole life plans are characterized by level premiums, a guaranteed death benefit and various living benefits (borrowing against cash value).
Similarities between Term and Whole Life Insurance
- They both pay out a death benefit to the beneficiaries of the policy
- The death benefit amount is called the “face amount”
- Premiums can be either monthly or annually (note that on average you can save 3% – 8% if paying annually)
- Premiums are guaranteed for as long as the policy is valid – premiums for term however will increase at each renewal.
Differences between Term and Whole Life Insurance
- A term plan is in force for as long as the premiums are paid and the final term has not expired, while a whole life plan is permanent coverage as long as premiums are paid up
- A whole life plan builds up a guaranteed cash value, a term life plan does not
- Term plans are substantially cheaper than whole life plans at policy issue, but in the long run (after multiple renewals) term plans can end up costing more
- Whole life premiums never increase, while term life premiums do increase (substantially) if the plan is renewed after the term is finished
- You can borrow money against the cash value of a whole policy (this is not guaranteed in the policy; however, a life insurance cash value is considered solid collateral).
- Whole life premiums can be paid using the cash value of the policy if you encounter financial difficulties later on. However, this depends on the cash value amount and is subject to the “policy loan” terms of the contract
When to Buy a Term or Whole Life Plan?
(Please note that these are suggestions only. Before making any changes to your life insurance or financial portfolio, make sure you get the advice of an experienced advisor.)
A term life plan may be more suitable if you:
- Are only interested in basic financial protection for a given amount of time
- Are only interested in basic financial protection but want it for life (consider a Term to Life plan)
- Have limited finances at your disposal
- Are interested in life insurance protection but want to invest your money elsewhere
A whole life plan may be more suitable if you:
- Want financial protection and also want to invest your money at the same time
- Are looking for an insurance vehicle that builds up a cash value
- Are interested in estate management or wealth management
- Want to be able to pay the premiums using the cash value if need be
We hope you found this article about term life insurance versus whole life insurance helpful.
You are welcome to leave us a comment below or contact us if you have any questions you need answered. As licensed Canadian life insurance brokers, we are here to help.
You can also get as many free, online quotes for life insurance as you need. Compare plans online at your leisure!