Term vs Whole Life Insurance?

The question is inevitable when you want to buy life insurance. But do you know the difference? Here's a guide to help you choose the life insurance that's right for you.

While permanent life insurance may be suitable for some situations, it's important to know that term life insurance is the most appropriate in almost all cases.

This is because term life insurance is less expensive and easier to understand.

Permanent life insurance, for its part, does not expire and has a cash value (cash surrender value) that functions as a low-interest investment.

Term or permanent?

Quick comparison

Before you purchase life insurance, here are 5 questions to ask yourself to further clarify your insurance needs.

• What coverage can you afford?
• Who depends on you financially and for how long?
• How long do you expect to be in debt? (Mortgage, student debt)
• How much would the funeral arrangements cost if I died?
• How much extra money would I want to leave my beneficiaries?

Term Life Insurance

Term life insurance is a type of life insurance that lasts for a set number of years. In the event of your death, a fixed, tax-free amount is paid to the people you choose to appoint (your beneficiaries). Also, most term life insurance policies can be converted to permanent life insurance for an equal or lesser amount of coverage. Simpler and less expensive, term life insurance is the preferred choice of most people.

As the name implies, term life insurance lasts for the length of time agreed upon with your insurer. As long as you pay your insurance premiums, you will be covered for the time specified in your contract.

If you anticipate being financially well off later in life, it's less risky to consider term life insurance that will eventually end while you are still alive. If not, be aware that a new life insurance policy will cost you more when you're older.

Advantages and Disadvantages of Term Life Insurance

Advantages

• Term life insurance is easy to understand
• It's the most affordable insurance
• It is possible to cancel your life insurance policy without losing any money.

Disadvantages

• Once the scheduled end date has arrived, you are no longer covered or you must renew your coverage at a higher premium if your health has deteriorated.

Permanent life insurance

Permanent life insurance is coverage that, as the name suggests, will cover you as long as you pay your insurance premiums.

The distinguishing feature of permanent life insurance is its cash surrender value, a cash value that acts like an investment that grows at a low rate of interest. The amount of money that is paid into the cash value is, in fact, a percentage of your insurance premium. (You may have guessed this is one of the reasons the premiums are higher).

So permanent life insurance combines its protection with an investment that you can withdraw in many different ways depending on your needs.

Although many people separate their investments from their life insurance, the cash value still has its advantages, such as the fact that it is a forced investment that will encourage you to save money. It is also possible to purchase a whole life policy without a cash surrender value if you want lifetime coverage at a lower premium rate.

Advantages and Disadvantages of Permanent Life Insurance

Advantages

• Permanent life insurance does not expire as long as you pay your premiums.
• It forces you to save money through the cash value.

Disadvantages

• Six to ten times more expensive than term life insurance.
• Because of the high cost, many people choose too little coverage or give up their life insurance after a few years.
• The interest rate on the cash surrender value is usually lower than an interest rate on a regular investment.
• Permanent life insurance is more complicated.

Cost differentiation between term and whole life insurance

The cost of a 20-year term life insurance policy with a death benefit of $250,000 to a permanent life insurance policy with a death benefit of $100,000 is significantly cheaper and offering a death premium more than twice the amount, term life insurance is the right choice in most cases.

The main differences between term and permanent life insurance

Coverage

Permanent insurance lasts for life while term insurance lasts for 1, 10, 20 or 30 years.

Term life insurance is recommended for most people because most people no longer need life insurance after paying for 30 years of coverage. (At this stage of your life, debts are usually paid off, you no longer have dependents and you have money saved).

However, an individual who is coming to the end of their term life insurance and would like to renew it can usually convert it to permanent life insurance without going through the complicated process of reapplying for life insurance.

Payout in the event of death

In both cases, your life insurance guarantees those you leave behind a payout. The main advantage of life insurance is that your death benefit is usually paid to your beneficiaries as a tax-free amount.

Cash surrender value

The cash surrender value is a unique feature of permanent life insurance.

This means that your term life insurance doesn't offer any other benefits other than the death benefit. However, the cash value remains a low-interest investment that grows slowly compared to other investment options available to you on the market.

Also, note that the cash surrender value is a sum of money that can be withdrawn at any time. It acts like a loan that you can access easily.

You can use the cash value of your life insurance in several ways: make a withdrawal, borrow an amount of your cash value, or assign your life insurance as collateral for a loan from a financial institution.

However, these transactions could have a negative impact on your life insurance coverage, and you may have to pay taxes or even terminate your policy if you withdraw the full cash value.

Insurance Premiums

Permanent life insurance premiums are fixed, while term insurance premiums may vary over time or be fixed.

For term life insurance, having guaranteed fixed premiums means that your premiums will not change for the term chosen of your insurance coverage. If you decide to renew your life insurance however, the premium rate will increase. You should reflect on how long you think you'll need life insurance before choosing the product that's right for you.

Term life insurance that is renewable every 10 years will cost less initially, but your premiums will increase significantly if you renew it for, say, 40 years.

The best of both worlds

As you may have guessed, choosing between whole and term life insurance is not an easy decision, especially since you probably see advantages to both...

The ideal solution? ** Combining permanent and term life insurance coverage.** In fact, it's possible to get the best of both worlds on one policy. Come chat with one of our experts to find out how to get the most out of both products!

Important insurance definitions

There are quite a few differences between term life insurance and permanent life insurance, but some terms are found in both types of coverage. Regardless of the insurance product you choose, here are some commonly used insurance terms. For even more definitions, see our comprehensive glossary of financial terms.

Policyholder: The person who owns the life insurance policy.

Insured: The person whose life is covered. Often the policyholder.

Premium: The amount of money the insured must pay (monthly or annually) to keep the insurance in force.

Beneficiary: The person(s) who will receive the premium in the event of death.

Death Benefit: Amount of money paid to the beneficiaries in the event of the death of the insured.

Riders: Additional coverage that you can add to your insurance policy for an additional fee.

Underwriting: The process by which the insurer evaluates the risk of insuring you, the coverages for which you are eligible and the resulting premium rates.