Different types of life insurance policies offer different levels of coverage and have unique features that may appeal to you and your family.
- Term life insurance is designed to provide coverage for a specific period of time, typically 10, 20, or 30 years. If you die during that term, your beneficiaries receive a death benefit.
- Once the term is up, the policy expires and you will no longer be covered. This makes term life insurance a more affordable option than whole life insurance since it doesn’t last forever.
- Whole life insurance, on the other hand, provides lifelong coverage as long as you continue to pay the premiums. In addition to the death benefit, whole life insurance also has a cash value component that builds over time. This cash value can be accessed through loans or withdrawals, but it will reduce the death benefit if not paid back.
- While whole life insurance is more expensive than term life insurance, it does offer lifetime protection.
Choosing the right life insurance policy depends on your specific needs and circumstances. It’s important to know the difference between whole life and term life insurance so that you can make the best decision for your needs.
Term Life Insurance
Term life insurance is a type of life insurance that provides coverage for a specific period of time, typically 10-30 years. If you die during the term of the policy, your beneficiaries will receive a death benefit. If you outlive the term, the policy simply expires and you (or your beneficiaries) don’t receive a death benefit.
Affordable: One of the main benefits of term life insurance is that it is generally much less expensive than permanent life insurance. This makes it a good option for people who are on a budget. A 32-year-old female non-smoker can get a 20-year term policy with $250,000 in coverage for $15 per month while a 32-year-old male can get the same policy for $18 per month.
Temporary coverage: Another benefit of term life insurance is that it may be used to cover specific financial responsibilities, such as a mortgage or student loan. If you die, your beneficiaries can use the death benefit to pay off these debts. It’s a relatively affordable option and perfect for people who need temporary coverage.
Unlike whole life insurance, which builds cash value over time, term life insurance provides coverage for a set period of time and does not accumulate cash value.
Furthermore, choosing to get coverage on a term-by-term basis may be more expensive in the long run. Because of the renewal process, these policies do not age well. You’ll be older each time your term comes up for renewal, which will raise your premium.
Whole Life Insurance
Whole life insurance policies are different from term life insurance policies in that they don’t expire after a certain period of time. Whole life insurance is a type of permanent life insurance that offers coverage for your entire life. This means that as long as you pay your premiums, your beneficiaries will receive a death benefit when you pass away. Whole life insurance has an investment component that builds cash value over time. This cash value may be accessed through policy loans or withdrawals, and it may be used for a variety of purposes such as funding a child’s education, supplementing retirement income, or paying off debt.
Whole life insurance is generally more expensive than term life insurance, and you’ll be paying for it for the rest of your life.
Lifelong protection: Whole life insurance provides coverage for your entire lifetime, as long as you continue to pay your premiums. This means that your loved ones will receive a financial benefit if something happens to you.
Cash value accumulation: Whole life insurance policies build cash value over time. This allows you to build up equity in the policy that you can borrow against or cash in if you need the money for things like retirement income, supplemental college funds, or unexpected expenses during your lifetime.
Fixed premiums: Unlike some other types of life insurance, whole life insurance policy premiums stay the same throughout the life of the policy. This makes budgeting for your coverage easy and helps ensure that your family will always be protected financially.
Tax-deferred growth: The cash value growth in your whole life insurance policy is tax-deferred, meaning you won’t have to pay taxes on it until you withdraw the money. This may help you maximize the growth of your cash value and give you some extra cash to use if you find yourself in a tight spot financially.
One of the main cons is the cost of whole life insurance (3 to 4 times more expensive than term insurance).
Furthermore, whole life insurance doesn’t yield much financial value in the first few years, so it’s not a viable short-term solution.
While you may be able to terminate (or cancel) the whole life policy and receive the surrender value (which is usually cash value minus any applicable fees), this would mean that your loved ones would not receive any payout when you die.
If you choose to access the added benefit of cash value by taking out a loan against the policy, or by withdrawing some of it, your death benefit will be reduced and your beneficiaries will receive a reduced payout.
How to Make the Right Decision?
When shopping for whole life insurance, be sure to compare features and benefits to find the policy that best meets your needs. Some things to consider include the death benefit amount, the cash value accumulation rate, the loan interest rate, and any riders or additional coverage options that may be available.
Choosing the right type of policy depends on your income, your loved ones’ requirements, and any large, existing debt that they may need to pay off in the event of your death. Term life insurance options fit the majority of Canadians and may be the best choice because of their affordability. For high-net-worth individuals who require assistance with estate planning, whole life insurance fits better.