Differences Between Whole Life And Term Life Insurance

 

You may have heard about life insurance, but may not know there are many types of life insurance. Let’s talk about the most commonly known are whole life insurance and term life insurance. The main difference between these two types of insurance is the period of coverage. But if you go into detail, there are more things to talk about.

 

So what is whole life insurance, and what is term life insurance?

Term life insurance?

Term life insurance is an insurance product of an insurance company that provides you coverage in a certain period, hence the name “term”. What term to choose is up to you, but the common ones are 10 years, 20 years and 30 years. If you pass away within the term, your beneficiary will receive the payout from the company. That’s it.

What is whole life insurance?

Unlike term life insurance, whole life insurance provides lifetime coverage with a fixed premium. The policy ends whenever you pass away, and the company will pay the death benefit. But whole life insurance is more complicated than term life because of the investment aspect with cash value and dividend.

 

When you pay a premium, a portion of it will go to the management fee and go to what actually insures you, while the other part goes to the cash value. Take it as an internal bank account that you can access in many ways.

 

Most companies distribute dividends to customers with whole life insurance when the business makes profits.

Side by side comparison

Let’s take a look at the below table of comparison to get a clear difference between them.

 

Criterion	Term life insurance	Whole life insurance
Duration	Period of 10, 20, 30...	Lifetime
Death benefit	Guaranteed within the term	Guaranteed
Cost	Lower	Way more higher
Premium	● Can be adjusted over time. ● The policy is terminated when you can’t afford the premium.	● Stay the same. ● You can use the cash value to pay the premium
Cash value	No	Builds up over time
Renewability	Guaranteed, but premiums will increase.	No need. It never expires.
Tax	Tax-free	● Tax-free for death benefits ● Cash value access is tax-free. In some cases, tax is reduced.

 

Differences in details

Now let’s dig into the details of each criterion

Duration

Clearly, the term life insurance is effective in a period of time compared to the lifetime of whole life insurance. For both types of insurance, you are guaranteed to receive the death benefit when you pass away. But in term life insurance, if the term ends and you’re still alive, you receive nothing. Fortunately, there are a few other options when your term expires: you can renew your policy, or you can buy a new policy. According to many analyses, buying a new policy is much better. Another option is to convert to whole life policy. Many companies offer a smooth conversion without going through the health examination and paperwork again under certain conditions.

 

Cost

The whole life insurance is always much more expensive than term life insurance. It is because it is designed to build up cash value and more extended coverage. Different insurance companies have different policies, but usually, whole life insurance is about 5 times to 15 times more expensive than term life insurance. If you have a good income and are willing to pay more, the whole life insurance’s extra benefits worth the extra money.

Premium

The 10 times more expensive cost doesn’t necessarily mean the premium is 10 times more expensive. Because the whole life insurance coverage spans a lifetime, the premium can be less than 10 times.

 

In renewable term life insurance, despite the death benefit stays the same, the premium is very low at first but significantly increases over time when you age. Many companies may increase your premium up to 20 percent. Nowadays, people buy level term life insurance, which guarantees the same premium.

 

In whole life insurance, your premium is guaranteed to stay the same over the course of your life.

Cash Value & Dividend

This feature is only available in whole life insurance. With the same death benefit, whole life insurance cost is more expensive because a part of the cost builds up the cash value. You can access the cash values in many ways, such as withdrawal, loans. Most of the time, people can use it to pay the premium when they are in financial trouble to avoid lapsing the policy.

 

Another unique feature is the dividend. In whole life insurance, you may receive dividends yearly, depending on the company’s financial performance. You can use the dividends in many ways, including topping up your cash value and paying out additional coverage.

 

Cash value with tax-free and dividend opens up a doorway to invest while you get insured or save for future plans and emergency expenses but makes it more complicated.

Conclusion

 

To sum up, whole life insurance offers lifetime coverage, builds up cash value and dividends, but it’s much more expensive. Term life insurance in Canada is more affordable, but it will expire sooner or later.

 

There are a lot of debates between term life and whole life about which one is better. Actually, it’s much more about personal finances and preferences. However, there are some straightforward factors that you can consider when buying term life insurance, such as having a low budget or other financial priorities, becoming new parents, or having more efficient investment opportunities. When your business grows, or those factors are no longer your concerns, whole life insurance can also be a good choice.

 

This is not an easy choice when there are many factors to consider and a lot of insurers for you to choose. You may need to consult the salespersons and tell them about your finances and situation to get professional advice. They’ll help you decide which product suits you better.