Term vs. whole life insurance: Which type of policy is best?

Generally speaking, term life insurance is best for those seeking a low-cost, short-term solution. Whole life insurance may be best for you if you’re seeking a long-term solution with locked-in rates.

Below, we outline the pros and cons for each—and more. 

The pros and cons of term life insurance

True to its name, term life insurance provides coverage for a set period of time—usually a 10-, 20- or 30-year term. Your premium costs stay the same throughout that period and may change when the term is over, if you choose to renew it. If you pass away during the term, a payment will go to your beneficiaries.

The pros: “Term life insurance is less expensive than whole life insurance,” says Adam Mitchell, president of Mitchell & Whale Insurance Brokers Ltd., in Whitby, Ont. “It’s also a great option for short-term coverage, or debt with a timeline [such as a mortgage].”

The cons: “A term life insurance policy has no cash value. So, if you don’t use the insurance, you don’t get any premiums back.” Plus, choosing to insure yourself term by term can be more expensive in the long run. “These policies don’t age well because of the renewal process. Each time your term renews, you’ll be older, and that factor will increase your premium.” 

The pros and cons of whole life insurance

Whole life insurance is a policy designed to cover you for your lifetime, as it does not expire. When you pass away, your beneficiaries will receive a payment, provided the premiums have been paid.

The pros: “In some cases, you may be able to pay off your lifetime premiums early [for instance, within 20 years], but coverage stays in force for the rest of your life,” says Mitchell. 

Another pro: A whole life insurance policy generates a cash value. “That means that if you decide to terminate the policy, you won’t lose all of your money.” And since the policy is locked in for life, you’ll also never have to worry about re-qualifying as you age or if new medical conditions arise.

Cons: Whole life insurance is more expensive. “Also, over the first few years, the policy doesn’t generate much cash value, so it’s not a good short-term option.”

Other types of life insurance

Term and whole insurance policies aren’t mutually exclusive. Depending on your needs for life insurance, a concept called a “laying insurance policy” may be the perfect solution. “This involves purchasing a lower amount of insurance on a whole life policy, to ensure you always have a baseline coverage amount to cover certain expenses at the end of your life—for example, to pay for your funeral and any amounts you would like to leave behind,” explains Mitchell. “You then also purchase a term policy with a higher coverage amount, to cover short-term debts and expenses that you may not need coverage for when you’re older.”

Mitchell provides this example: “If you’re 40 years old with two young kids and 20 years left on your mortgage, in the short term you may want to ensure the entirety of the mortgage is covered should you pass away, and you leave behind enough money to put both children through post-secondary school. A term policy would be a great option to cover these expenses [that will only be required for the next 20 years] on a lower-cost policy. However, what if you would also like to cover your funeral expenses and leave behind $25,000 for each child no matter how long you live?

“At first glance, it may seem like adding these amounts to the term policy would make sense. However, in 20 years when that term policy renews, the client will now be 60 years old and the rates will be much higher, which may make even the funeral costs and the inheritance you wished to leave behind completely unaffordable.

“The solution? When you’re purchasing the term policy, if you also purchase a whole life policy that only provides the coverage amount for the funeral and inheritance, it will lock in your rates as a 40-year-old and guarantee that the coverage is affordable—or possibly even paid off, depending on the policy—even as you age. This layering coverage is a great option to consider when some obligations are short-term and some coverage is for longer term.”

The questions to expect—and to ask—before getting life insurance

Be prepared to answer questions about your medical history. “Regardless of the option you choose, you would need to have knowledge about your health history, as well as any genetic predispositions to diseases, like if multiple members of your family have died from a certain type of cancer,” says Mitchell.  

As for what to ask, he recommends these questions before committing to a policy:

• Based on my current obligations and financial plan, which would be the best solution for me? Would you recommend term life insurance, whole life insurance, or a combination of both (see “Are there any other options?” below)?
• Based on my current medical history, do you know which underwriting requirements I may need to complete (for example, just a questionnaire, partial medical, full physical and blood work, etc.)?
• Is there anything I should be aware of before beginning this process? 
• What additional riders are available with your company’s policies that may be of benefit to me?

Thinking of changing your life insurance policy?

If you want to cancel or surrender your term life insurance policy, you can. You can even switch policies from term to whole. Peter Wouters, director of tax, retirement and estate planning services at Empire Life Insurance Company in Burlington, Ont., says you can do any one of the following: Call your financial advisor or the insurer; you can write a letter to your insurer; or you can complete a cancellation form provided by the financial advisor or insurer and send it in. Include all policy particulars (policy number), the date you want to cancel the policy, and, of course, all of your contact information. You can go through a similar process for withdrawing or borrowing cash from your policy. Here, of course, you need to keep paying premiums to keep your coverage in force.