My term life versus whole life insurance decision
Maybe you’ve answered this question for yourself or you’ll need to answer this question for your family.
Should you own term life or whole life insurance?
I thought about this subject again when my own term life insurance contract was ending last year – when I needed to consider a renewal.
In fact, in that post, I wrote about the insurance I owned, why, and what I would consider for any future term life insurance or other life insurance going-forward.
Well, I’m back, with that decision made and policy now in place. I’ve got some great details below so you can digest what I did and see if anything similar can be leveraged for your own financial decision on life insurance.
First up, what the heck is the difference between term life insurance versus whole life insurance?
Read on, and I had Brian So, a friend of mine who is a life insurance agent based out of beautiful Vancouver, BC share some insights as well.
Term Life versus Whole Life Insurance
Building upon this older post, Life Insurance 101, I thought I would break down the two major types of life insurance you may consider for your own decision making.
What is term life insurance?
Just as the name sounds, term life insurance is for a specified term.
Think of it as renting life insurance. Whether it’s for 10, 20, or 30 years, during that term, the life insurance premium payments are paid and remain the same. However, your premiums will increase if & when you want to renew the policy.
That was my dilemma last fall.
A MAJOR benefit of term life insurance is that most policies allow you to convert to permanent, or whole life, insurance without having to provide evidence of insurability. That means even if your health declines or your lifestyle is riskier, your premiums won’t be affected.
You may also choose term insurance, in my opinion, if you only expect to have debts for a medium-term period (e.g., a mortgage) and you expect to self-insure as you get older. That’s our plan.
Term life insurance is therefore an excellent, affordable option, for temporary protection.
Let’s bring Brian in.
Brian, what other reasons might term life insurance be a good option? What did I forget to share?
Mark, a reminder to your readers that term life insurance can be looked upon as an option if you’re looking to create replacement income for your dependents in case of your death; this is a tax-free payment to your beneficiary.
What is whole life insurance?
Whole life insurance, or permanent life insurance, is coverage for an entire lifetime, paid out upon your death.
Most whole life policies require you to pay annual premiums which is set when you buy your policy – so the younger you buy whole life insurance the better.
Whole life is different than term life insurance in that it costs more, and premiums are due as long as you’re alive.
However, some whole life insurance policies allow you to choose a paid-up status where you don’t have to pay any more premiums. For example, you can choose to pay for 20 years so you don’t have to pay for your whole life.
Here are some great facts to remember when it comes to whole life insurance versus term insurance:
- All whole life plans build up a cash value over time.
- Once whole life coverage has been issued, it cannot be revoked or reduced or cancelled by the insurance company unless there is a non-payment, material misrepresentation or fraud involved. In the case of material misrepresentation, the insurance company can only void the policy in the first 2 years of coverage.
- If you cancel your whole life policy – you’ll likely get what is called the cash surrender value (CSV) – which is really a refund in premium overpayments.
Whole Life Plans are popular for some Canadians because of the certainty they provide and the CSV available to policyholders. Again, because of the CSV, this certainty sometimes comes at a cost (more than term insurance premiums).
Dare to compare? Term life vs. whole life
Brian was kind to compare term life insurance, versus whole life insurance, for an average non-smoking male and female in generally good health. He calculated the benefit coverage to be $250,000 each*.
*Information/rates current to time of post. Also, because there’s no direct comparison, Brian chose the most common length of term: 20 years.
|Policy owner||Whole life policy / month ($)||20-year term life policy / month ($)|
|Male, age 30||$142.65/month||$19.35/month|
|Female, age 30||$129.38/month||$14.63/month|
|Male, age 35||$171.90/month||$20.48/month|
|Female, age 35||$151.65/month||$15.98/month|
|Male, age 40||$213.53/month||$28.80/month|
|Female, age 40||$192.60/month||$21.15/month|
|Male, age 45||$291.60/month||$44.55/month|
|Female, age 45||$247.95/month||$32.18/month|
Mark to Brian:
Given this table above, what key factors should go into the decision-making of whether to buy term life insurance versus whole life insurance?
Well Mark, if you’re looking for a life insurance policy that will be beneficial for estate planning, or you want to make a significant charitable donation upon your death, then whole life insurance may be for you.
With whole life insurance being guaranteed until the time of your death – not just for a term of 10- or 20-years, this type of insurance provides financial security at the time of your death as long as you keep up the premiums of course!
Meaning, if you’re going to consider buying whole life insurance, you should likely do it when you’re young to save on premiums. When you get to 70 or 80 years old, and you need to live off your RRSP, RRIF, Canada Pension Plan (CPP), and/or Old Age Security (OAS), it may be hard to see the value in buying it at that age and paying the high premiums.
Like you Mark, I always advise my clients to consider both short-term liabilities and those income needs to cover a catastrophic financial loss (your death), AND longer-term estate planning wishes when it comes to life insurance.
In your situation Mark, we discussed the benefits of term life insurance. That’s a good product for younger families or professionals, while paying off a mortgage and saving for retirement.
Should something happen to you or your wife, in the coming decade, either of you are financially protected. Your term life insurance can easily cover any ‘final’ expenses and then some. I know you also have the desire to self-insure, which is understandable and reasonable for your situation.
Going back to my situation, re: should I renew my term life insurance policy, I found out that if I did, the cost of renewal was going to be substantially higher than when I first signed up for it.
This is essentially because it is more costly to insure older individuals than it is younger ones because the risk is higher for the life insurance company.
Here are the considerations that went into my recent decision-making, knowing I wasn’t going to renew that policy based on the high cost to renew:
- Work – I am very thankful for my basic life insurance coverage from work; including the long term disability coverage as part of our benefits package, so that’s some protection right now if I don’t do anything. However, I don’t want to assume this coverage will always be there and/or I will always remain with my employer for the coming decades. Things change. So, I would like to consider owning some form of term insurance beyond any workplace coverage.
- Debt – given we are not yet debt-free (but 3-4 years out), I would like some coverage should something occur in the coming years for each of us. Of course we want nothing to ever happen but I can’t be sure. I think we need to consider not only the debt obligations but also the permanent income loss as well. I figure a years’ worth of income is essential coverage should either of us want to take some long-term time off work.
- The desire to self-insure – I’ve learned from many early and other retirees that they advise to self-insure to the extent possible. I’ve always seen insurance as a risk mitigation tactic – meaning – you only insure and you should only pay premiums for things that would render you in a catastrophic financial loss should something terrible occur. This is why insuring your cell phone or other gadgets makes no sense to me. These are not catastrophic losses (although they might be annoying). Losing a spouse and any income in your asset accumulation years or while you’re paying off a fat mortgage is.
Brian’s recommendations and my decision?
After Brian and I talked things out, my wife and I finally landed on a decision to own $100,000 of term life insurance coverage each. That term will end in 2030. We landed on T10 (term, ten-years) because well within the next 10 years, our mortgage will be paid off. We should also be semi-retired or at least working on our own terms hopefully with our current employer. The T10 policy then bridges the gap between now and retirement when we won’t need insurance anymore. We will self-insure after that.
That new T10 policy is now in place.
Why I didn’t renew my existing policy
Well, Brian confirmed with me: the premiums to renew would have been much higher than getting a new policy. Much higher.
I took Brian’s advice to ignore the renewal option because the rates that are set by the insurance company are extremely high to account for the fact that only people who have developed poor health and medical conditions will renew.
Healthy people can usually take out a new policy for much cheaper. And we did.
I mean, I found the math in the fine print old of my former/old policy. Geez.
Coverage years 11-20 (years 2021 – 2030) = $2,182 + riders $1,625 = total of $3,807 per year for $1M total coverage.
Sure, much larger benefit but not needed. That was astronomically higher than the $48 per month or $576 per year I was paying for the last 10 years.
Again, I’ve always viewed life insurance as a risk mitigation tactic. Buy what you need.
Even though I’m ten years older now, I knew I could get a new term life insurance policy for less. And I did. We landed on a new T10 policy that costs us less than $300 per year.
My term life insurance versus whole life decision
Life insurance is not for you, it’s for others.
It’s a risk mitigation tactic, an opportunity to buy financial security to help your beneficiaries survive a catastrophic (and financial) loss.
In the coming years, once the debt is long gone, our emergency fund is higher to cover any ‘final’ expenses and as hopefully the personal investment portfolio grows, it is our assumption we simply do not need life insurance. We will self-insure.
It’s important to note that this is our decision.
You might be in a similar financial and personal situation but come to a totally different conclusion about your insurance needs. And that’s totally fine of course. Your risk tolerance level and attitude towards insurance plays a big part in the decision-making process. Everybody is different in that regard so you shouldn’t worry if you settle on a different insurance amount, type of insurance, or both.
I want to thank Brian for his expertise and support on this decision. I hope this post helps you make your decision too – whether to buy term life insurance or whole life insurance.
You can find Brian’s other fine work on my site here – what to consider when workplace benefits are disappearing.
Brian So is a life insurance agent based in beautiful Vancouver, British Columbia. He runs Brian So Insurance (no affiliation) and is committed to helping his clients find the best coverage for their needs. He takes a holistic approach to insurance, implementing life, disability, critical illness, healthcare and long-term care insurance into his clients’ risk management plan to provide comprehensive coverage for their families.
I would avoid no medical life insurance personally – read why.
My WFG whole life policy was sold to me by an Agent showing me the large cash value etc. that would accumulate after 20 years and how I have to pay no premiums after 55, (i’m 35 now). After reading this article I feel like I should get term and invest the difference in a TFSA. I am a regular working class guy who’s wasting $140/month on this whole life policy.
Hi Jagdeep…thanks for your comment.
I can’t speak to your insurance needs of course but I know Brian would be happy to talk out with you (I suspect).
That whole life would have a large cash value based on your premiums but the challenge with some of those policies is the payments are for decades.
I find life insurance is really a personal decision, how much risk you can/your family can tolerate in a major financial loss; so best to work out the numbers and see what your family cannot afford to lose. Sometimes, whole life absolutely makes sense!
Anyhow, maybe Brian can help out at least understand your options on a go forward basis.
I’ll have more articles over time with him – he likes my site. Ha.
Take good care,
Hey Jagdeep. I’m sure the WFG agent showed you the illustration of how much cash will be in the policy after a number of years. It’s very appealing to see it grow over time and using it as another source of retirement funding.
However, it’s not for everyone. You should consider it if you’ve maxed out your RRSP and TFSA, have a high income, and are looking for another place to shelter your investment from tax. Only then does it make sense to buy whole life.
There’s actually an illustration that the agent can run in his/her software that compares buying whole life vs buying term and investing the difference. You should seek this out to see if the numbers make sense for you over the long term.
Hope this helps.
Thanks for that take Brian – I was hoping you would chime in!!
Good post Mark and Brian!
I find term insurance is the way to go in the vast majority of cases. As someone posted, ‘Buy term and invest the difference’. The ‘difference’, if invested in a TFSA or non-registered account can easily cover final expenses (30 years x $50 per month x 5% = $41,786).
A great resource to compare term life insurance rates is https://www.term4sale.ca. I use it often to compare rates and give clients a bit of a gauge to see if what they are being offered is reasonable.
30 years of investing really adds up even at $50 a month! Great stuff Steve.
Hi Mark and Brian,
Good post. I have a T20 policy for $1M on me, approx 10 years income, that will cover me another 17 years or so. By then, mortgage will be done, kids will be in the back half of their twenties, and we’ll be eying some form of retirement closely.
After that, it’s self insurance!
However – one topic in personal finance I don’t see a lot on is living insurance like disability, long term care, and critical illness. Personally, aside from having work coverage for disability, I’ve ignored them, focusing instead on getting us on a good track financially.
But – are any of them a good idea, great idea, or a lousy idea generally?
Ya, I’m fortunate to have some coverage at work. I wrote about that here:
Personally, I think in order of importance there is life insurance then long-term disability then critical illness.
Thanks, Mark. I’d agree, with long term care coming after disability perhaps. I had never heard of critical illness insurance until our former HR manager got cancer (she beat it), and having had a policy, found that very helpful for breathing room. I worry that it might be hard to find a provider and policy that is not…well, kind of a scam.
Long-term disability is a good idea – my only coverage is through work though. Do you maintain a separate policy not contingent on continued employment?
I just personally worry about all the clauses that come with any critical illness insurance. It’s designed, as always, to benefit the company not the insuree otherwise they wouldn’t need so much legalese.
I absolutely think some long-term disability is needed for many. You simply don’t know what the future holds sadly including any short-time off work.
I don’t have a separate policy, work covers what I have right now.
The good thing about all these types of insurance is that you can get a quote and look at a sample contract before committing to it. You just have to request it from the insurance advisor.
The covered conditions are defined in great detail so there’s not much grey area for claims.
Agreed, disability insurance is absolutely necessary.
Yes, re: disability insurance. Thanks again for answering reader questions.
Hey Rob, anytime there’s a possibility of a catastrophic financial loss, you want to insure it if the cost is reasonable. Generally speaking, you’d want to prioritize life and disability insurance. Critical illness insurance is nice to have and gives you more financial flexibility if you are diagnosed with a covered condition. Long-term care insurance is like disability insurance for retirees but instead of protecting your income, it protects your retirement assets from depleting too quickly. I think it’s very important but it hasn’t gotten much traction in Canada which is why you don’t hear about it much.
Great insights Brian…thanks for sharing as always!
Thanks, Brian, that first sentence is a polished gem. Very useful way to gauge whether a form of insurance appropriately mitigates a risk, affordably.
Given long-term care insurance hasn’t taken off much, I’d assume policies are fairly costly given the risk-sharing pool is small. Perhaps that will change with the Baby Boom generation aging. Better to plan to self-insure through retirement savings?
One of the major factors that affect the cost of insurance is the claims experience. Since Canadians are living longer but not necessarily healthier, claims have gone up, driving the cost up. I don’t anticipate the trend changing with baby boomers aging either.
Self-insurance may be your best bet but with the nursing homes costing at least $2,000/month, you’re going to need to have a pretty large retirement fund to fully self-insure.
Great points about nursing homes. They can be quite expensive and you need to plan for one. We are for sure…
Buy Term Invest the rest.
According to the above your previous term policy cost $576.00 per year yet you obtained a new policy( same coverage?) for less than $300.00 per year. How?
Good question Rod! My wife and I had $500K each as a policy, so $1 M coverage total but that was many years ago (over 10 now) and it was cheaper for that greater coverage in our 30s. In our 40s now, similar coverage would be much higher but then again, I decided we don’t need that much coverage each any longer for the reasons in the post.
Hope that helps!
Great post Mark, most personal finance blogs pay little attention to insurance and protecting one’s family from death and illness that can disrupt income flows.
Like yourselves, we concluded that term insurance was all we wanted when we were young and had kids and a mortgage – by the time the jacked up renewal rates came, our mortgage had been paid off and we were aggressively saving into RRSPs, TFSAs, etc. It didn’t occur to us that applying with other insurance firms might yield more competitive rates – we figured our age would drive this elsewhere – the insurance industry sure could do a better job on the customer experience side – in their greed they permanently lost a stream of reliable income.
I’ve long subscribed to the notion of keeping insurance and investments separate, so permanent insurance never appealed to me from a protection point of view, but more recently I’ve been wondering whether it might have use for an estate planning/probate point of view? I hope you could write more on this topic and hear from fellow readers who might be using whole or universal policies like this, and at what point (asset level or family situation) this makes sense over other strategies. I don’t want to pay as much or more in fees, commissions and premiums as I would save in taxes!
Hey BartBandy, that’s a great idea for a future post. Permanent life insurance like whole life and universal life certainly has a place in estate planning and isn’t just reserved for the wealthy. Lots of Canadians will face a large tax liability and probate fees when the latter of them and their spouse pass away and can look at life insurance to cover this amount. At this point, life insurance isn’t used for protection but is more for estate preservation. This is a situation where a joint last-to-die policy might make sense because of the lower premiums compared to a single life policy.
Thanks Brian, that’s a great idea about the last-to-die policy. I’d love to see some case studies/scenarios that lay out the financial costs/benefits of estate planning with permanent life insurance vs. the alternative where end of life capital gains become significant.
Sounds like we have a future guest post Brian re: when does permanent insurance make sense as part of estate planning 🙂
Thanks for answering reader mail with me!
No doubt Brian might be interested in tackling that question, re: permanent insurance for estate planning.
I think that could make some sense but with TFSA and RRSPs and RRIFs structured how they are, I really don’t see a huge need unless you are really thinking about wealth preservation.
1. TFSAs can have “success holders”. Smartest thing to do in my book.
2. RRSPs have spousal rollover provisions as a beneficiary
3. RRIFs should be set-up as “successor annuitant” in my book = similar reasons to RRSP.
Life insurance whether term or whole life are to insure that those who are dependant on you will at least have the financial means to carry on if you kick the can so to say. Other scenarios are disability insurance if you didn’t quite kick the can hard enough and also for business partners to make sure that the death of one partner does not cripple the business.
So as Cannew says the insurance is not for you other than peace of mind.
I have a few small whole life policies to, as i say to my kids, get me in the ground. I had term policies up until the premiums started to escalate rather significantly. Once my kids were working and on their own I saw no need to pay for any more insurance.
If I am travelling then I get the credit card insurance included with the card but that is it.
Having said all that I did take out whole life insurance policies for the kids when they were young which are all paid off now. If they wish to up the value then it is up to them to buy their own for their own families.
My parents did the same re: whole life insurance policy for me. Now long since paid off and I have a very small CSV that I won’t bother with – it would be taxable.
I figure after 2030 my wife and I will self-insure. Keep enough cash to put me in the ground as morbid as a thought that is!
Good decision. We made some mistakes with our life insurance and it’s too late for us to correct that. But I will make sure to pass my lessons to my kids so they will not make the same mistakes as us.
Tell them to subscribe to my blog 🙂 Made a few mistakes myself but live and learn May!
Take good care,
Thanks for letting me review your insurance needs with you. I think you made a great decision with your life insurance to balance your current and future needs.
Yes, thanks again for walking me through all the pros and cons to make an informed decision Brian.
I hope this post helps others!
Great post. “Life insurance is not for you, it’s for others.” Stick with Term and get rid of it when no longer needed, by Investing for income.
Thanks for that cannew. Good feedback!