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.