If you’ve ever shopped around for life insurance, you know that there is a wide range of policy costs.
Many different factors go into the cost of an insurance premium, including your age, gender, health status, and how whether you’re obtaining an insurance policy through an employer or on your own through a separate financial provider.
Another big factor: the type of life insurance you’re pursuing. Rates range wildly between insurance policies depending on what they generally cover, for how long, and if they include elements specially tailored for you.
That’s a big reason why whole life policies are almost always more expensive than a term policy.
Why? It all comes down to how they function as insurance plans generally and how they fit in with your specific needs.
The biggest difference between whole life and term policies is what leads to their main cost difference. Whole life offers guaranteed insurance for the rest of your life at a fixed premium rate, whether it lasts for 15 years or 50.
Term insurance covers you for a set amount of time of your choice, usually in 10-year intervals (ex: 10 or 20 years).
While you won’t need to reapply for a whole life policy as long as you pay your premiums on time, if you have a 10-year term policy, you’ll have to go through the whole underwriting process again to stick with your policy when the 10 years is up.
That likely means you’ll also be paying new premiums since your age and health is a major part of rates.
Another large difference between the two policies that dictate their expense is that while whole life policies accumulate cash values, term policies do not.
That makes whole life insurance something close to a savings account that grows interest since part of your monthly premium is reserved in savings.
Additionally, many whole life insurance policies include an option for holders to receive dividends on a yearly basis.
On the other hand, while term life insurance also provides financial stability for you and your family it is most effective if what you’re looking for comes down to providing a basic income replacement for dependents following your death.
There are similarities between the two, though. That payment to your dependents, which is called a death benefit? Both plans offer those payouts without the burden of taxes and the payout is guaranteed.
Generally, a monthly whole life insurance premium can be anywhere between 5 times to 15 times the amount of a term life premium.
It can be somewhat challenging the compare, considering the policies fundamentally differ in their coverage time frames. Also, there are usually differences in cost between men and women, since women live longer on average.
But there are averages to review. For example, if you take out a $500,000 policy, experts agree that at the age of 30, a man will pay around $200 to $250 each year for a 20-year term policy and between $325 and $375 for a 30-year term. It’s about $50 less a year for a woman of the same age.
The annual cost for a $500,000 while life policy each year would land somewhere between $4,000 and $4,500.
The annual cost starts much higher when you sign up for a policy in your 40s, 50s, and beyond. For example, the yearly annual cost for a 50-year-old female with a $500,000 term policy can be around $650 or so.
If that same person started a whole life policy, the annual can be about $8,400.
Whole life insurance is primarily more expensive because it guarantees coverage throughout your lifespan. That inherently costs more than time-limited insurance plans. Hypothetically, someone can have a whole life policy for 100 years, since a policy can be taken out on a child at birth.
Whole life insurance is also particularly attractive to Canadians of all ages who are financially stable, have the resources to start diversifying their income streams and place a high priority on establishing a lucrative payout for heirs to an estate or business.
Those with very specific investment needs or goals, as well as types of assets — and very specific plans in mind for those assets after death — are more inclined to go with whole life insurance. The higher cost of whole life reflects this aspect of the policy.
The cost is also higher because a whole life insurance premium in Canada is split between three categories: the actual premium, fees associated with the policy, and the cash value investment.
That pumps the monthly cost up. On the positive side, you can cash out a whole life policy but not term insurance since it technically does not contain a cash value.
Term policies, however, are cheaper because their scope is comparatively limited. They are good ways for someone to provide a basic level of financial security and estate planning that’s more realistically reflective of their financial and life situations.
That makes term insurance more appealing to those who are young and healthy and are not interested in an investment platform at this point in their lives.
There are other life insurance options in Canada to consider that may be a little less expensive than whole life but offer investment flexibility, including universal life insurance that lets you earn interest on market rates.
Picking the right life insurance for you can be complex, but it doesn’t have to be challenging. For more than a decade, those in and around Ontario, Canada, have trusted insurance agent and financial adviser Sim Gakhar to help them make the best insurance choice.
Gakhar will guide you through the process, the price differences, and the various pros and cons of whole life and term life policies. Before you make a big financial decision, get in touch with Gakhar today either over the phone (647-889-7290) or by email ([email protected]).
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