Life insurance is always a wise investment. It’s the best way to protect your family and loved ones from potentially devastating financial loss. It’s a legacy. It’s about caring for others and being responsible.
Life insurance provides support for those you love when they need it the most. And you have many options, including whether to get term insurance or whole life insurance.
Term and whole life are among the most popular — and oldest — forms of insurance. A financial plan is not solid if life insurance isn’t part of it, and it’s a fantastic way to possibly build wealth.
Both come with their own benefits and drawbacks, so how do you know which one is best for you? We’re here to help. Here’s a closer look at each.
Whole life insurance is just what it sounds like — coverage for life. The coverage rate is set at a fixed rate, so your individual whole life insurance payments will never change. It’s permanent.
All you have to do is pay your premiums on time and your insurance beneficiaries will receive the full amount, also known as the death benefit, which essentially protects your family by covering at least your income as your work.
There is also a savings aspect to whole life insurance that’s an additional feature with the death benefit.
Interest in a whole life insurance policy, the “cash value,” can accumulate with taxes deferred and policyholders have the option of cashing out the policy if you no longer need it. Interest rates vary, but they are commonly between 1% and 2%.
You also have an option of paying off the whole life insurance premiums yearly while still keeping your coverage for the rest of your life. And if you close the policy, you don’t lose all of your money.
Whole life insurance also creates an inheritance that’s taxed free after you retire, which can further benefit your family, pay for education or support a designated charity. The benefits also commonly cover taxes and funeral expenses.
Whole life insurance is also a good choice if you have certain assets that may be hit with taxes and fees after you die.
First, the cost. Whole life insurance is far more expensive than term life insurance — sometimes up to 15 times the amount for coverage with a death benefit.
The cost of whole life insurance in Canada depends on factors such as what you need in a policy, your gender identity, and your age. You’ll generally pay less when you take out a policy when you’re in your 20s or 30s, and men usually pay more than women (transgender and non-binary people usually are charged based on their assigned gender at birth).
For example, while a man in his mid-30s can get a $250,000 benefit for about $140 a month, a man in his 80s may have to pay about $1,500 for a whole life insurance policy.
Whole life insurance can also sometimes be more complex than term life insurance. While you can close out a whole life insurance policy in the same way a term life insurance policy ends, you could possibly have to forfeit a percentage of the cash value you’ve accumulated if you choose to do so.
However, the associate charge is reduced year after year of your policy and can eventually go away entirely.
While it’s great to have both the death benefit and the cash value, they can impact each other. Usually, if you need to take out a loan from your policy, the death benefit amount goes down correspondingly if you can’t pay back the loan.
Term life insurance differs from whole life insurance primarily because it provides coverage for a certain amount of time instead of permanently. Terms are usually for 10, 20, or 30 years.
Term life insurance is particularly popular in Canada because of its low-cost coverage and covers many of the common costs in a lifetime for an average person, such as a mortgage.
Like whole life insurance, premium rates depend on many different factors, including your age and lifestyle. Premiums can be very low, such as $13 a month, but some are more than $100 a month.
However, it can work well as supplemental coverage if you have other forms of life insurance because of its low cost.
Term life insurance is generally preferred if you know exactly what type of debt you’d like to protect you and your loved ones from during your life; it’s the more straightforward life insurance option compared to whole life.
If you are unconcerned about building cash values within life insurance, it likely makes more sense to go with term over whole life. Term life insurance payouts are also tax-free.
Unlike whole life insurance, you cannot use term life as a way to build up wealth or plan your strategy for taxes. You won’t get a return of investment or build cash values even when you’re paying your premiums.
When the term you selected ends, you’ll need to find a buy a new policy and go through the life insurance underwriting process once more. You may find that you have to pay higher rates than you expected, since your age and health impacts rates.
You will likely encounter a significant increase in premiums the older you get — and most policies require medical exams to requalify.
Picking either term life insurance or whole life insurance depends on your needs. While term life insurance may be a better fit for more people because of its lower cost and benefits that reflect the average person’s needs, whole life insurance may be a good route if you want to also build wealth or have significant tax and estate planning needs.
It helps to have a trusted adviser when deciding between whole and term life insurance.
A life insurance agent and investments advisor, Sim Gakhar has spent more than a decade providing customers across Ontario, Canada, with the solid guidance they need when setting up a life insurance plan that’s best for them and their families.
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