Term vs. whole life insurance: Which one is right for you?

With files from James Battiston

This post was originally published on January 25, 2021, and was updated on April 17, 2025.

Having to consider your own mortality is a sensitive subject. It’s even more complicated when you consider the financial well-being of your dependents.  Luckily, there’s life insurance, which assures that upon your passing, your family and dependents will be taken care of.

There are many options available when it comes to life insurance. The two most common types are term life insurance and whole life insurance. 

But what kind is right for you? When looking for life insurance quotes, it’s helpful to understand what each policy type offers and the cost.

What is term life insurance?

A term life insurance policy provides coverage for a specific period of time, typically 10, 20, or 30 years. The premium remains fixed during the term, making it an affordable option for many Canadians. However, premiums will increase if and when you want to renew the policy at the end of the set term. If the policyholder passes away during the term, their beneficiary will receive a tax-free death benefit.

A benefit of term life insurance is that most policies allow you to convert to another insurance product, such as whole life insurance. However, your health, job, or lifestyle changes may affect your rates.

What is whole life insurance?

Whole life insurance is a form of permanent life insurance that provides coverage for an entire lifetime and is paid out upon your death. Most whole life policies require you to pay annual premiums, which are usually fixed regardless of your health. The rate you’ll pay is set when you buy your policy. Whole life is the opposite of 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 convert your policy to a paid-up status where you don’t have to pay any more premiums. You can only do this when you have a significant amount of money, and the life insurance company can use dividends from your policy to pay the premium. Alternatively, if you get to paid-up status, you can also get a cash surrender value, which will be about 10% of the overall value of your policy.

Why choose term vs. whole life insurance?

In general, term life insurance is an excellent option if you’re looking for an affordable policy that provides temporary protection. For instance, if you only want life insurance to cover your mortgage payments or your children's university tuition, term life insurance would be the best choice. 

Another example is a colleague who purchased term life insurance when his wife returned to school. If anything were to happen to him, he wanted to ensure that her education and expenses were covered until she re-entered the workforce. They bought an inexpensive 5-year term policy.

A term life policy is also a good option if you’re a business owner looking for key person protection or insurance coverage for individuals who play an invaluable role in a company. With businesses experiencing staff turnover and unpredictable longevity, it’s a safe way to get coverage without making long-term commitments.

Term life insurance is the more affordable option compared to whole life. However, it’s important to reiterate that term policies are only valid for a limited time. If you’re looking to create replacement income for your dependents in case of death and provide a tax-free payment to your beneficiary, term life insurance is the way to go. On the other hand, if you want to ensure you’re covered for your entire life, you might want to consider a whole life insurance policy.

When to choose whole life vs. term life insurance

If you’re looking for a life insurance policy that will benefit estate planning or want to make a significant charitable donation upon your death, then whole life insurance may be the better choice. With the policy guaranteed until the time of your death, whole life insurance assures that your dependents will have financial security (as long as you keep up the premiums). 

However, many whole life policies lapse, meaning the owner failed to pay the premiums. While you can buy whole life insurance when you’re young to save on fees, if you’re 80 years old and living off your RRSP and investments, it may be hard to see the value in continuing to pay. In that case, you can use viatical settlements, in which someone buys out the policy from you for less than its value, pays the premiums, and receives the death benefit.

If price is an issue, let’s look at the cost of whole life vs. term life insurance.

How much does term life insurance vs. whole life insurance cost?

The cost of life insurance varies by policy type, coverage amount, and factors like age and sex. Below are monthly cost comparisons between term vs. whole life insurance for a $500,000 20-year term policy.

The examples are based on non-smoking, healthy males and females. To get a personalized quote, compare life insurance quotes and see what’s available.

As with all life insurance products, males face higher premiums because their shorter life expectancies pose a greater risk to insurers. Age also plays a factor in determining rates.

Also read: Life insurance for Canadian seniors

Should I get term or whole life insurance?

Whether you should purchase a term policy or a whole life policy depends on your present financial situation and the long-term benefits. As with any decision, it’s important to consider the options available and what is best for your situation.

Term life insurance is a great option for young families who require temporary protection while paying off mortgages and saving for the future. This policy type protects your assets while you’re building your wealth. 

However, if you choose a term life insurance policy, be aware that, should you want to renew your life policy at the end of the term, the renewal cost may be substantially higher than when you first signed up for it. It is more costly to insure older individuals because they pose a higher risk to life insurance companies.

Whole life insurance is an investment for life where premiums build cash value. With most policies offering a guaranteed cost for life, you may find yourself paying more upfront, but in the long term, you will see cost savings and efficiencies.

For instance, unlike term life insurance, whole life policies can provide individuals with tax-free income through leveraging. This works by borrowing money against your own policy, which will need to be paid back with interest, but usually at a much lower rate than bank loans or credit cards. Initially, these policies could be substantially more expensive monthly, but you will also know that the premium will most likely remain unchanged for your lifetime.

Another way to look at life insurance

If you’re still trying to decide whether term life insurance is better than whole life insurance, consider this: When you reach retirement age, your assets should ideally pay for your funeral expenses and leave an inheritance for your beneficiaries.

However, your beneficiaries will have to pay capital gains on the inheritance. If this concerns you, consider purchasing a 10-year term policy to cover what the CRA may tax. It is much cheaper than whole life insurance and can afford you peace of mind, knowing your loved ones will get the full value you want for them.

The bottom line

Should I buy term life insurance or whole life insurance? By considering your current finances and future goals and comparing available term and whole life insurance policies, you can decide what type of life insurance coverage is right for you. Planning for your financial needs and those of your dependents after your death is painful, but the right insurance policy can help ensure a positive future for your loved ones.

Also read

• Do I really need life insurance?
• How much life insurance do I need?
• Life insurance for kids? It’s a thing.