Term Life Insurance Vs. Whole Life Insurance
Let’s face it – the only two real certainties in life are probably death and taxes. So when looking for ways to protect our loved ones upon death, and save on income taxes (and other costs) while we are alive, it is important to weigh the costs and benefits of using a Term Life insurance Vs Whole Life insurance policy.
Pros of Term Life Insurance
- Inexpensive, relative to all other forms of insurance, especially mortgage life insurance.
- Additional features are available at no cost, such as convertibility into a small whole life insurance policy.
- Very secure, flexible and can be used for any purpose on death including mortgage payments, funeral costs, kids’ education and providing retirement funds to loved ones.
Cons of Term Life Insurance
- Renewal of a term policy can be prohibitively expensive later in life if insurance is still desired.
- If payments are missed, even by accident, the policy can lapse and the insured could find themselves without any life insurance without full re-qualification. This happens more often than you might think…
Pros of Whole Life Insurance
- Offers maximum life insurance flexibility and protection that includes a separate high interest pool of savings to cover issues such as missed payments and benefits like tax free policy loans. It can be a great ‘forced savings’ tool similar to a mortgage payment.
- Whole life insurance is guaranteed to pay out upon death at any age, and given how late it can last in life, can be the least expensive option.
- Can offer excellent tax benefits to those who have used up all RRSP room, or have substantial assets to pay taxes on at death.
Cons of Whole Life Insurance
- Is usually much more expensive earlier in life, because the policy may be in place for many, many years and these policies are feature rich.
- For many Canadians, there may be more efficient savings and investing methods.
What does this mean for you?
It means that weather term or whole life insurance is best for you is entirely dependent on your situation. It’s not simply guess work and there will end up being a clear indication of what type of life insurance is best suited to you.
- Specific need to provide income over a specific time. A couple of common needs are providing income until Kids are through School, or providing income until a pre-determined retirement date.
- There is still room left for RRSP and TSFA contribution to realise income tax benefits.
- You are comfortable selling assets later in life to cover any income tax burden on the next generation.
- You wish for income to be available to your deemed beneficiary during any point in life. A few common examples are to provide for a disabled child, provide for parents in old age, and provide for an income tax bill on your death to avoid an income tax burden on the next generation.
- You have used up all room in TSFAs and RRSPs and are looking for additional tax sheltering opportunities within a life insurance product.