Life Insurance is one aspect of a total plan to protect your family’s future from financial devastation. Generally, you have two options in Canada: Term Life Insurance and Cash Value Life Insurance. While both types offer some key benefits of Life Insurance, they drastically differ in structure, cost, and ultimate long-term value. Which you choose depends on your financial goals, how long you need coverage, and what you’re willing to pay for protection.
Below, we’ll outline key differences between Term Life Insurance and Cash Value Life Insurance in Canada to help you decide which one may be right for you and your family.
What is Term Life Insurance?
Term Life Insurance is the purest Life Insurance product that covers an individual for a specific period or “term,” usually from 10, 20, 30 years, or more. A premium is payable by the policyholder in return for which a tax-free death benefit is paid to the beneficiary in the event of his demise within the term. But if he outlives the term, the coverage ceases, and no payout is made.
Key Features of Term Life Insurance
- Fixed Term: Term Life Insurance is designed to provide coverage for a limited time. Common term lengths include 10, 20, or 30 years, though some insurers may offer custom terms.
- Level Premiums: During the term, premiums remain the same. This fixed cost makes it easier to budget for the insurance, particularly for younger policyholders.
- Pure Death Benefit: Term Life Insurance is designed solely to pay a death benefit to your beneficiaries if you die during the term. It does not have an investment or savings component.
- Affordability: Compared to cash-value Life Insurance, term life policies are much more affordable, especially for younger individuals. Because it offers protection for a limited time without any savings feature, the premiums are generally lower.
- Renewal Options: At the end of the term, many Term Life Insurance policies allow the policyholder to renew the coverage. However, the premium for the renewal period will be based on the policyholder’s age at the time of renewal and will likely be higher.
- Conversion Options: Some Term Life Insurance policies include a conversion option, allowing the policyholder to convert their term policy into a permanent policy, like whole life or universal Life Insurance, without undergoing a medical exam.
What is Cash Value Life Insurance?
Cash Value Life Insurance is a type of permanent Life Insurance wherein a death benefit is integrated with a savings or investment component. In cash value, the policyholder pays premiums whereby a portion goes to keep the Life Insurance coverage, and the remainder gathers in a cash value account, growing over time.
Cash Value Life Insurance can be in the form of whole Life Insurance, universal Life Insurance, or variable Life Insurance, each with its own distinctive feature.
Key Features of Cash Value Life Insurance
- Permanent Coverage: Cash Value Life Insurance provides coverage for your entire life as long as you continue to pay the premiums. The death benefit will be paid to your beneficiaries whenever you pass away, even if you live to 100 or beyond.
- Cash Value Component: In addition to providing a death benefit, Cash Value Life Insurance builds a savings or investment component over time. This cash value grows tax-deferred, and the policyholder can borrow against it or withdraw funds under certain conditions.
- Higher Premiums: Cash Value Life Insurance is more expensive than Term Life Insurance because it provides lifelong coverage and includes the cash value feature. The premiums are much higher, but a portion of those premiums goes toward building the cash value.
- Loan and Withdrawal Options: Policyholders can take loans against their cash value or make withdrawals, although doing so can reduce the death benefit and may have tax implications.
- Fixed or Flexible Premiums: Depending on the type of Cash Value Life Insurance, the premiums may be fixed for the life of the policy (as in whole Life Insurance) or flexible (as in universal Life Insurance).
- Guaranteed and Non-Guaranteed Growth: With whole Life Insurance, the cash value growth is guaranteed, but in policies like variable Life Insurance, the growth depends on the performance of the underlying investments.
Comparing Term and Cash Value Life Insurance
Now that we’ve outlined the basics of both Term Life Insurance and Cash Value Life Insurance let’s dive deeper into how these two types of policies compare.
- Cost of Premiums
One of the major differences between term and Cash Value Life Insurance has to do with the cost. Term Life Insurance is way more affordable, especially in the early years of the policy. A young, healthy person might pay as little as $30 per month for a 20-year term life policy with $500,000 in coverage.
Conversely, Cash Value Life Insurance may be much more expensive, carrying premiums up to 5 to 10 times higher than Term Life Insurance. This is because partly of the premium goes towards building the cash value, and the policy covers the entire life of the policyholder. A whole Life Insurance policy with the same $500,000 in coverage could easily cost upwards of $300 or more per month, depending on the age and health of the insured.
- Duration of Coverage
With Term Life Insurance, coverage is available for a specific period only. At the end of the term, the policyholder can renew the policy, usually at a higher premium; he can convert it to a permanent policy, or he can allow the coverage to lapse.
On the other hand, cash-value Life Insurance covers you for your lifetime. As long as premiums are paid, the policy remains in force, and the death benefit is guaranteed when the policyholder dies at any moment in his life.
- Cash Value Growth
Cash Value Life Insurance has the advantage of its cumulative cash values over time. It grows tax-free in this component and can be used for savings or investment. The insured can access this cash value while he or she is still alive through withdrawal or loan.
Term Life Insurance, on the other hand, does not have savings or investment components. It simply offers pure death benefits, and no cash value will be built up over the term.
- Flexibility
Cash Value Life Insurance is often more flexible than Term Life Insurance. Under policies like universal Life Insurance, you can adjust your premium and death benefit amount over time. Or, you can use the cash value to pay part of your premium, borrow money, or take out an advance.
Term Life Insurance is much more rigid. The premiums never change throughout the term, and when the policy expires, so does the coverage unless you either renew or convert it.
- Purpose and Suitability
Term Life Insurance provides affordable coverage for a specific period. For example, a parent may purchase a 20-year term policy to cover their children until they reach adulthood. Additionally, it is also very suitable for people who want to cover some high-value expenses, such as a mortgage or business loan, during any specific period.
Cash Value Life Insurance will serve the client who needs or desires lifetime coverage and an accumulation vehicle inside their policy. It is more appropriate for high-net-worth individuals, those with maximized other retirement savings vehicles, and those seeking estate planning solutions.
Term Life Insurance Pros and Cons
Pros of Term Life Insurance:
- Affordability: Term Life Insurance is the most cost-effective way to get a significant amount of coverage.
- Simplicity: Term policies are straightforward, making them easy to understand and manage.
- Flexibility in Term Lengths: You can choose the exact term length that fits your needs, whether it’s 10, 20, or 30 years.
- Conversion Options: Some policies allow for conversion to permanent insurance without a medical exam.
Cons of Term Life Insurance:
- Temporary Coverage: The policy only lasts for the chosen term, and once it expires, you need to renew it or risk losing coverage.
- No Cash Value: There is no savings component, so you don’t build any value in the policy over time.
- Higher Premiums with Age: If you renew your policy after the term expires, your premiums will likely be significantly higher due to your increased age.
Cash Value Life Insurance Pros and Cons
Pros of Cash Value Life Insurance:
- Lifetime Coverage: As long as premiums are paid, the coverage lasts for the policyholder’s entire life.
- Cash Value Accumulation: The policy builds cash value over time, which can be borrowed against or withdrawn under certain conditions.
- Tax-Deferred Growth: The cash value grows tax-deferred, meaning you won’t pay taxes on the gains until you withdraw the funds.
- Estate Planning: Cash Value Life Insurance can be used as a tool for estate planning, providing a tax-free inheritance to beneficiaries.
Cons of Cash Value Life Insurance:
- High Premiums: Cash Value Life Insurance is significantly more expensive than Term Life Insurance, often making it unaffordable for some.
- Complexity: The policies are more complicated than Term Life Insurance, making it harder to understand how the cash value grows or how loans and withdrawals work.
- Slow Cash Value Growth: In the early years of the policy, the cash value builds slowly, meaning you won’t have significant savings in the first few years.
- Fees and Penalties: Borrowing from or withdrawing cash value can result in fees and in some cases, may reduce the death benefit.
Which Should You Choose: Term or Cash Value Life Insurance?
The decision between Term Life Insurance and Cash Value Life Insurance depends on your individual needs and financial goals.
Term Life Insurance Might Be Best If:
- You’re looking for affordable coverage to protect your family during key financial periods, like while raising children or paying off a mortgage.
- You need high coverage but have a limited budget.
- You’re primarily interested in the death benefit and don’t need the cash value component.
Cash Value Life Insurance Might Be Best If:
- You want permanent coverage that lasts for your entire life.
- You’re interested in building a tax-deferred savings or investment component within your policy.
- You’re focused on estate planning and want to provide a tax-free inheritance to your beneficiaries.
Term Life Insurance vs. Cash Value Life Insurance- Comparison
| Criteria | Term Life Insurance | Cash Value Life Insurance |
| Coverage Duration | Fixed term (e.g., 10, 20, 30 years) | Lifetime coverage |
| Premiums | Lower premiums, fixed for the term | Higher premiums, often fixed for life |
| Cash Value | No cash value | Builds cash value over time |
| Purpose | Temporary protection (e.g., covering a mortgage) | Lifelong protection and savings/investment |
| Policy Cost | More affordable for the same death benefit | More expensive due to lifetime coverage and savings |
| Death Benefit | Paid only if death occurs during the term | Guaranteed payout, regardless of when death occurs |
| Tax-Deferred Growth | No investment component | Cash value grows tax-deferred |
| Flexibility | Fixed term, but some policies offer conversion to permanent | Can borrow against or withdraw from the cash value |
| Renewability | Renewable at a higher premium after the term expires | Not applicable, as coverage is for life |
| Best For | Temporary needs like income replacement or debt payoff | Estate planning, lifelong protection, and wealth building |
| Cost Over Time | Cost increases with age at renewal | Costs remain stable over time, but initial premiums are high |
Wrapping It Up
Both the Term Life Insurance and the Cash Value Life Insurance have significant beneficial provisions to your loved ones, but they serve varying needs and financial strategies. Term Life Insurance is generally recommended for those who need temporary but budget-friendly protection, while Cash Value Life Insurance provides lifetime coverage and an investment aspect along with it. The thing is to know and analyze your financial goals, budget, and long-term plans to determine which one will suit you perfectly.
As you weigh the options, consider how long you need the coverage, if building savings within the policy is what you want, and how much you’re willing to pay in premiums. Understanding the difference between term and cash-value Life Insurance will give you a better understanding of how to reach your decision, one that can provide security and peace of mind for you and your loved ones.
Know More: What Is a Long Term Life Insurance Policy?