Life Insurance Basics
Life insurance provides financial protection for your family when you're no longer there to provide for them. The two main types — term and whole life — serve different purposes and fit different situations.
Think of life insurance as income replacement. If your family depends on your income, life insurance ensures they can maintain their lifestyle, pay off debts, and reach important goals even without you.
Key Question
How much would your family need to replace your income and maintain their financial security? This number often guides how much coverage you need and which type makes sense.
Term Life Insurance
Term life insurance provides coverage for a specific period — typically 10, 20, or 30 years. If you pass away during the term, your beneficiaries receive the full death benefit. If you outlive the term, the policy ends.
Key features of term life
When term life makes sense
Whole Life Insurance
Whole life insurance provides lifelong coverage with level premiums and a cash value component. Part of your premium goes toward insurance coverage, and part builds cash value that grows over time.
Key features of whole life
Dividends in Participating Whole Life
Some whole life policies are "participating," meaning they may pay non‑guaranteed dividends based on the insurer's performance (investment returns, expenses, claims experience). Dividends are not guaranteed and can change.
Universal Life Insurance
Universal life (UL) is another type of permanent insurance. It separates the cost of insurance from the investment component, giving you flexibility to adjust premiums and investment choices within the policy. Coverage can last for life when funded appropriately.
Key features of universal life
When universal life makes sense
When whole life makes sense
Cost Comparison
The cost difference between term and whole life is significant, especially early on. Here's a rough comparison for a healthy 35-year-old non-smoker:
$500,000 Coverage Comparison
20-Year Term
~$40/mo
Coverage ends at age 55
Whole Life
~$400/mo
Lifelong coverage + cash value
Universal Life
~$150–$400/mo
Flexible premiums + investment options
The difference in premium ($360/month) could be invested separately. Over 20 years at 6% annual return, that's potentially over $175,000 — which might exceed the whole life policy's cash value.
How to Choose
Here's a framework to help you decide:
Choose term life if:
Choose whole life if:
Choose universal life if:
Common Scenarios
👨👩👧👦 Young family with mortgage
Get enough coverage to pay off the mortgage and replace income until kids are independent. The lower premiums let you maximize coverage when you need it most.
💼 High-income earner, maxed retirement savings
If you've maximized RRSP and TFSA contributions, whole life can provide additional tax-advantaged savings plus permanent insurance coverage.
🏢 Business owner with key person risk
Permanent coverage can fund buy-sell agreements and provide business continuity. The cash value can also be accessed for business opportunities.
🙋♂️ Single person, no dependents
Minimal term life (enough for final expenses) or none at all. Focus on building wealth through investments instead.
Remember
You don't have to choose just one. Many people start with term insurance for immediate needs, then add permanent coverage later for estate planning or when their financial situation improves.
The best insurance strategy is one that fits your specific situation, goals, and budget. Consider working with an advisor who can model different scenarios and help you make an informed decision.