Insurance products comparison: term, whole life and universal life 2026

Term insurance: T10, T20, T65 and T100

Term insurance provides coverage for a defined period with a fixed premium during that period. At renewal, the premium increases substantially to reflect the insured's attained age. T10 (10-year term) and T20 (20-year term) are the most common for temporary needs such as mortgage repayment, protecting dependent children, or income replacement during the working years.

T65 covers until age 65 and suits needs that end at retirement. T100 is a special case: the premium is fixed and payable for life (or until age 100), but there is no cash surrender value. T100 is often used as a less expensive alternative to permanent insurance when the client wants lifetime coverage but does not need the savings component. Note that some T100 policies are not renewable and expire at age 100 without benefit if the insured is still living.

Term insurance has no cash surrender value. Premiums are the lowest of all life insurance products, allowing a high coverage amount at low cost. Most term policies are convertible to permanent insurance without medical evidence before an age limit (typically 65 or 70). This conversion privilege is a major advantage that should not be overlooked.

Whole life insurance

Whole life insurance provides lifetime coverage with a fixed premium and guaranteed growing cash surrender value. It is the most stable and predictable product. The premium is higher than term because part of it funds the cash value accumulation. Coverage never expires as long as premiums are paid.

The participating version is offered by mutual insurance companies. It pays dividends that come from the mutual's favourable results in three areas: mortality better than expected, investment returns above assumptions, and administration costs below projections. These dividends are not guaranteed but have been historically stable at the major Canadian mutuals. They can be used in several ways: purchase of paid-up additions (PUA), premium reduction, accumulation at interest, or cash payment.

The non-participating version offers only the contractual guarantees: fixed premium, guaranteed death benefit, and guaranteed cash surrender value. No dividends. It is generally less expensive than participating but offers less long-term growth potential. Whole life is suited to permanent needs: estate planning, funding tax at death, corporate strategies (CDA), and intergenerational wealth creation.

Universal life insurance

Universal life combines an insurance component and an investment component in a single contract. The policyholder can adjust premiums and death benefit within certain limits. Deposits beyond the cost of insurance accumulate in an investment account that grows tax-sheltered if the policy is exempt.

Flexibility is the main advantage: the policyholder can increase or decrease deposits according to their financial capacity. Investment choices are varied: guaranteed interest accounts, market indices, investment funds. However, this flexibility comes with significant risks. Investment account returns are not guaranteed. Internal charges (increasing cost of insurance with age, management fees, administration fees) can be high and reduce net returns. If returns fall below the projections used at the time of sale, the client may need to increase deposits to keep the policy in force.

The advisor must present illustrations at multiple return rates (optimistic, realistic, conservative) and ensure the client understands the risk. Universal life suits sophisticated clients who understand investments and want to maximize tax-sheltered growth inside a life insurance policy.

Exempt vs non-exempt policies

A life insurance policy is exempt if it passes the NCPI (Net Cost of Pure Insurance) test, also called the exemption test. This test compares the policy's cash surrender value to a calculated threshold. If the cash value does not exceed the threshold, the policy is exempt and cash value growth is not taxed annually. Most standard whole life and universal life policies are designed to pass this test.

A non-exempt policy exceeds the NCPI threshold. Accrued interest in the policy is taxable annually to the policyholder, even if nothing is withdrawn. This can occur if too much deposit is made into a universal life policy or if the policy structure is modified. Exempt status is crucial for corporate strategies and estate planning because it allows tax-sheltered growth until death.

Adjusted cost basis (ACB / CBR)

The adjusted cost basis (ACB in English, CBR in French) is an essential tax concept for life insurance. It represents the cumulative net cost of the policy to the policyholder. The ACB is calculated as the sum of premiums paid minus the cumulative net cost of pure insurance (NCPI) over the years. Over time, the ACB generally decreases because the NCPI accumulates faster than premiums.

The ACB is important in two situations. At disposition of the policy (surrender or transfer), the taxable gain is the cash surrender value minus the ACB. At death, the CDA credit is the death benefit minus the ACB. A low ACB maximizes the CDA credit. The advisor should track the ACB annually and include it in corporate and estate planning discussions.

Key life insurance riders

Riders add supplementary protection to the base policy. The waiver of premium is the most recommended rider: if the insured becomes disabled, the insurer pays the premiums during the disability. The guaranteed insurability rider gives the right to increase coverage at certain key dates (marriage, birth, home purchase) without medical evidence, even if health has deteriorated.

The child rider provides temporary coverage on the insured's children, generally convertible to an individual policy at adulthood without medical evidence. The critical illness rider (acceleration of death benefit) pays part or all of the death benefit upon diagnosis of a covered critical illness while the insured is alive. The disability rider pays a monthly income during disability. Each rider has an additional cost and should be recommended based on the specific needs of the client.

Summary comparison

Term (T10/T20): lowest premium, no cash value, temporary coverage, ideal for mortgage and dependent children. T100: fixed lifetime premium, no cash value, lifetime coverage at moderate cost. Participating whole life: fixed lifetime premium, guaranteed cash value plus dividends, ideal for estate planning and CDA. Universal life: flexible premium, variable cash value depending on returns, ideal for sophisticated clients seeking to maximize tax-sheltered growth.

The choice depends on the client's objective (temporary vs permanent), financial capacity (low vs high premiums), need for cash value (none vs accumulation), and risk tolerance (guaranteed vs variable). A well-constructed insurance portfolio often combines several product types to cover different needs at different time horizons.

Frequently asked questions