You’ve probably heard that buying life insurance is one of the best ways to protect your family financially.
Permanent life insurance might sound like a better option because it’s coverage that lasts for your entire life. On the other hand, term life insurance only lasts for 10 to 30 years.
It seems like buying versus renting your life insurance—who wants to rent when you can own it forever?
But more isn't necessarily better when it comes to life insurance.
In this post, we’ll explore the pros and cons of permanent life insurance and why it isn't the best type of coverage for most Canadian families.
Permanent life insurance in Canada is guaranteed life insurance coverage that covers you for your entire life, often called lifetime or lifelong coverage.
No matter when you pass away, your beneficiary will receive your death benefit as long as you have paid your premiums.
Some plans build cash value over time, which means you can access a small portion of the payments you’ve paid over the course of the policy if you surrender, or cancel, the policy. Some have fixed premiums, while others allow you to adjust your premiums and death benefit.
However, these policies are more expensive across the board than term life insurance policies, sometimes many times over.
Not quite, though you’ll often hear the terms discussed together. Permanent life insurance refers to the types of life insurance policies that cover you over your lifetime.
Whole life insurance is just one example of a permanent policy.
Many people don’t realize permanent life insurance is an umbrella term that refers to different types of lifetime coverage policies.
The most common types of permanent life insurance are whole life insurance or universal life insurance policies.
If you have a term life insurance policy, your insurer has to pay out your death benefit if you pass away while holding your policy. But if you have a permanent life insurance policy, your insurer will have to pay up sooner or later.
How do insurers account for this guaranteed expense? By making permanent life insurance much more expensive than term life insurance coverage.
So even though the idea of getting lifelong coverage may seem appealing, permanent life insurance is a sky-high expense that you may not even need.
It can be easy to believe that the higher premiums for permanent life insurance policies mean better coverage. However, it’s not quality that bumps up the price of permanent life insurance products. It’s simply a reflection of a few additional components and features that you may or may not need.
If you can’t make use of these additional benefits, they aren’t worth the extra expense.
There are two main categories of life insurance policies: term life insurance and permanent life insurance.
For an overview on the difference between “term vs perm,” watch this quick video.
Term life insurance provides coverage for a fixed number of years, usually 10, 20, or 30 years. You simply select the policy length based on the number of years you expect to need protection.
This is the biggest difference between term coverage and permanent coverage. However, your reasons for needing insurance will change over time. You may need more coverage while caring for dependents like children or older parents, then less coverage later on.
If you pass away while holding the term life policy, your beneficiary will receive your death benefit.
In comparison, permanent life insurance provides coverage for the rest of your life, even if you don't actually need protection beyond a certain age.
Before we dive into the pros and cons of permanent life insurance, let's talk about why you need life insurance in the first place.
Life insurance protects your family financially when you pass away and your income isn't around anymore to support them. You can think of it as a security blanket, just not the warm and fuzzy kind you had as a kid.
To be more specific, life insurance is designed to protect people who are financially dependent on you. So in most cases, you need life insurance only for years during your life when your dependents are most vulnerable, for example, when your children are young or your debt is at its highest.
Your life insurance needs will shift as your life does and a permanent policy doesn’t give you that flexibility.
When you consider this, it’s easy to see why you might not need permanent life insurance.
Most people are better off buying term coverage instead of permanent coverage because they'll need coverage for only a certain number of years.
That said, there is a situation where having a permanent policy may make sense.
Let’s dive into the advantages and disadvantages of permanent life insurance. We’ll also look at who needs it and who doesn’t.
One of the advantages of permanent life insurance is that it can help with estate planning for high-net-worth Canadians.
Permanent life insurance isn’t for everyone. Here are some disadvantages of permanent policies:
Still not sure about permanent coverage? Let’s look at a couple of other questions that might help guide your decisions...
There is an investment component to permanent life insurance, making it harder to understand than term life insurance. It can seem like a positive feature and a good selling point, but for most people, keeping investment funds in permanent policies doesn’t offer the same flexibility that a separate investment fund would.
On top of this, the premiums on a permanent policy will be significantly higher, meaning you’ll have less to invest overall. If you calculate what you’ll pay for a term life insurance policy compared to a permanent one, you’ll find the difference significant.
Next, calculate what you could earn if you invested it separately, earning interest in a traditional investment account over the next 10 or 20 years.
In most cases, a term life policy is ideal to meet your family’s coverage needs, and you can invest the difference in a separate investment account. This way you have the freedom to control how it’s invested and earn greater returns.
Yes, permanent life insurance does have a savings component that is commonly known as cash value. That might be all most people know about it when they ask an advisor for “cash value life insurance.”
The longer you’ve held a policy and the longer you’ve paid into it, the more the cash value of your policy grows. Always keep in mind though that this savings component comes from the higher premiums you’re paying.
Cash value is sometimes offered as a selling feature for these policies because, in many cases, you can choose to cash in or borrow funds against this savings component. However, cashing in or borrowing from these policies is rarely a wise financial decision.
A permanent life insurance policy is usually five to 15 times more expensive than a comparable term life insurance policy. The cost of insurance is a valid discussion point simply due to the dramatic cost difference between the different policies.
Check out the table below for more details on how the costs of term versus whole life insurance stack up.
If you want the best bang for your buck, term life insurance is your best bet for affordable life insurance.
Curious about how much term insurance might cost you? Use our term life insurance calculator below to see your monthly rate in seconds.
Depending on your needs, you may realize that you can skip out on the lifetime financial commitment of buying permanent life insurance and opt for term life insurance instead.
Or you may decide that buying a permanent policy truly does make sense in your case.
No matter which type of life insurance you end up buying, be sure to shop around for the best rates. Different reputable life insurance companies will have wildly different rates, even for the same type of term policy or permanent policy.
Permanent life insurance is designed as lifelong financial protection. It lasts your entire lifetime, as long as you keep the policy in force by keeping the premium payments up to date.
It’s wise to read the details on any permanent life insurance policy, as these policies last until you pass away or until it runs out of money. If you stop paying the premiums, the cash value could lapse immediately if you haven’t built up much of the savings component.
Permanent life insurance isn’t necessarily bad. It’s just not a good fit for most people. In most cases, people buying permanent policies such as whole life insurance or universal life insurance either don’t understand how the plan works and is paid for or don’t ever access the benefits.
A small percentage of people could benefit from this type of policy, and if that’s true for you, we’ll tell you. However, our goal is to provide you with the best policy to offer you and your family the best protection that meets your needs.
In most cases, we find that term life insurance is the best option, so that is what we recommend.