Is Permanent Life Insurance Worth It? Not If You're Like Most Canadians

Is permanent life insurance worth it? 

Permanent life insurance may sound like a smart financial tool for lifelong coverage, a guaranteed payout, investment growth, and peace of mind. But if you’re like most Canadians, a permanent life insurance policy is an expensive way to get coverage, and an underwhelming way to build wealth. In other words, it’s easy to overbuy a policy that underdelivers.

If your goal is to offer financial protection for your loved ones while you have a mortgage or dependents, you’ll probably find more affordable (and more flexible) coverage with a term life insurance policy.

What is permanent life insurance? 

Permanent life insurance is a lifelong insurance policy that typically builds cash value over time and provides a guaranteed death benefit payout upon your death.

Unlike term life insurance, permanent life insurance policies never expire. 

There are four types of permanent life insurance (which we’ll explore in more details below): whole life insurance, universal life insurance, final expense insurance, and survivorship insurance.

Learn more: How does life insurance work?

Why permanent life insurance probably isn’t right for you

Generally speaking, most people don’t require the extensive, long-lasting coverage that permanent life insurance offers. 

Permanent life insurance is also very expensive, anywhere from 5 to 15 times as much as term life insurance. You can secure the coverage you need at a fraction of the cost with a term policy.

Erik Heidebrecht

Customer Service Manager and Licensed Insurance Advisor

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Erik Heidebrecht is the customer service manager and licensed advisor at PolicyMe. Erik has a Bachelor of Business Administration from the University of Wilfrid Laurier University with a minor in Financial Mathematics. Erik has broad exposure to the personal finance world after working at Fidelity Investments Canada as well being an advisor with Sunlife Financial, one of Canada's largest individual insurance providers. Erik is now focused on taking that experience to improve the customer journey and provide the best advice to Canadians looking for life insurance.

“If you buy an expensive permanent insurance plan, it’s going to take money away from saving for a down payment, which might be more important. Maybe instead, you consider a cheaper term insurance policy that will get you what you want from an insurance perspective without jeopardizing savings for retirement, for a house, or whatever it may be.”

“Cash value” isn’t that valuable 

Proponents of permanent life insurance tout the policy’s cash value as a major benefit, but it may not be as valuable as it seems. Here why:

• Cash value takes years to grow. The cash value of your policy grows over time but returns are typically lower than you might achieve with a traditional investment account, like a TFSA, RRSP, or even high-yield savings account.
• It can be difficult to access. Sure, you can borrow against your cash value for withdrawals or borrowing money, but you may be on the hook for taxes and it could reduce the amount of the death benefit. If you cancel the policy early, you’ll get very little back compared to what you put in.

For most people, it’s best to keep insurance and investing separate. A term life insurance policy offers medium-term financial protection and your investment accounts allow your savings to grow over the long term with greater flexibility (and higher returns).

Term life insurance is the best choice for most Canadians 

Most Canadians have temporary financial responsibilities, such as a mortgage or supporting dependent children, that life insurance should help protect. A term life policy offers affordable coverage during these critical years and gives you the flexibility to reduce or end your coverage once those obligations are no longer a concern.

Term vs. permanent life insurance 

Both term and permanent life insurance policies offer financial protection for your loved ones if you die, but there are some significant differences you need to consider.

Term vs. permanent life insurance: Cost 

Term life insurance is substantially cheaper than permanent life insurance.

With term life insurance, you pay for coverage over a set period, typically from 10 to 30 years. This aligns with temporary financial needs, like paying off a mortgage or raising kids. Once the term ends, so do your insurance premium payments (unless you renew). 

On the other hand, permanent life insurance requires you to pay higher premiums for lifelong coverage. While cost varies depending on policy details, permanent coverage can be anywhere from 5 to 15 times the cost of term coverage.

The bottom line

If you’re looking for affordable coverage that provides financial security while you have major financial obligations, term insurance is the best choice.

Term vs. permanent life insurance: Coverage

With term life insurance, you secure coverage for a specific period; you can typically choose from 10, 15, 20, 25, and 30 years. You pay a fixed premium for this term and the policy only pays a death benefit to your beneficiaries if you die within the term.

On the other hand, permanent life insurance policies offer coverage for your entire life, resulting in a guaranteed payout of a death benefit whenever you pass away (as long as you continue to pay premiums and the policy is active). 

Remember: Both types of policies allow you to choose the amount of coverage that best suits your financial situation. That said, it’s easy to end up underinsured with permanent coverage since the cost is so high. It’s tempting to purchase less coverage than you really need in an effort to keep premiums affordable.

The pros and cons of permanent life insurance 

While we believe that permanent life insurance is unnecessary for most Canadians, it does have some benefits:

Who should get permanent life insurance?

There are two groups of people for whom permanent life insurance might be a decent consideration:

• High income earners
• People doing estate planning

If you fall into the high-earner category, you may want to consider a permanent life insurance policy once you’ve maximized your TFSA and RRSP contribution room and you have unregistered assets. A permanent policy offers an opportunity to take advantage of compound interest without being subjected to full taxation.

A permanent life insurance policy can also make sense if you’re doing estate planning and want to cover funeral costs.

Erik Heidebrecht

Customer Service Manager and Licensed Insurance Advisor

Read more

Erik Heidebrecht is the customer service manager and licensed advisor at PolicyMe. Erik has a Bachelor of Business Administration from the University of Wilfrid Laurier University with a minor in Financial Mathematics. Erik has broad exposure to the personal finance world after working at Fidelity Investments Canada as well being an advisor with Sunlife Financial, one of Canada's largest individual insurance providers. Erik is now focused on taking that experience to improve the customer journey and provide the best advice to Canadians looking for life insurance.

“Generally between the ages of 50 and 60, where you're coming to the end of your first term and considering whether to get term into retirement age or opt in for a more expensive whole-life plan that's going to act as final expense coverage whenever you pass away. The need for insurance is not significant but you’re looking for final expense coverage.”

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Broadly speaking, these are the two major use cases where permanent coverage might be worth it.

Types of permanent life insurance 

There are four types of permanent coverage, each one with unique features and suitable for unique situations. Here’s a rundown of your permanent life insurance options.

Whole life insurance

What it is: A whole life insurance policy offers coverage for your entire life, with fixed premiums and a guaranteed tax-free death benefit to your beneficiaries upon your death. It includes a cash value component that grows over time, and while the value is typically low, you may be able to borrow against it.

When it makes sense: If you have lifelong dependents that you need to care for, or you’ve maximized contributions to your TFSA and RRSP, a whole life insurance policy might be a good choice.

Universal life insurance

What it is: Universal life insurance is similar to whole life, in that it offers lifetime coverage. But you won’t get fixed premiums, instead, your premiums are flexible and based on the cash value that you’ve built up.  

When it makes sense: This type of insurance might be best suited to those who need lifelong coverage but want greater control over when and how much they pay. You’ll need to have higher tolerance for risk, but in exchange you’ll enjoy a bit more flexibility.

Final expense insurance

What it is: Sometimes called burial insurance or funeral insurance, final expense insurance is a permanent policy that pays a small death benefit, typically between $5,000 and $25,000. This policy allows your beneficiaries to cover the cost of a funeral and other final expenses after your death.

When it makes sense: A final expense policy might be a good choice if you can’t qualify for another type of life insurance and want to cover final expenses. If you need money for your beneficiaries to cover more than that (like income replacement), you should choose something else.

Survivorship insurance

What it is: Survivorship insurance is also known as joint or second-to-die life insurance. It offers coverage for two people, and once they both pass away, the policy pays the death benefit to the beneficiaries. It’s typically less expensive than purchasing two separate policies and can be easier to qualify for, since the payout only happens once both policyholders have passed.

When it makes sense: This type of whole life policy might be a good idea if you’re concerned about estate taxes and final expenses. It can also be helpful if you want to leave a legacy or equalize inheritances among those inheriting your estate.

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