Your Guide to Permanent Life Insurance in Canada

What is permanent life insurance?

Permanent life insurance provides lifelong coverage and a guaranteed tax-free death benefit that pays out when the insured person passes away. It typically includes a cash value component, which can act as a tax-deferred savings or investment account.

Unlike term life insurance, which offers coverage for a set period, permanent life insurance does not expire and lasts your entire life. The main caveat is that permanent life insurance is generally more expensive and complex than term life coverage, so it's only recommended to individuals who truly require lifelong coverage. 

Who is permanent life insurance for?

Permanent life insurance may not be the best fit for your coverage needs, especially if you’re looking for an affordable policy that mainly protects you during the years when your financial responsibilities are high (e.g., while paying off a mortgage or supporting your dependent children). 

In fact, permanent coverage can be 5 to 15 times more expensive than term life insurance, so you should only consider a permanent plan if lifelong protection aligns with your circumstances and goals. Here are the most common situations where permanent life insurance could make sense:

• Lifelong dependents: Permanent coverage can help protect your lifelong dependents, such as a child with a disability or an adult family member who relies on you for financial support. 
• Estate planning needs: High-net-worth individuals may use permanent life insurance to help cover capital gains taxes on properties, businesses, or investment portfolios.
• Business succession: Business owners can dedicate the payout of their permanent policy to fund the continuation of their business.

Permanent life insurance is always tied to an insurable interest—you can’t simply take out a policy on anyone. In Canada, you generally need to show a financial or familial relationship to the insured person.

Outside of these cases, term life insurance is usually the simpler and more affordable choice. Term coverage can be tailored to the years when your family needs coverage the most, and the money you save from paying lower premiums can give you more financial flexibility outside of your policy, for everyday needs.

Are permanent policies a good investment solution?

Some Canadians consider permanent life insurance because it offers a tax-deferred cash value or investment component. But, while it sounds appealing, the fees are typically high, and the returns are often lower than other investment options (e.g., TFSAs or RRSPs). In the end, you may end up paying more in premiums than the policy’s worth.

When permanent life insurance is a good fit: example scenario

Mariah is a 45-year-old parent with a 17-year-old son. Her son has a lifelong disability and will rely on her for financial support for as long as she lives.

Since her financial responsibilities won’t end when her mortgage is paid off or when her son reaches adulthood, she requires life insurance coverage that will last until she passes away.

The verdict?

In this case, a permanent life insurance policy will provide her son with a tax-free payout, regardless of when she passes. Her policy’s death benefit can be used to cover his housing, personal care and more, ensuring he’s protected for years to come.

When permanent life insurance isn’t a good fit: example scenario

Alexi is a 32-year-old husband and father with a new mortgage. He wants to ensure that his wife and young kids can cover living expenses and pay off the mortgage if he were to pass away. 

Alexi doesn’t need lifelong coverage since his financial needs will decrease as his mortgage is paid down and his kids become financially independent. He primarily needs short-term financial protection for the next couple of decades while his responsibilities are at their highest.

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The verdict?

For him, a 20-year term life insurance is the best fit. It provides the protection his family needs at an affordable cost, opposed to permanent life insurance, which could cost significantly more for an amount of coverage he likely won’t need later in life. The money Alexi saves from choosing term can be invested into his mortgage, retirement savings, or an RESP for his children.

Types of permanent life insurance

There are three main types of permanent life insurance products:

• Whole life insurance
• Universal life insurance
• Term-to-100 life insurance

Each policy structure offers lifetime coverage, but there are a few key differences in their savings features, flexibility, risk, and cost. Here’s a rundown of each.

Whole life insurance

A whole life insurance policy provides lifelong coverage and a guaranteed payout when you pass, but there are a few core traits that set it apart from other permanent policies:

• Fixed premiums: Whole life premium payments are typically fixed.
• Cash value component: These policies typically include a guaranteed cash value component that grows over time. 
• Borrowing: The policyholder may be able to borrow against the cash value of their whole life policy.
• Cost: Whole life insurance is often described as a “low-risk” permanent coverage option, but it’s generally the most expensive type of permanent policy.
• Dividends: Participating whole life policies may include optional dividends.

Who is whole life insurance best for?

Whole life insurance is best suited for individuals who have lifelong financial responsibilities or estate planning needs. For example, parents with lifelong dependent children or high-net-worth individuals looking to cover future estate taxes may benefit the most from a whole life policy. But for most families, term life insurance may be a wiser and more budget-conscious choice.

Universal life insurance

Similar to whole life insurance, universal policies offer coverage that lasts for life and a guaranteed payout, no matter when you pass. Here are the main features that differentiate universal life insurance from whole life insurance: 

• Flexible premiums: Universal life premiums can be flexible, meaning you may be able to adjust when and how much you pay.
• Cash value flexibility: Typically, universal plans offer multiple investment options for their cash value component. This means policyholders have more flexibility in where their cash value is invested, but growth isn’t guaranteed since it depends on how the investment performs.
• Borrowing: Policyholders can borrow against the cash value accumulated in their universal life policy, but this is less common and often riskier than with whole life since growth is not guaranteed. 
• Cost: Universal life policies are generally less expensive than whole life policies, but they usually cost more than Term-to-100 coverage.

Who is universal life insurance best for?

Universal life insurance may be a worthwhile consideration for high-net-worth individuals or business owners seeking lifelong coverage with flexibility and control in how they pay their premiums and invest their cash value. Just keep in mind that you’ll need to be comfortable with the market’s risks since returns aren’t guaranteed. This may not be ideal if you’re looking for simple and straightforward coverage.

Term-to-100 life insurance

Term-to-100 (T100) life insurance is a simpler type of permanent life coverage that lasts for life, but it doesn’t include a savings or investment component like whole life or universal life policies. Here are the notable details that make up term-to-100 policies:

• Premiums: Term-to-100 premiums stop at age 100, but coverage continues until you pass.
• No cash value: This type of policy doesn’t offer a cash value or investment component.
• Level premiums: Premiums stay the same throughout the policy’s life.
• Cost: Term-to-100 coverage is generally cheaper than whole life or universal life insurance, but it’s still more expensive than term life coverage.

Who is T100 insurance best for?

Term-to-100 life insurance may be a good fit for individuals who want affordable, straightforward permanent coverage without the worry of dividends, investments, or policy loans. It’s just pure, lifelong insurance coverage that can provide for estate planning or final expenses. But term-to-100 coverage is still more expensive than term life insurance, so a term policy may be a better fit if you don’t require lifelong coverage.

Alternatives to permanent life insurance

Permanent life insurance has its appeal, but most Canadians don’t actually need lifelong coverage. In most cases, the best life insurance plan balances affordability, flexibility, and protection that covers you and your loved ones during the years when your financial responsibilities are at their peak.

That’s where term life insurance comes in. Term policies can be anywhere from 5 to 15 times cheaper than permanent coverage, which means you could save hundreds to thousands of dollars with term. Here are the main benefits of choosing term life coverage over permanent life insurance:

• Affordable protection: Term life insurance is considerably cheaper than permanent coverage, so you get the insurance protection you need without overspending.
• Smart coverage: This type of policy is designed to cover you while your largest financial obligations are at their highest. You can select a term and coverage amount that aligns with responsibilities, such as paying off your mortgage, covering childcare costs, or replacing income if you pass.
• Flexible terms: Many life insurance companies offer terms as short as 10 years and as long as 50 years. You can choose a term that matches your family’s timeline, rather than paying for unnecessary lifelong coverage.
• More financial freedom: Since term life insurance premiums are lower than permanent life premiums, you can use the saved money for your mortgage, retirement income, or your children’s education.
• Renewability and convertibility: Most term life policies can be renewed when the policy is up, meaning you can extend your term length if you require coverage for a longer period. Many insurance providers also offer policy conversions (usually up to age 65), so you may be able to switch to a permanent policy if it feels necessary. But keep in mind that your premiums will likely increase if you choose to renew or convert your plan.

Overall, permanent life insurance can make sense in very specific situations, but term coverage is often the smarter and more affordable choice for the average household.

Pros and cons of permanent life insurance

Like most financial products, permanent life insurance has its upsides and downsides. Here’s a rundown to help you decide if a permanent plan is worth your while:

Pros of permanent life insurance:

• Lifelong coverage: Your death benefit is guaranteed to payout to your beneficiaries no matter when you pass, as long as your premiums are paid.
• Financial planning support: Permanent life insurance is often used to cover estate taxes, which can’t be paid off earlier in life. 
• Protects lifelong dependents: Permanent coverage can provide financial security if you support someone with a disability or other lifelong needs.
• Savings components: Whole and universal life insurance policies include a tax-deferred cash value component that can be borrowed against or used later in life.

Cons of permanent life insurance:
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• High cost: Permanent policies are usually significantly more expensive than term life coverage, which can put them out of budget for some families.
• Risk of over-coverage: Most people take out a life insurance policy to protect their loved ones from the burden of steep financial responsibilities if they pass away. These responsibilities are often temporary for most families, so a permanent policy could lead to overpaying for lifelong coverage that isn’t necessary over time.
• Less financial flexibility: Higher permanent life premiums mean less money left to put towards other common goals, like saving, investing, paying down debt, or even just day-to-day expenses.

“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.” – Erik Heidebrecht, Licensed Insurance Advisor

Common misconceptions about permanent life insurance

Permanent life insurance can sound appealing, but there are a few misconceptions that may falsely add to that appeal. Before you make a final decision on your policy type, let’s set the record straight on the most common permanent life insurance myths.

Myth 1: Permanent life insurance is always a good investment

Yes, it’s true that permanent policies include a cash value component that typically grows tax-deferred at a guaranteed rate, but that doesn’t mean the returns are great. In fact, most cash value returns are modest, and you may need to pay tax if you withdraw from the cash value or if interest accumulates from a loan. 

In short, you’re better off choosing a traditional investment vehicle like a TFSA or RRSP, alongside an affordable term life policy.

Myth 2: A guaranteed payout makes permanent life insurance more valuable

Yes, permanent policies offer guaranteed payouts, but here’s the catch: the premiums are so high (up to 15 times more than term life) that some policyholders end up paying close to or even higher than their death benefit amount by the time the policy pays out. 

A term life insurance policy can help keep costs down, giving you the flexibility to invest your savings for a return with higher value.

Myth 3: Cash value is “free money”

You can borrow or withdraw from the cash value in a permanent policy, but it comes at a cost. It can reduce your coverage, create a tax bill, or even cancel your policy if mismanaged. 

For example, withdrawals above your policy’s adjusted cost basis are taxable, and the same goes for loans if your policy lapses or is surrendered with an outstanding loan balance. If the debt exceeds your cash value, your policy can collapse, leaving you with no coverage.

FAQ: Permanent life insurance in Canada