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Term and permanent life insurance are the two main types of life insurance policies available in Canada.
The difference between these two types of policies:
Let's look at each type further.
This quick video is a great primer:
At this point, you may be thinking: I'd rather have life insurance that's guaranteed to pay out and that builds a cash value. That sounds like the Cadillac (or Tesla?) of life insurance!
But more isn't necessarily better when it comes to life insurance.
The purpose of life insurance is to protect the people who are financially dependent on you.
This means you really only need life insurance when your children are minors or your debt, like a mortgage, is at its highest.
You may need more coverage while caring for dependents like children or older parents, then less coverage later on. Most people are better off buying term coverage instead of permanent coverage because they'll need coverage for only a certain number of years.
You definitely need life insurance if you have people in your life who depend on your income. But what specific life situations warrant term life insurance vs. permanent life insurance?
The average Canadian has temporary life insurance needs, here are a few examples:
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If you have permanent life insurance needs, like a disabled child or are an exceptionally high income earner, whole life insurance might make sense. Here are a few scenarios:
That said, there are times where having a permanent policy makes sense.
Let’s dive into the advantages and disadvantages of permanent life insurance, plus who it's best suited for.
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:
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.
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.
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.
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.
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.
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.
Permanent life insurance policies are more expensive across the board than term life policies, sometimes many times over.
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 against these life insurance 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 life 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 quote calculator to see your monthly rate in seconds.
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.
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.
The question of whether permanent life insurance is haram (forbidden) can be a bit tricky. In Islam, things like uncertainty (gharar) and gambling (maisir) are considered haram. Some argue that since traditional life insurance involves elements of these, it might be seen as haram.
However, it's important to remember that the interpretation can vary among different scholars and individuals. Some might see the concept of insurance, including permanent life insurance, as a form of mutual help and protection among the community, which is in line with the principles of Islam. To sum up, whether permanent life insurance is considered haram or not can depend on the individual's interpretation of Islamic principles. If you're unsure, it's always a good idea to seek advice from a knowledgeable person in your religious community.