Term vs. Permanent Life Insurance policies both offer death benefits, but their structures and functions differ significantly. This comprehensive guide delves into the essential differences between these two types of life insurance available in Canada.
We will explore aspects such as policy premiums, payouts, riders, and tax implications to help you or your clients make an informed choice regarding the most suitable coverage.
Whether you are considering life insurance in Canada for personal needs or advising clients, this detailed overview provides the insights needed to navigate the complexities of Term vs. Permanent Life Insurance.
How do term vs. permanent life insurance differ?
When deciding between term and permanent life insurance, it’s essential to consider your unique financial situation, goals, and needs. Here’s a detailed comparison of the two types of policies:
Cost and Affordability
- Term life insurance premiums are generally lower and more affordable, especially for younger individuals in good health. This makes term policies attractive for those on a budget or with temporary coverage needs.
- Permanent life insurance premiums are higher due to the lifelong coverage and cash value component. These policies require a longer financial commitment and may be more suitable for those with higher disposable incomes or long-term financial goals.
Coverage Duration and Expiration
- Term life insurance provides coverage for a specific term, typically ranging from 5 to 30 years. Once the term expires, the policyholder must decide whether to renew the policy, convert it to a permanent policy, or allow it to lapse.
- Permanent life insurance provides coverage for the insured’s entire life as long as premiums are paid. There is no expiration date, and the policy remains in force until the insured’s death or until the policy is surrendered or lapsed.
Cash Value and Investment Options
- Term life insurance does not have a cash value component or investment options. Premiums are used solely to provide death benefit protection for the specified term.
- Permanent life insurance includes a cash value component that grows tax-deferred over time. Policyholders can access the cash value through loans or withdrawals, subject to certain conditions and potential tax implications. Some permanent policies, such as universal life, offer investment options that allow policyholders to choose how the cash value is invested.
Premium Flexibility and Adjustability
- Term life insurance premiums are fixed for the duration of the term. Policyholders cannot adjust their premiums or death benefits during the term unless they have a rider who allows for such changes.
- Some permanent life insurance policies, such as universal life, offer premium flexibility. Policyholders can adjust their premium payments and death benefits within certain limits, subject to the policy’s terms and conditions. This flexibility can be advantageous for those with fluctuating incomes or changing financial needs.
Underwriting and Eligibility Requirements
- Both term and permanent life insurance policies typically require medical underwriting, which involves assessing the applicant’s health, lifestyle, and risk factors to determine eligibility and premium rates.
- Some permanent policies offer simplified or guaranteed issue options for those who may not qualify for traditional underwriting due to health concerns. These policies typically have lower death benefits and higher premiums compared to fully underwritten policies.
Beneficiary Payout and Settlement Options
- Both term and permanent life insurance policies provide a tax-free death benefit to the designated beneficiaries upon the insured’s death.
- Permanent life insurance policies may offer additional payout options, such as converting the death benefit into an annuity or receiving a portion of the cash value in addition to the death benefit. These options can provide flexibility in how beneficiaries receive and manage the proceeds.
Suitability for Different Life Stages and Goals
- Term life insurance is often suitable for individuals with temporary coverage needs or specific financial obligations, such as a mortgage, children’s education expenses, or income replacement for a specified period.
- Permanent life insurance is generally more suitable for those with long-term financial goals, such as estate planning, wealth transfer, charitable giving, or providing a financial legacy for future generations. The lifelong coverage and cash value component can make permanent policies an attractive option for these purposes.
Permanent life costs more upfront but provides lasting coverage and potential cash value growth. Term offers affordable temporary protection. Here is the summary table highlighting the differences:
Factor | Term Life | Permanent Life |
Duration | Temporary (e.g. 10-30 years) | Lifelong while premiums are paid |
Cost | Lower | Higher |
Cash value | None | Yes, grows over time |
Investment component | No | Yes, through cash value |
Flexibility | Less adjustable | More adjustable |
Use of funds | Limited | Cash value loans possible |
Conversion options | Usually convertible to permanent | Not applicable |
Compare Types of Term vs. Types of Permanent
Term Life Insurance Types:
- Level Term: Premiums and death benefits remain constant throughout the term.
- Decreasing Term: Death benefit decreases over time, typically used to cover a decreasing liability, such as a mortgage.
- Renewable Term: Allows policyholders to renew coverage at the end of the term without undergoing a new medical exam, but premiums may increase based on age.
- Convertible Term: Gives policyholders the option to convert their term policy to a permanent policy without a new medical exam.
Permanent Life Insurance Types:
- Whole Life: Offers a guaranteed death benefit, fixed premiums, and a cash value component that grows at a predetermined rate.
- Universal Life: Provides flexible premiums and death benefit, along with an investment component where cash value growth is tied to market performance.
- Variable Life: Similar to universal life, but policyholders can invest the cash value in a variety of investment options, such as mutual funds.
- Indexed Universal Life: Cash value growth is tied to the performance of a specified market index, such as the S&P 500.
When comparing term and permanent life insurance, it’s essential to consider your long-term financial goals, risk tolerance, and budget. A knowledgeable insurance advisor can help you assess your needs and determine the most suitable type of policy for your unique situation.
Compare Companies Providing Term vs. Permanent Life Insurance
Most life insurance companies in Canada offer both term and permanent life insurance policies. Some of the top insurers include:
- Manulife Financial
- Sun Life Financial
- Canada Life
- RBC Insurance
- BMO Insurance
- Industrial Alliance
- Empire Life
- Canada Protection Plan
- Desjardins Insurance
- Foresters Financial
When comparing life insurance companies, consider the following factors:
- Financial stability and ratings from independent agencies like A.M. Best or Standard & Poor’s
- Product offerings and customization options
- Premiums and value for money
- Underwriting process and requirements
- Customer service and claims handling reputation
- Riders and additional benefits available
- Online tools and resources for policy management
Compare Fees on Term vs. Permanent Policies
Beyond premium costs, compare policy fees when choosing insurance:
Term life fees
- Application fees: $75 to $150
- Policy and admin fees: $60 to $100
- Rider fees, if added: Vary based on selected riders
- Renewal and conversion fees: $75+ at renewal periods or for converting term to permanent
Term life tends to have lower fees overall if renewal and conversions aren’t required.
Permanent life fees
- Application fees: $100 to $300
- Policy and admin fees: $100 to $500 annually
- Surrender charges: If cancelled early, $500+ in first 1-5 years, then declining over 5-10 years
- Loan setup fees: $100+ for policy loan application and interest on loans
- Rider fees: Vary based on selected riders
- Investment management fees: On universal and variable life policies
Permanent policies tend to have more fees related to the investment account and policy complexity. However, brokers should clearly explain fees upfront.
When is term life insurance the best option?
There are many scenarios where term life insurance suits need well:
- Replacing income early in life before retirement savings can support dependents
- Covering the remaining mortgage balance if premature death occurs
- Providing college funds if a parent dies while children are young
- Paying estate taxes and final expenses and avoiding probate issues
- Leaving an inheritance if most assets are tied up in real estate or retirement accounts rather than liquid investments
- Matching the duration of financial dependencies, like needing coverage until kids are independent
Term life insurance is affordable and provides solid coverage for temporary needs without paying for lifelong protection. It provides good coverage for risks that are reduced over a set timeframe.
When is permanent life insurance the better choice?
Certain situations where permanent life insurance is advantageous include:
- You know you require lifelong insurance protection no matter when death occurs
- Using a policy’s cash value component for supplementing retirement income or emergencies
- Accumulating the death benefit to pay large potential estate taxes
- Leaving an inheritance for special needs dependents requiring lifelong care
- Locking in lifelong insurability when health is optimum since age can bring health issues
- Wanting fixed premiums that never increase
- Retirement or succession planning for a business
Permanent life insurance aligns well with goals like maintaining long-term assets and leveraging compounded tax-deferred growth. Having lifelong coverage and liquidity often makes the higher premium costs a prudent expense.
What are some alternatives to term vs. permanent life insurance?
Beyond essential term and permanent life insurance, there are other options to financially provide for dependents that can complement insurance:
- Savings accounts: Joint savings accounts and dedicated investment accounts earmarked to transfer to beneficiaries
- Inheritable registered accounts, Such as Inheritable RRSPs and TFSAs that transfer to named beneficiaries tax-free
- Trusts and wills: Designating distribution of assets to heirs through meticulous estate planning
- Annuities: Tax-deferred income streams beneficiaries receive from invested lump sums or annual deposits
- Pension plans: Setting up survivor benefits from employer or personal pension plans
- Mortgage insurance: Covers outstanding mortgages if a borrower dies before paying off the debt
- Final expense insurance: Small policies that cover funeral and immediate costs when someone passes
However, traditional life insurance remains the simplest way to guarantee directly paying tax-free funds to beneficiaries while avoiding lengthy probate. For most families, it provides indispensable financial security.
Read more : life insurance for family
Choosing Between Term vs. Permanent Life Insurance
So, when deciding between term vs permanent life insurance, there are some key considerations:
- Current budget – Can you afford higher permanent premiums or need lower-term costs?
- Need for lifelong coverage – Do you require insurance your whole life or just temporarily?
- Desired investment component – Do you want cash value accumulation in addition to death benefits?
- Risk tolerance – How much investment risk are you comfortable accepting?
- Income stability – How confident can you afford fixed premiums long-term?
- Beneficiary needs – Will dependents require lifelong support or temporary coverage?
While term life is more affordable in the short term, permanent policies allow you to leverage death benefit payouts and accumulated cash value over decades. Carefully weighing the pros and cons of your situation is key.
If you need temporary and lifelong coverage, an intelligent strategy is pairing term insurance for short-term needs with a smaller permanent policy for lifelong protection.
An independent life insurance advisor can provide personalized guidance on the suitable policy types and amounts to fully protect loved ones while optimizing benefits for your budget and risk preferences.
Final Considerations When Comparing Life Insurance Options
Some final tips when evaluating term vs permanent life insurance:
- Look beyond premiums alone – consider long-term costs and benefits
- Review insurance company ratings – only choose highly rated providers
- Understand exclusions that can impact payouts – ask brokers what’s not covered
- Compare multiple quotes – rates for the same policies can vary greatly
- Evaluate conversion options – the ability to switch to permanent later on if needed
- Take advantage of life insurance living benefits if health declines later on
- Review in-force illustrations – permanent policies project how benefits accrue over decades
- Consider adding supplemental coverage like critical illness or disability insurance
Which Type of Life Insurance Is Right for You?
In summary, weigh your budget, risk tolerance, period needing coverage, and desire for tax-advantaged savings potential when opting for term life versus permanent life insurance.
Term life insurance fits temporary lifestyle protection needs at lower initial costs.
Permanent life insurance aligns better with lifelong goals like maximizing death benefits to offset estate taxes, leaving an amplified inheritance, or accessing long-term policy cash value.
Discussing priorities and scenarios with an independent life insurance advisor can provide valuable guidance specific to your situation.
FAQs When Comparing Term Life Insurance vs. Permanent Life Insurance
What's the difference between term and permanent life insurance?
Term life insurance provides temporary coverage for a set period, usually 10-30 years. Permanent life insurance provides lifetime protection as long as you pay premiums. Permanent also builds cash value that can be borrowed against.
How do you decide between term vs. permanent life insurance?
Speaking with a licensed life insurance advisor can help you decide what policy type, amount, and carrier works best.
Should you buy term or permanent life insurance?
There is no one-size-fits-all answer. The right policy depends on your budget, life stage, financial goals, and needs.
When should you buy term instead of permanent insurance?
When you need coverage for a specific timeframe, such as providing for young kids or paying off a debt.
What's the main difference between term and permanent life insurance?
Term life insurance provides coverage for a set period of time, while permanent life insurance provides lifelong coverage.
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