Insurance agents frequently promote permanent life insurance, but permanent life Insurance isn’t right for most Canadians. Term life insurance typically satisfies coverage needs at a lower expense and complexity. This comprehensive guide explores the key variances between permanent and term life insurance, misleading sales tactics, and recommendations for when permanent life may be suitable.
A Quick Introduction to Permanent Life Insurance
Permanent life insurance furnishes lifetime coverage as long as you keep paying premiums. The most common types are whole life and universal life. These policies also accumulate a cash value you can borrow against.
According to 2021 data, 51% of Canadians with life insurance had permanent coverage exclusively, while 33% had term coverage exclusively. However, term life is typically the better option for most people.
Type of Life Insurance | % of Canadians with Coverage |
Permanent Only | 51% |
Term Only | 33% |
Permanent life insurance premiums are much higher than term life. A healthy 30-40 year old may pay 10-20 times more for permanent coverage versus a 20-year term policy with the same death benefit.
How Does Term Life Insurance Compare to Permanent Life Insurance?
Term life insurance has several advantages over permanent life:
Lower Cost
The lower term life insurance premiums make it more affordable, especially for young, healthy applicants. This saves money you can invest elsewhere.
According to insurance industry data, term life premiums can be 10-20 times lower than permanent insurance for Canadians in their 30s and 40s.
For a healthy 30-year-old non-smoker in Ontario looking for $500,000 of coverage, here are sample annual premiums:
Policy Type | Annual Premium |
20-Year Term Life | $260 |
Whole Life | $2,100 |
As illustrated, the annual cost of permanent protection is significantly higher.
Meets Temporary Needs
Many Canadians need life insurance coverage for a certain period, such as while raising children or paying off a mortgage.
Term life insurance meets this temporary need for protection. The coverage expires after the term length, at which point policyholders can re-evaluate their insurance needs.
Straightforward and Simple
Term life insurance is simple coverage without complex investment components. The death benefit pays out if you pass away during the term.
Permanent life insurance integrates investment accounts and cash value, making it more convoluted than pure protection.
Living Benefits
Several term life policies offer “living benefits” that allow access to your death benefit if you become terminally or critically ill.
This provides funds for medical expenses and bills during a health crisis. Permanent policies may also include this feature.
The objective with term life is for the policy not to pay out – i.e. you live a long, healthy life. If you outlive the term, you can re-assess your coverage needs at that stage.
Read more: Term vs. Permanent Life Insurance
Common Misleading Permanent Life Insurance Sales Tactics
Insurance agents frequently utilize questionable sales ploys to push permanent life insurance. Here are several misleading arguments and why they do not make financial sense:
“Buy Now When Rates Are Low”
Premium rates are indeed lower when you are young and healthy. However, most young Canadians have limited need for life insurance coverage.
Getting permanent insurance with premiums locked in at a young age is usually unnecessary. Holding off until coverage is needed can save substantially on costs.
“Own vs. Rent Your Policy”
Agents may portray permanent insurance as an asset you own, similar to a home. However, permanent insurance is much pricier than term life. It’s not an apt comparison.
Renting term insurance when coverage is required and investing or saving the premium difference is often the superior financial move.
“Be Your Bank”
A sales pitch for permanent insurance is that you can take loans or withdrawals from the accumulates cash value. However, withdrawals incur fees and taxes. It’s better to use proper investment accounts for liquidity needs.
The death benefit can decrease or terminate if you lapse on premium or loan payments. This can leave you without coverage.
“Forced Savings”
Permanent life insurance should not be your primary savings vehicle or “forced savings” plan. It’s best to maximize RRSPs, TFSAs, and RESPs first. The fees and drag on investment performance make insurance an expensive way to save.
“Dividends”
Agents emphasize dividends and cash value growth in policy illustrations. However, dividends are not guaranteed, especially long-term, and projected returns may not materialize.
“Diversification”
It is also questionable to pitch permanent life insurance as a way to diversify your assets or portfolio. Traditional investment accounts offer far greater flexibility and control at a lower cost.
The Main Drawbacks Why Permanent Life Insurance Isn’t Right
Beyond misleading sales tactics, permanent life insurance has inherent drawbacks:
- Expensive Premiums – Permanent premiums are significantly higher, often 10-20x the cost of term life premiums.
- Complexity – Permanent policies have convoluted investment components that term policies do not.
- Opportunity Cost – The premium difference could be invested with higher returns elsewhere.
- Illiquidity – Withdrawing or borrowing against cash value incurs fees and taxes.
- Non-Guaranteed Returns – Projected dividends and cash value appreciation are not guaranteed.
From a cost and complexity standpoint, these factors make permanent insurance inferior to term insurance for most Canadians.
When Permanent Life May Make Sense
While term life insurance is typically the superior option, there are a few situations where permanent life insurance may be appropriate:
Lifelong Dependents
If you have a dependent who will require lifelong care, such as a child with special needs, permanent life insurance can provide funds after you’re gone.
The death benefit, cash value accumulation, and lifetime coverage of permanent policies may better serve these specific long-term needs.
Estate Taxes
For high-net-worth individuals with sizeable estates, permanent life insurance can help heirs avoid burdensome estate taxes when inheriting assets.
The tax-free death benefit may provide funds to pay estate taxes owed without liquidating other assets.
Funeral Costs
If you want to pre-fund your funeral expenses that may occur decades in the future, permanent life insurance can cover these costs.
The lifetime coverage and compounding cash value growth make permanent insurance suitable for this goal.
Even in the above cases, alternatives like term insurance plus conservative investing should be evaluated. A customized financial plan is prudent.
Evaluate Your Options Objectively
The decision between term life insurance and permanent life insurance is highly personal and depends on each individual’s financial situation and coverage goals. There is no definitive right or wrong option.
For many Canadians, term life insurance is the most straightforward and affordable way to secure the coverage they need. The lower premiums and simplicity of term policies make them the optimal choice for temporary protection needs.
However, permanent life insurance does offer unique benefits like lifelong coverage, cash value accumulation, and premium lock-ins that could provide value in certain circumstances.
Rather than accept or dismiss permanent life insurance in Canada automatically, it is wise to objectively assess your specific requirements, lifestyle and longevity. Analyze the pros and cons of all available options.
Work with a qualified financial advisor to determine the policy type, length, and amount that aligns best with your priorities and budget.
The right life insurance in Canada will provide peace of mind that your loved ones will be protected without unnecessary complexity or inflated costs. Carefully evaluating all alternatives is the key to finding the optimal coverage solution.
FAQs Why Permanent Life Insurance Isn’t Right for Most Canadians
What are the main disadvantages of permanent life insurance?
The main disadvantages are the high cost compared to term life, complexity due to the investment components, opportunity cost of investing the premium difference elsewhere, illiquidity of the cash value, and non-guaranteed returns.
Why is term life insurance a better option for most people?
Term life has lower premiums, meets most people's temporary coverage needs, is simple to understand, and provides living benefits access in some policies. It covers you when you need it most.
When does it make sense to buy permanent life insurance?
Permanent life may make sense if you have lifelong dependents, a large taxable estate, or want to pre-fund funeral costs decades away. But even then, alternatives like term life plus investing should be considered.
What are some misleading arguments insurance agents make for permanent life insurance?
Some misleading pitches are "buy now when young/healthy", "own vs. rent", "be your own bank", "forced savings", "guaranteed dividends", and "diversification". Most don't stand up to scrutiny.
Is permanent life insurance an effective retirement savings option?
No, the fees and drag on investment performance make permanent life insurance inefficient for retirement savings compared to options like TFSAs and RRSPs.
Do the dividends or returns on permanent life insurance policies get guaranteed?
No, the dividends and illustrated cash value growth projections are not guaranteed, especially long-term. Assume lower performance than projected.
Is permanent life insurance more expensive than term life insurance?
Yes, permanent life insurance premiums are significantly higher, often 10-20 times the cost of term life premiums for equivalent coverage.
Should I avoid buying permanent life insurance when I'm young and healthy?
Most young healthy people have limited need for life insurance, so buying permanent when young is usually unnecessary. Consider term life later on when coverage needs arise.
Does permanent life insurance make sense if I want to leave an inheritance?
Permanent life insurance isn't the best way to leave an inheritance. Term life plus investing the premium difference will likely create a larger estate at a lower cost.
Is it easy to switch from term life insurance to permanent?
It depends on your health and insurer rules. Converting term to permanent life gets more difficult as you age or develop health conditions. Read the policy carefully.
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