You’ve probably heard that buying life insurance is one of the best ways to protect your family financially. 

Permanent life insurance might sound like a better option because it’s coverage that lasts for your entire life. On the other hand, term life insurance only lasts for 10 to 30 years.

It seems like buying versus renting your life insurance—who wants to rent when you can own it forever?

But more isn't necessarily better when it comes to life insurance. 

In this post, we’ll explore the pros and cons of permanent life insurance and why it isn't the best type of coverage for most Canadian families.

What is permanent life insurance?

Permanent life insurance in Canada is guaranteed life insurance coverage that covers you for your entire life, often called lifetime or lifelong coverage. 

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. Some have fixed premiums, while others allow you to adjust your premiums and death benefit. 

However, these policies are more expensive across the board than term life insurance policies, sometimes many times over.

Is permanent life insurance the same as whole life insurance?

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. 

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. 

The most common types of permanent life insurance are whole life insurance or universal life insurance policies. 

  1. Whole life insurance is the traditional option people choose from permanent types of coverage. It’s a set-it-and-forget-it policy where the monthly premium and death benefit are guaranteed for life.
  2. Universal life insurance is more customizable but more complex. It requires you to update it annually and make sure you’re paying enough that it doesn’t lapse.

Why is permanent life insurance more expensive than term life insurance?

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. 

Term vs. permanent life insurance

There are two main categories of life insurance policies: term life insurance and permanent life insurance.

For an overview on the difference between “term vs perm,” watch this quick video:

Term life insurance provides coverage for a fixed number of years, usually 10, 20, or 30 years. You simply select the policy length based on the number of years you expect to need protection. 

This is the biggest difference between term coverage and permanent coverage. However, your reasons for needing insurance will change over time. You may need more coverage while caring for dependents like children or older parents, then less coverage later on.

If you pass away while holding the term life policy, your beneficiary will receive your death benefit. 

In comparison, permanent life insurance provides coverage for the rest of your life, even if you don't actually need protection beyond a certain age. 

Why you probably don’t need permanent life insurance

Before we dive into the pros and cons of permanent life insurance, let's talk about why you need life insurance in the first place.

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.

To be more specific, life insurance is designed to protect people who are financially dependent on you. So in most cases, you need life insurance only for years during your life when your dependents are most vulnerable, for example, when your children are young or your debt is at its highest.

father and son in kitchen for article on why you might not need permanent life insurance

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.

Pros and cons of permanent life insurance

Most people are better off buying term coverage instead of permanent coverage because they'll need coverage for only a certain number of years. 

That said, there is a situation where having a permanent policy may make sense. 

Let’s dive into the advantages and disadvantages of permanent life insurance. We’ll also look at who needs it and who doesn’t.

Pros of permanent life insurance

One of the advantages of permanent life insurance is that it can help with estate planning for high-net-worth Canadians.

  1. It could help pay estate taxes when you pass away: Having a permanent life insurance policy could come in handy if you anticipate paying estate tax on your estate when you pass away. Unlike a mortgage, estate tax isn't an expense that you can pay off earlier in life when a term life insurance policy still covers you.
  2. It might help you pass on a second residence to heirs: A permanent policy could be purchased as a way to offset the eventual tax liability if you own a second residence and want to pass it on to the next generation.
  3. It could help cover permanent expenses: A permanent policy may be something to consider if you know you’ll have lifelong costs, such as a child or other dependent with a disability you support, which may cause your coverage needs to stay level.
  4. It could help if you don’t have time for other options: Even if it’s more expensive to pay for each month, a permanent policy could offer you peace of mind if you don’t have the luxury of putting money away over time.

Cons of permanent life insurance

Permanent life insurance isn’t for everyone. Here are some disadvantages of permanent policies:

  1. It’s costly: Permanent life insurance rates are usually a whopping five to 15 times the cost of term insurance policies!
  2. It assumes you have the same financial obligations forever: If you don't expect to have dependents like young kids or ageing parents or debt like your mortgage well into the future, why pay insurance premiums for the rest of your life?
  3. It has an investment component you don’t need: Permanent life insurance differs from term life insurance in several ways, one of which is building some cash value. The cash value is an investment vehicle that's coupled with the insurance policy.
  4. It prevents more strategic investment decisions: You'll earn interest on the cash value of your permanent life insurance policy. But this amount will usually be lower than what you'd get if you invested your money in other ways.

Still not sure about permanent coverage? Let’s look at a couple of other questions that might help guide your decisions...

Is permanent life insurance a good investment?

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. 

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.
Young child and baby sitting on deck for article about why you might not need permanent life insurance

Does permanent life insurance have a cash value? 

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 from these policies is rarely a wise financial decision.

Cost of permanent life insurance vs. term life insurance

A permanent life insurance policy is usually five to 15 times more expensive than a comparable term life insurance policy. The cost of 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.

$250,000 20-year term life insurance $250,000 whole life insurance
Male, aged 30 $18/month $135/month
Female, aged 30 $15/month $121/month
Male, aged 40 $28/month $204/month
Female, aged 40 $22/month $178/month
Male, aged 50 $72/month $327/month
Female, aged 50 $51/month $279/month

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 calculator below to see your monthly rate in seconds.

In summary: your life insurance needs will change over time, and so should your coverage

Depending on your needs, you may realize that you can skip out on the lifetime financial commitment of buying permanent life insurance and opt for term life insurance instead. 

Or you may decide that buying a permanent policy truly does make sense in your case.

No matter which type of life insurance you end up buying, be sure to shop around for the best rates. Different reputable life insurance companies will have wildly different rates, even for the same type of term policy or permanent policy. 

FAQ: Permanent life insurance

How long does permanent life insurance last?

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.

Why is permanent life insurance bad?

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. 

Laura McKay

COO & Co-Founder

Laura brings 7 years of experience working in insurance & strategic operations as a management consultant at Oliver Wyman, after experiences at Manulife and Munich Re. In 2017, she launched a successful initiative for the World Economic Forum focused on innovation in insurance, working closely with insurers, tech pioneers, and policy-makers.

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