Permanent Life Insurance
With permanent life insurance:
- Your family or estate gets a death benefit for permanent needs like funeral costs and taxes.
- You can combine permanent life insurance protection with a tax-sheltered investment.
- You can use the investment for personal or business opportunities while keeping the insurance coverage.
- You can use the cash to supplement your retirement income and provide for long-term care for yourself or a family member.
- You can pay it off in 10, 15, or 20 years or by age 65, which relieves you of the financial burden of paying for it in your retirement years.
Permanent life insurance, unlike term life insurance, is more suitable for a long-term or end-of-life need. You can use it to relieve the burden of funeral costs, reduce the impact of taxes on your children’s inheritance, or create a legacy for your beneficiaries or favourite charity.
You can also benefit from the policy while you’re alive. That’s because some permanent policies have a cash value that you can access at any time to supplement your retirement income. The investments grow in a tax-advantaged account for extra tax-sheltering on top of your RRSP and TFSA.
The cash value makes permanent life insurance a great option for executing strategies within a corporation like the corporate insured retirement program. This strategy allows you to save tax, increase your retirement savings, and enhance your estate values.
Seniors who only need the death benefit can get an affordable permanent life insurance policy to cover final expenses (like burial costs) and taxes.
There are 3 types of permanent insurance: Whole life (Participating and non-participating), term to 100, and universal life.
Whole life
With a whole life policy, the premium is level throughout the policy. At first, the premium you pay is more than what’s needed to cover you, so the excess premium is put inside a reserve. When you get older, the premium you pay won’t be enough to cover you, so money is drawn from the reserve to keep the policy in force.
This means if you cancel the policy later on, the insurance company no longer needs to keep the reserve to fund the policy in the later years. So it will refund to you the overpayment of premiums, called the cash surrender value.
Instead of taking back the refund, you can choose other options, like using the cash to buy a reduced amount of insurance or buy extended term insurance (keeps the coverage the same, but reduces the length of the policy).
Participating whole life
Participating whole life (Par) insurance lets you participate in the success of the insurance company.
This means part of the premium goes into an account invested by the insurance company. If investment returns are good, the insurance company will pay the policy owner a dividend.
The dividend is unique in that it’s not just based on the investment return but also depends on the claims experience of the insurance company.
The most popular option is to use the dividend to buy more insurance. That way, you’re increasing your death benefit without having to qualify for it through underwriting. It’s also the most tax-efficient method of using the dividend.
You can also use the dividend to:
- Reduce premiums,
- Put it on deposit to earn interest,
- Buy extra term insurance, or
- Cash it out.
Par is a popular permanent life insurance product because of the lengthy history of dividend payments by many Canadian insurance companies. Some of them have paid dividends every year for over 100 years, even through the Great Depression, world wars, the Great Recession, and other financial crises.
The dividend accumulated inside the policy will grow to a significant amount over the years. There are several tax-efficient ways you can access the cash value to supplement your retirement.
Term-to-100
Term-to-100 is similar to whole life, except you don’t get anything back if you cancel your policy. That makes it a lot like term insurance, where you also don’t get anything back if you cancel the policy.
That’s also why term-to-100 is slightly more affordable than whole life insurance.
Like all the other permanent products on this page, you don’t have to pay any premiums past age 100.
Universal life
Universal life (UL) insurance is another type of permanent insurance with a tax-sheltered investment component.
While the investment and insurance components of Par are bundled, they are unbundled with UL. That means you get to choose your investments inside a UL policy.
You have more control over both the premium and the investment. You can even take a break from paying premiums and shuffle the cash from the investment portion to pay the premium.
Here’s how it works. You pay the insurance company a specified amount. Each month, the insurance company takes out money to cover the cost of insurance. The money left over goes into the investment account and earns a tax-sheltered return. You can choose an affordable cost of insurance option so that more of your money goes into the investment.
As for the investments, you can choose the safety of a daily interest account or be more aggressive and go with an account based on the performance of an equity index. What investment mix you choose will be based on your financial goals and risk tolerance.
It’s important to note that investments within a UL policy are not guaranteed and depending on your option, will experience the same turbulence as the stock market. It is generally better to max out your RRSP and TFSA before considering investing in a UL policy.
Here are some blog posts about permanent life insurance you want to check out:
Permanent life insurance: 5 most common uses
Term vs permanent life insurance: Which should you choose?
Joint last-to-die life insurance: Pros and cons
To get a quote for permanent life insurance, use the tool on the right (or bottom, if you’re on your phone) of the page. Enter your date of birth, gender, and smoking status and your preferred permanent product.
If permanent life insurance is not right for you, you can check out term life insurance.
