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Choosing the right life insurance policy is one of the most important financial decisions you’ll make, but it often comes with a tough question: Should you go for term or permanent life insurance? Both types have their unique features, benefits, and drawbacks, and understanding them is key to making the right choice for your needs.
In this post, we’ll demystify the differences between term life insurance—a cost-effective option for temporary coverage—and permanent life insurance, which provides lifelong protection and potential cash value. We’ll delve into the pros and cons of each type, helping you weigh affordability, flexibility, and long-term benefits.
By the end, we’ll settle the debate once and for all, helping you determine which type of life insurance is most suitable for you, based on your financial goals and personal circumstances. Let’s dive in and uncover which policy aligns best with your life plan.
- Key takeaways:
- Term life insurance provides temporary coverage for a set period, while permanent life insurance offers lifelong protection and may include a cash value component.
- Term life insurance is ideal for covering short-term financial obligations, such as mortgages, raising children, or business loans. Permanent life insurance is better suited for estate planning, wealth transfer, or tax-sheltered savings.
- For some people, a mix of term and permanent life insurance provides comprehensive coverage that balances affordability and long-term benefits.
What Is Term Life Insurance?
Term life insurance provides coverage for a specific period, such as 10, 20, or 30 years. If the insured person passes away during the term, the designated beneficiaries receive a tax-free death benefit.
However, if the term expires and the insured person is still alive, the policy ends without any payout. Term life insurance is straightforward, offering pure protection without the cash value or investment component found in permanent policies.
Who is term life insurance for?
Term life insurance is ideal for individuals with temporary financial needs or specific responsibilities, such as:
- Covering loans: People with mortgages or business loans.
- Families on a budget: Those who would face financial hardship if one parent passed away.
- Families with young children: Parents who want to provide for their children until they reach adulthood.
- Business partners: Protecting against the financial risk of losing a key partner.
- Couples nearing retirement: Those with a mortgage or insufficient retirement savings.
- Supporting dependents: Caregivers financially responsible for elderly parents or disabled siblings.
How much does term life insurance cost?
Term life insurance offers a fixed and guaranteed premium for the initial term, making it budget-friendly. For instance, a 20-year term policy will have a set cost for the first 20 years.
However, after the initial term, the premiums significantly increase. This is because insurance companies assess risk based on age. As you get older, your risk of mortality increases, leading to higher premiums.
Below is an example of monthly premiums for a 20-year term life insurance policy with a $500,000 death benefit. Rates are for the first 20 years for male and female non-smokers at different ages at purchase.
Age | Male | Female |
|---|---|---|
25 | $30 | $20 |
30 | $30 | $22 |
35 | $32 | $23 |
40 | $45 | $34 |
45 | $72 | $52 |
50 | $123 | $83 |
55 | $214 | $153 |
60 | $403 | $281 |
65 | $678 | $474 |
Note: These are approximate rates and may vary by individual factors, policy specifics, and insurance provider.
What are the pros and cons of term life insurance?
- Pros:
- Affordable: You can get a large death benefit for a few dollars per month.
- Simple: It is easy to manage and understand.
- Flexible: Choose the term length and death benefit amount that suits your needs.
- Tax advantage: The death benefit is tax-free.
- Convertible: If your needs change, you have the option to convert a term policy to permanent insurance without medical evidence.
- Cons:
- Long-term costs: Term renewals become very expensive after the initial term.
- Expiration: Policies often expire without a death benefit being paid.
- No cash value: You don’t get anything back if the policy expires.
What Is Permanent Life Insurance?
Permanent life insurance provides lifelong coverage and guarantees a death benefit payout to beneficiaries, regardless of when the insured person passes away. There are several permanent life insurance plans, each tailored to specific needs:
- Term-100: Similar to term life insurance but never expires. It offers level premiums for life but does not include a cash value component, making it a straightforward option for those who want lifelong coverage without the complexity of investments.
- Whole life: Combines lifelong protection with a cash value component that grows over time on a tax-deferred basis. The cash value can be accessed during the policyholder’s lifetime, serving as a financial asset.
- Universal life: Offers more flexibility, allowing policyholders to adjust premiums and death benefits. It also includes an optional investment component where the cash value grows tax-sheltered and can be tailored to match risk tolerance.
These features make some permanent life insurance policies a hybrid of insurance and investment.
Who is permanent life insurance for?
Permanent life insurance is ideal for individuals with long-term financial or estate planning needs, such as:
- Covering final expenses: Ensuring funds are available for funeral and end-of-life costs.
- High-net-worth individuals and private corporations: Using it as a tax-efficient savings tool to grow wealth.
- Estate preservation: Mitigating large tax liabilities at death due to unrealized capital gains, RRSPs, or RRIFs.
- Charitable giving: Leveraging the death benefit to leave a legacy for charities.
- Wealth transfer: Facilitating wealth transfer to children or grandchildren.
- Children: Parents purchasing policies for their children to build wealth and ensure their insurability in the future.
How much does permanent life insurance cost?
Permanent life insurance is generally more expensive than term life insurance due to its lifelong coverage and potential cash value growth. Costs vary by type:
- Term-100: Offers the most affordable permanent option with premiums level until age 100, but lacks cash value.
- Whole life: Higher premiums since it has guaranteed cash value and the potential for dividends to increase both the death benefit and cash value over time.
- Universal life: Some policies offer a level premium similar to a term-100 policy. Others, like yearly renewable term, have premiums that increase annually, starting low but gradually rising over time. Any deposit exceeding the minimum required premium contributes to the tax-sheltered cash value within the policy.
Below is a sample of monthly premiums for $500,000 term-100 coverage for male and female non-smokers:
Age | Male | Female |
|---|---|---|
25 | $204 | $171 |
30 | $246 | $207 |
35 | $307 | $263 |
40 | $386 | $331 |
45 | $479 | $414 |
50 | $571 | $499 |
55 | $753 | $628 |
60 | $1,005 | $826 |
65 | $1,338 | $1,136 |
Note: Rates may vary by insurer and policy features.
What are the pros and cons of permanent life insurance?
- Pros:
- Guaranteed payout: Ensures a payout since everyone passes away eventually.
- Cost certainty: Premiums are guaranteed until age 100.
- Flexible: Choose the type of plan, death benefit, payment period, and investment options.
- Tax advantages: Tax-free death benefit and tax-sheltered cash value growth, ideal for a high-income earner or someone who has maxed out their RRSPs and TFSAs.
- Cash value access: Some policies allow tax-free access to cash value.
- Cons:
- Cost: Most permanent life insurance is significantly more expensive than term life.
- Complex: The structure and options of some permanent life insurance plans can be difficult to understand.
- Ongoing monitoring: Policies, especially those with investments, require active management.
Is Term Or Permanent Life Insurance Right For You?
Choosing between term life insurance and permanent life insurance—or even deciding whether you need both—depends on your unique circumstances and financial goals. The purpose for buying life insurance, your budget, and your long-term needs all play a crucial role in determining the best solution for you.
Here’s a table which should help you decide whether you should get term or permanent life insurance.
Comparison table: When to choose term vs permanent life insurance
Scenario | Term life insurance | Permanent life insurance |
|---|---|---|
You need a substantial amount of affordable life insurance to financially protect your family and replace your income in the event of your death, ensuring they can maintain their current lifestyle. | ||
You want to cover a specific debt like a mortgage or business loan so it doesn’t become a burden for survivors. | ||
You’re on a tight budget and need coverage while your children are young.
| ||
You want lifelong coverage to ensure funds for final expenses. | ||
You’re a high-income earner looking for tax-sheltered growth or a wealth-building tool. | ||
You’re concerned about a significant tax burden on your estate due to capital gains, RRSPs, or RRIFs, and aim to protect your assets for future generations. | ||
You want to make a charitable donation or transfer wealth to your heirs tax-efficiently. | ||
You want to ensure your child has life insurance coverage, even if they develop a health condition that makes them uninsurable later in life. Additionally, you may want to build cash value that they can access for future needs. |
Why it might make sense to get both
Often, it’s not an either-or decision. For instance, you might have both short-term and long-term life insurance needs. In these situations, a combination of term and permanent life insurance can provide comprehensive coverage tailored to your specific requirements. For example:
- Protecting your family: You might need a large term policy while your children are young, but also a smaller permanent policy to cover final expenses later in life.
- Wealth building: If you’re a high-income earner, permanent life insurance can act as a tax-efficient savings vehicle while term insurance provides affordable, high-value coverage during peak earning years.
Remember, the best approach depends on your financial goals, responsibilities, and the advice of a qualified insurance advisor. Combining policies can provide the flexibility and security to address both immediate and long-term needs effectively.
Examples of when term or permanent life insurance—or both—are most suitable
1. Term insurance only: Protecting a young family on a budget
A 40-year-old married couple with two young children and a $400,000 mortgage earns a combined income of $150,000. Their primary goal is to protect their family financially if one parent passes away. Term life insurance is the most suitable option for them because:
- It provides affordable coverage to pay off the mortgage and replace income during their working years.
- It covers them until their children are financially independent or they reach retirement.
- Their tight budget and high living expenses make permanent life insurance unaffordable.
- They have not yet maximized their RRSP or TFSA contributions, meaning they cannot fully leverage the tax advantages of permanent policies.
Solution: A 20- or 25-year term insurance policy on each person ensures the couple gets the protection they need at a low cost.
2. Both term and permanent life insurance: Combining protection and wealth-building
A 50-year-old professional in the top tax bracket has maximized his RRSP and TFSA contributions. He is seeking another tax-efficient savings vehicle since his marginal tax rate is over 50%. With dependents and a $1,000,000 mortgage, he requires both immediate and long-term solutions:
- Term life insurance: Covers the mortgage and provides income replacement to protect his family while the debt exists.
- Permanent life insurance: Offers a tax-sheltered way to grow wealth for retirement and provide a legacy for his children.
Solution: A 15-year term policy covers the mortgage and provides income protection, while a permanent insurance policy builds cash value over time for retirement or estate planning. The combination ensures financial flexibility and maximizes tax efficiency.
3. Permanent insurance only: Estate preservation for retirees
A recently retired couple, both aged 65, has a large RRSP and significant unrealized capital gains from their investment portfolios and rental properties. Their projected tax liability at this moment is $500,000, expected to rise to $2,000,000 by life expectancy. Since term insurance will likely expire before death, permanent life insurance is the better solution:
- It provides lifelong coverage with an increasing death benefit to match the growing tax liability.
- A joint last-to-die policy ensures a payout only after both spouses pass, keeping costs low.
Solution: A permanent life insurance policy like whole or universal life with an increasing death benefit ensures their heirs won’t have to liquidate assets to cover taxes, preserving the estate.
Frequently Asked Questions
What is the main difference between term and permanent life insurance?
Term life insurance covers you for a set period, like 10 or 20 years, while permanent life insurance provides lifelong coverage and may include cash value.
Which is cheaper, term or permanent life insurance?
Term life insurance offers significantly lower premiums than permanent life insurance for the same death benefit, especially during the initial term.
However, renewing a term policy after the initial period can lead to substantially higher premiums, potentially exceeding the long-term cost of a permanent life insurance policy.
Can you convert term life insurance to permanent?
Yes, many term policies allow conversion to permanent life insurance without a medical exam.
How do you decide which type of life insurance is right for you?
The right type of life insurance—term or permanent—depends on your financial goals, budget, and needs. Consult an insurance advisor for a tailored recommendation.
Your Guide To Choosing Term, Permanent, Or Both
The right life insurance policy depends on your unique personal and financial circumstances. As illustrated in the scenarios, term life insurance is ideal for temporary needs like protecting dependents or covering a mortgage, while permanent life insurance is better suited for estate planning, wealth-building, and addressing lifelong needs. Often, a combination of both types provides the most comprehensive solution, ensuring both immediate and long-term financial security.
To find the best insurance solution for your needs, we invite you to reach out for a free, no-obligation consultation. Email us at info@briansoinsurance.com or call us at 604-928-1628. We provide personalized comparisons with other insurance companies to ensure you get the best coverage. Beyond securing your policy, we offer ongoing support to help your insurance align with your evolving financial and personal goals.
In addition to life insurance, we can design a complete insurance solution, including term and permanent life insurance, disability insurance, health & dental coverage, and critical illness insurance. Alternatively, use the form below to request a quote, and we’ll deliver it straight to your inbox. Let’s work together to protect what matters most to you.
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While we make every effort to keep our site updated, please be aware that timely information on this page, such as quote estimates, or pertinent details about companies, may only be accurate as of its last edit day. Brian So Insurance and its representatives do not give legal or tax advice. Please consult your own legal or tax adviser. This post is a brief summary for indicative purposes only. It does not include all terms, conditions, limitations, exclusions, and other provisions of the policies described, some of which may be material to the policy selection. Please refer to the actual policy documents for complete details which can be provided upon request. In case of any discrepancy, the language in the actual policy documents will prevail. A.M. Best financial strength ratings displayed are not a warranty of a company’s financial strength and ability to meet its obligations to policyholders.
