Two types of life insurance: term and permanent
Term life insurance – basic coverage within a preset time period
Term life insurance is the simplest and usually the least expensive form of life insurance. It's designed to pay out if you die within a certain period of time (e.g. 5, 10, 30 years), so it's used to cover peak expense years while your debt loads are greatest. If you die within the term covered by the policy, the face value of the life insurance policy is paid to the survivor. However, if your insurance term expires and you’ve not renewed the policy, no benefits are paid.
Term life insurance can be purchased several ways, including:
- Level term insurance, where the coverage remains the same throughout the term of the insurance policy. Rates are guaranteed, but increase at term renewals.
- Decreasing term life insurance, which provides coverage to pay off a mortgage in the event of your death. The value of the policy reduces over time in line with the decreasing value of the mortgage, but your premiums remain the same.
Permanent insurance – lifelong protection and asset value
Permanent insurance is lifetime protection designed to pay a benefit when you die, whenever that may be. In other words, there is no specific term or timeline attached to the policy.
Permanent insurance is based on level premiums, determined by your age, health and lifestyle when the policy is written – the younger and healthier you are, the lower the premium.
This type of policy also has an investment aspect. The premiums, which are typically higher than term policies, are used to build up a policy reserve – or "cash value" – that grows tax-deferred, and which can be drawn upon when needed. There are two main types of permanent life insurance:
- Whole life insurance, which has the potential for earning policy owner dividends.
- Universal life insurance, which is fully customizable and is ideal for people who wish to actively manage their life insurance policy and want premium payment flexibility.
Which is right for you – term or permanent?
Term life insurance is usually the more affordable and much simpler. It also fills a temporary need – coverage for your dependents – which may no longer be as critical once your children are on their own and you have enough saved for retirement.
The downside is that term life insurance expires. If you find that you still need life insurance at the end of the term, it may be difficult and quite expensive to secure another policy. If you outlive your policy (or cancel it) you get nothing in return for the premiums you've paid over the years – much like the insurance you pay on a home or car.
Some term policies, however, have the option for conversion to a permanent policy. The ability to convert can expire as early as age 65 or 70, so it's important to understand your options when you purchase or renew.
Permanent insurance policies are more expensive, but provide persistent value and can enhance your overall wealth protection strategy. The cash reserve that builds up over the years is one strategy for supplementing retirement savings. These policies can also play an important role in estate planning – particularly for larger estates that could be subject to significant capital gains tax. The payout of this policy is tax-free, and could be used to cover the tax burden from the rest of the estate.
Permanent policies never expire as long as premium payments are maintained. This means that you know you'll have something to leave behind for your heirs.
The right advice makes all the difference
Everyone's personal situation and financial circumstances are unique. The best approach is to discuss your needs with a BlueShore Wealth insurance advisor (a subsidiary of BlueShore Financial). They'll recommend solutions specifically designed for you, and will source the best policy at the most competitive price from leading Canadian insurance companies.