What is permanent life insurance?
Permanent life insurance offers lifelong coverage — as long as you keep up your premiums. It’s a life insurance policy and often an investment product rolled into one. It pays out a lump sum to your beneficiaries when you die, and usually has a savings component known as the “cash surrender value” (CSV).
Canada has a unique permanent life insurance option, “term to 100” (sometimes called Term 100 or T100), which does not usually include cash value. Because there is no investment component, the premiums are cheaper than other permanent life policies.
How does permanent life insurance work?
When you pay your monthly or annual premiums, typically a portion will go towards the death benefit and another portion goes to the cash value of your policy. Think of the cash value as a tax-deferred savings account. The amount of money that goes into this account varies by policy, and it earns interest over time.
Once you build up enough cash value, you may have the option to take out loans against your policy, use the funds to pay for premiums, boost the death benefit or save for retirement. Make sure to read through your policy carefully, because some policies require that you use the entire portion of your cash value while you’re alive, or else it won’t get payed out to your beneficiaries along with the death benefit once you die.
Different types of permanent life insurance plans
All of the following permanent policies last your entire life and most accumulate cash value. But they vary in terms of how the cash value grows:
- Whole life. The simplest permanent policy, whole life insurance earns a fixed rate of return set by your insurer.
- Universal life. With universal life insurance the cash value is tied to a stock index, and earns interest based on the current market rate. Since it’s subject to market conditions, the returns may fluctuate over time.
- Variable life. This policy offers the highest potential returns, but it’s risky. When you sign up for variable life insurance, you’ll be given a portfolio of stocks, bonds and mutual funds to align with your risk tolerance. The cash value will be invested into those accounts and may be professionally managed by your insurer.
- Variable universal life insurance. This hybrid policy tends to offer flexible premiums and the ability to invest your cash value in the investments of your choice. If those investments do well, there’s potential to earn significant returns. But if they perform poorly, you could face losses. This type of life insurance requires a hands-on approach, so it’s best suited to experienced investors with a high risk tolerance.
- Term to 100. This insurance product is unique to Canada. It provides coverage for your entire life, although you’ll stop paying premiums after you turn 100 years old. Unlike other permanent policies, this option does not usually include any invested cash value component. Therefore, term to 100 is generally cheaper than the other types of permanent policies.
The terminology can vary…
It’s important to realize that this is just one way to breakdown permanent life insurance options. Some insurance companies may define these policies differently or include any combination of features in the policies they offer. This list should still give you a good starting point to learn the types of permanent policies generally available, and help you decide what options may be right for you.
Pros and cons of permanent life insurance
- Lifelong protection. As long as you pay your premiums, you’ll have coverage your entire life — and your beneficiaries will receive a death benefit whenever you die.
- Cash asset. Most permanent policies accumulate cash value over time. When you reach a certain threshold, you can access that cash and spend or invest it.
- Tax advantages. The cash value grows tax-deferred, and your beneficiaries receive a tax-free death benefit.
- Flexible premiums. Many permanent policies allow you to adjust the amount and frequency of your premium payments.
- Collateral against a loan. If you take out a loan, your lender can guarantee the loan with the cash value of your policy.
- Expensive. A permanent policy can be four times more expensive than a temporary term life insurance policy when you’re younger. However, as you grow older term life becomes drastically more expensive than permanent.
- Risky investment. Though permanent policies build cash value, the investment options are limited with relatively low rates of return. If investing is your priority, you might be better off investing in a mutual fund, RRSP or TFSA.
- Depleting cash value. If you take out too many loans against your policy, there’s a chance you might deplete your cash value to the point where you lose your coverage.
Is permanent life insurance right for me?
For the average person, a term life insurance policy makes the most sense. But permanent life insurance might be the best option for those with complex financial needs, such as:
- High income earners who have maxed out their RRSP, TFSA and other retirement accounts, and want to use their life insurance policy to build tax-deferred savings.
- High net worth individuals who want to leave a tax-free inheritance so their children can avoid paying hefty estate taxes.
- Parents with lifelong dependents, such as special needs children.
Most permanent policies are a two-in-one product: They offer lifelong coverage and the opportunity to invest. While the forced savings vehicle works well for some people, this type of life insurance is expensive to maintain — and it isn’t always a sound investment.
Whether you’re in the market for a permanent policy or a simpler term life insurance policy, be sure to compare providers and learn more about what life insurance options are available.
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