Term vs Permanent Insurance: Two Types of Life Insurance

The Difference Between Term vs Permanent Insurance

In my experience when helping clients, one of the first questions people ask about life insurance is, “what is the difference between term vs permanent insurance?” Now, in truth the question doesn’t always sound exactly the same. People could be asking what different types of life insurance are there,  what is whole life or universal life, does term insurance have a cash value, etc.  In the end the question is ultimately the same. People need to understand the difference between term vs permanent insurance. This article will try and show you the difference in very basic language between term insurance and your two main permanent life insurance options.

Type of Life Insurance: Term Life Insurance

Term life insurance is simply the rental cost of life insurance for a set period of time, or your term number of years. Term insurance is like renting your risk coverage for 10, 20 or even 30 years. You are not trying to create a life long insurance plan or have investments/cash values growing inside your policy.

Term life insurance is the least expensive type of life insurance in Canada today. The cost for different term insurances varies based on the number of years you want to lock in the benefit. The longer the lock in the more expensive the premium is today. Paying a little more in premium today is usually less costly than taking a high renewal rate that can triple or quadruple your premium in 10 short years. The other factors for cost are your age when you buy it and your lifestyle choices. The younger you are the less expensive. If you chose to smoke or do a highly risk job, you will have to pay more.

Term insurance rates in Canada have been coming down over the last decade and it is very cost effective to get a large amount of coverage with premiums locked in for 20 or even 30 years. If you have an old term insurance policy it might be good to look at your options to renew that plan. Even though you are older the premium for a new plan could be the same or less because of term life insurance cost reductions in Canada.

Type of Life Insurance: Permanent Life Insurance

Permanent life insurance comes in two main products; universal life insurance and whole life insurance. There is one fundamental difference that both permanent life insurance plans do for you over term insurance. They “buy” you the underlying death benefit vs just renting the risk protection for a certain number of years. Even though universal life and whole life insurance do these things differently, they will in the end help you own a large tax free cash benefit for your heirs or estate.

Universal Life: Type of Life Insurance

A universal life insurance plan is permanent life insurance that allows you to plan the pure “rental” cost of your life insurance for the rest of your life and investment additional money into a self directed, tax sheltered, investment portfolio inside the plan. Simply, if your investments inside your life insurance do well over the course of your life, then the growth of money will ultimately help you pay less for your life insurance. There is risk to this plan, along with the upside rewards. If your investments do poorly over your life, then you might have to pay more for your life insurance than you originally planned. There is a clear risk/reward relationship when designing a universal life insurance policy.

You will also have to manage your investments over the course of your life. Very much like a mutual fund portfolio, you will have chose your investments, rebalance them over time, and change your idk profile as your life and needs change. It is not a simple plan to manage over your life, but can be highly beneficial if managed properly because the growth of your investments inside the life insurance policy grow tax sheltered.  

Whole Life: Type of Life Insurance

Whole life insurance is vey different from universal life. It is a fully guaranteed product with all the risk of the market’s returns put onto the shoulders of the insurance company.  You might expect, the plan is designed much more conservatively. Insurance companies take a very long term view on how to invest the money because their clients are investing into a plan the might hold for 30, 40, 50 or more years. Msg mutual fund companies talk about the long term horizon, but if they haven’t delivered profits to their investors in 4-5 years they will lose lots of clients.

When you enter into a whole life policy contract, you know you are investing in a plan that has been successfully managed for many, many years (Canada Life has been paying dividends on their whole life policy for 140 years continuously). Policy holders who cash out their policies before they die will not see nearly much return on their investment as those who allow the ultimate death benefit to pay out. This is where a whole life insurance policy really provides a high rate of return for your investment.

Term vs Permanent Insurance Summary

In summary, the main difference between term vs permanent insurance is that one is designed to “rent” you risk protection for a low price for a certain number of years while permanent life insurance will “buy” you the death benefit for the rest of your life.

Universal life gives you a self directed investment plan with all the risk and rewards of the markets inside your permanent life insurance policy.  Whole life insurance gives you a set it and forget it guaranteed insurance plan with stable and predictable returns over your life. You would chose the permanent life insurance plan the most suits your investment style and comfort with risk

At Life Guard Insurance we offer all types of life insurance from all the major Canadian life insurance companies. We would be happy to show you the difference between term vs permanent insurance and advise you on the best plan today for your current situation.

The article was written by Mitch Reynolds+. If you found this article interesting or it made you think, please feel free to share your comments below. Liking us on Facebook, giving us a +1 on Google or Tweeting this article about term vs permanent insurance would also be very much appreciated.

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