When it comes to life insurance, everyone's situation is different. There is no cookie cutter solution.
In the life insurance industry, there are two main types of life insurance: term and permanent.
For some people, a term insurance or permanent insurance policy on its own is enough.
For others, combining term and permanent is a better option.
There are also different reasons why Canadians buy life insurance.
For some, they want to protect their family or their business.
For others, they want to make sure they leave something behind for their children.
So how do you know what's right for you?
I've put together a list of common questions below, which breaks down everything you need to know about both types of insurance. After reading this, you'll have an idea of which type of insurance is a better option for you - or maybe both!
What is it for?
Term
Temporary coverage from the financial impact of death.
Permanent
Lifelong coverage from the financial impact of death.
Combining coverage with tax-preferred cash value growth.
Estate planning.
Who is it for?
Term
Young families and homeowners with a mortgage.
Business owners.
Permanent
Adults with a long-term perspective.
People who already make full use of registered investments like a TFSA or RRSP.
What Are the Advantages?
Term
Initially inexpensive if you're young (especially less than 40 years of age).
Can buy a ton of coverage.
Simple concept.
Permanent
Lifetime coverage continues even if your health fails.
The cost is guaranteed to never go up.
Later in life, it's cheaper than term insurance.
Provides tax-preferred cash value growth opportunities for people whose RRSPs & TFSAs are topped up.
You can cash in or borrow against its accumulated value.
When is it most cost-effective?
Term
When you're young.
When you only need temporary coverage (Example: until your mortgage is paid off, or until your children are no longer financially dependent)
Permanent
Later in life.
When you have built up cash value in the policy.
When you have a sizeable estate to pass along to heirs or charities.
If you're in a higher tax bracket.
Can you convert it to the other type of insurance?
Term
Yes.
Permanent
No.
Can it supplement the insurance you have With work?
Term
Yes.
Permanent
Yes.
Things to Consider...
Term
Rising mortgage consumer debt.
Adult children are financially dependent on parents longer than ever, perhaps even after your policy expires.
Permanent
The trend toward increased longevity makes this an increasingly attractive option b/c coverage is lifelong, not temporary.
Lastly, I will leave you with two common scenarios. One where a term insurance policy would be a great option, and one where a permanent insurance policy would be a great option.
Term Insurance Scenario:
John, 32, and Mary, 29, own a home and an investment property. They have a mortgage on each of those properties, totalling about $1,400,000. They both work full-time, and have two kids: an 1-year old and a 3-year old. They plan on sending their children to a post-secondary institution.
In this scenario, John and Mary might purchase a term insurance policy to cover both mortgages, as well as the future cost of post-secondary education for their kids. They decide to purchase a 25-year term insurance policy for $1,600,000.
When the policy expires, their children will be 26, and 28, respectively, meaning they will most likely no longer be financially dependent on their parents. They also make the assumption that both mortgages will be paid off.
Permanent Insurance Scenario:
Rick, 28, and Sarah, 26, have both recently begun their careers as health professionals. Their combined household income is $300,000, which puts them into a high tax bracket. They regularly invest into their TFSA and RRSPs, and want to utilize the tax-deferred benefits of a permanent insurance policy, while making sure that they leave their future children with a tax-break on any inheritance(s).
Rick and Sarah each purchase a $120,000 permanent insurance policy for themselves. They also decide that they would like to pay off their permanent policy in 20 years.
At 48, and 46 respectively, Rick and Sarah will have fully paid off their policy, and will continue to receive annual dividends permitted to them by their insurance company's policy until they pass away.
At this point, you should be a bit more comfortable with what type of insurance is a good fit for you!
As an independent broker, I can not only create a customized solution that fits your lifestyle, but I can also compare options from multiple insurance companies to ensure you're getting the most competitive options in the market!
You are always welcome to give me a call or send me a text at 647-393-3474.
Thanks for reading!
Best,
Dan
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