Term versus permanent: what type of life insurance do I need?

Deciding to get life insurance is a big choice, made even bigger by the fact that there isn’t just one uniform type to choose from. The one you’ll need will depend on your circumstances and what, exactly, you want your life insurance to achieve for your loved ones once you’re gone.

While there are different types of life insurance and different ways to acquire them (e.g. through an employer group plan or an individual plan), each one falls under one of two umbrellas: term life insurance and permanent life insurance.

Let’s break down what each type is all about and who they’re best intended for.

Term life insurance

Term life insurance provides temporary protection, as the name indicates, for a certain period of time or “term.” A term life insurance policy can last  anywhere from 10 to 100 years and is usually purchased during someone’s younger years. Canadians owned $4.7 trillion of life insurance protection at the end of 2017, according to the Canadian Life and Health Insurance Association (CLHIA). And individual term life insurance represented 37% of that total.

If the insured person happens to die within the term, then the beneficiaries will receive a tax-free death benefit associated with that policy. If you don’t die within the specified term, you can renew your policy. Be aware, though, that if you go to renew, say, 15 years from now, it’s likely that you’ll face an increase in premiums, since they’re determined largely based on your health and age. 

Term life insurance policies are a good option for people who want to protect their family from financial loss in the short-term. Someone, for example, who wants temporary protection for their loved ones, say, in order to cover the costs of an outstanding mortgage or loan. Term policies are generally less expensive and more flexible than permanent life policies, too, since the coverage is, in a way, being loaned to you and only intended for a specified window of time.

Permanent life insurance

Permanent life insurance, on the other hand, provides the policyholder with lifelong coverage. When you purchase permanent life insurance, such as whole or universal, coverage is effective until the day the policyholder dies — and there’s no renewal necessary. Of the $4.7 trillion worth of life insurance that Canadians owned at the end of 2017, 11% was individual whole life, and 13% was individual universal life.

The nice thing about some permanent life insurance plans is that they allow the policyholder to accumulate a cash value over time, which they can borrow against the policy in the form of a loan, for instance. This would reduce the death benefit, however, in the event that the policyholder dies before the loan is repaid. The cash value can also be used to pay policy premiums.

The nice thing about permanent life insurance is that your premiums stay the same over time, and it’s an asset that you own. Permanent life insurance policies are usually intended to cover things like funeral and estate expenses, as well as income loss, after the policyholder dies. 

Which one is best for me?

Because Canadians tend to be on the underinsured side when it comes to life insurance, it’s important to ask questions so you can find out how much coverage you’ll actually need, and what type of coverage is best. You can do this by speaking with a life insurance advisor, a financial planner, and just by doing some general research yourself. 

A 2017 study from Edward Jones found that only 16% of Canadians had a life insurance policy that could pay off the remainder of their mortgage. Generally speaking, an appropriate amount of life insurance should be enough to cover funeral costs, pay off any outstanding debts (including your mortgage), and replace your income (ideally) until you would have retired. If there are kids left behind, you might also want enough life insurance to help pay for their education.

In order to find out how much life insurance you’ll need and what type, do some research online about term and permanent life insurance policies, compare quotes for each, and ask your advisor every question you can think of. Only when you’re well-informed can you make a decision that will give you peace of mind knowing your loved ones are protected