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How we make buying life insurance easier

So, you’re thinking about buying life insurance. Awesome. 

Before you jump into buying a policy, we recommend doing some research — spend some time thinking about your needs and see what kind of products are available on the market.  

This page explores the ins and outs of permanent life insurance. We’ll try to answer the most frequently asked questions about this multi-purpose financial product, which can be used to combine the benefits of equity investing and life insurance. 

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What is permanent life insurance?

Permanent life insurance offers coverage that lasts your whole life.

Permanent policies also have an investment component, which you can leverage while you’re still alive. And while the premiums for permanent life insurance cost more, they'll never increase — guaranteed.

The two subtypes of permanent life insurance are universal and whole life insurance.

What makes permanent life insurance different from other policies?

There are two basic types of life insurance policies: permanent and term. 

Insurance agents liken the difference to owning versus renting a house. 

After many years of paying premiums, you’ll eventually own your permanent life insurance policy — meaning, by the time you’re retired, you won’t need to make payments at all. And you’ll still be insured.

A portion of each payment goes into a savings account that pays interest (and dividends, if you want it to). This savings account is what is referred to as the policy’s ‘cash value’.  That’s why permanent insurance can cost upwards of $100 a month, even if you’re young and healthy. Some policies let you make extra payments so you can pay off your policy sooner.

On the other hand, term insurance only covers you for the duration of the term, which is typically sold in denominations of 10, 15, 20, or 30 years (policies that offer coverages until age 65, 70, and 100 also exist). When the term ends, the policy is automatically renewed up until about age 65, at which point your coverage ends. 

Permanent insurance offers coverage until age 100 and has a cash value — meaning that a portion of your payments goes into a savings account that pays interest.
   
Policyholders can tap into this cash value by borrowing against the policy. Unlike a bank loan, you’re not obligated to pay your insurer back. And this type of loan is tax-free. However, doing this will reduce the size of your death benefit. Your insurer may also have restrictions on how soon you can access its cash value. In many cases, insurers make you wait years before you can withdraw from it (you have to let the cash value build) and may charge you fees for borrowing prematurely. 

As a holder of a permanent policy, living beyond 100 years entitles you to money back, since you own the policy. 

Different types of permanent life insurance

Whole life and universal life are the two subtypes of permanent life insurance. Here’s a quick rundown of each one: 

Whole life

  • The premiums are level for the lifespan of the policy.
  • The premiums are fixed and cannot be increased or decreased.
  • The policy has a cash value.
  • The investment component is managed by the insurer.
  • The policy is fully guaranteed and cannot be altered by the insurance company.
  • Interest on the policy’s cash value is adjusted annually.

Universal life

  • The policy has a cash value.
  • Premiums are flexible. Plus, you can take a holiday (of sorts) from making payments. When you skip a month, the insurance company will take the money out of your policy’s cash value, as long as the cash accumulated is enough to cover your premium. 
  • Interest on cash values is adjusted monthly, so in times of rising interest rates, the cash value of the universal policy will accumulate faster. 
  • Policyholders are allowed to be involved in the management of the investment component. 

Who should get permanent life insurance?

You want to invest and build wealth

The fact you can use the cash value to invest in equities makes it an attractive retirement savings tool for many investors. 

Life insurance companies are experts at hedging against risk, so using permanent insurance as an investment is generally considered to be lower risk. A 2015 study by Consumer Reports found that the average rate of return for permanent life insurance was between 2% and 3% a year — realistic and sustainable numbers.

A financial advisor can help you decide whether a life insurance policy could help you reach your investment goals. 

 

You have children or grandchildren

Permanent life insurance is often marketed as a way to help secure a child’s financial future, making it popular with both parents and grandparents. Here’s why:

  • It guarantees that the child will never be turned down for coverage if they develop a health issue in the future.
  • The premiums on a child’s policy are much lower than what an adult would pay. 
  • Children have the advantage of time: with a long investment horizon, the child’s cash value could reach seven figures by the time they embark on post-secondary education and worth millions as they near retirement age. 

A person who waits until age 30 to buy permanent insurance most likely will never see the same returns as a person who has been invested since birth. 

 

You have a major tax liability

If you own property when you die, your beneficiaries — most likely your spouse or your children — will be responsible for property tax on it. But if you had a permanent life insurance policy, your beneficiaries will have the option of drawing down on your policy’s now-substantial cash value to pay the tax. Now, your beneficiaries can wait until conditions are at their most favourable to offload the property. 

 

You want to leave your estate to charity 

Some people hate the idea of the government getting a chunk of their estate after they die. If this sounds like you, a permanent life policy could be the right product for you. 

Giving to charity is a time-honoured way to shelter money from taxes. You can do this by leaving your policy’s cash value to a charitable organization in your will. 

How much does permanent life insurance cost in Canada?

Comparing quotes is a good way to quickly see what several different insurers can offer you. Here are a few example quotes for permanent life insurance:

Whole life, female, 30, non-smoker 
$400,000 benefit, non-participating
$185.22 / month
$2,058 / year
Universal life, female, 30, non-smoker 
$400,000 benefit, non-participating
$170.33 / month
$2,044 / year
Whole life, male, 30, non-smoker 
$400,000 benefit, non-participating
$207.54 / month
$2,306 / year
Universal life, male, 30, non-smoker
$400,000 benefit, non-participating
$191.33 / month
$2,296 / year

Just remember, the quotes on our site are conditional on the results of your medical exam. 

When you apply for a free quote, it’s assumed your risk level is standard for your age, gender, and your status as a smoker or non-smoker. However, your actual risk level could be different. Here's what to expect during the medical exam.

First, the insurance company will ask about your habits. You can expect to get asked about any current or previous recreational drug use and whether you have any high-risk hobbies (think skydiving, scuba diving or rock climbing). 

Next, you’ll undergo a physical examination. A doctor will calculate your body mass index, your blood pressure, and will take urine and blood samples. 

Never lie on your life insurance application. Your policy will be voided and you could be permanently banned from applying for one with the company again. 

If you’re wondering why the men in the example table pay more each month than the women, it’s because actuaries have determined that women on average have longer lifespans than men.   

Deciding how much your benefit should be

Seven times your current gross annual income: that’s the back of the napkin way of figuring out how large your benefit should be — and it’s good enough for the purposes of filling out an online quote. 

However, during the actual application process, your insurance agent will help you fill out a financial needs analysis form.

The form is a deep dive into your current finances and your future needs, as well as the future needs of your beneficiaries. It involves going over your current debts and assets in fine detail. 

The higher your benefit, the more your monthly premium will cost. Of course, the relationship between the size of your benefit and the premium you pay each munch isn’t quite as linear as that, but it’s pretty close. Other factors that influence your premium include your risk profile and the company’s own underwriting standards and financial situation.

Should you ever need to increase your benefit, your insurer may ask you to undergo another medical exam — you're essentially buying a new policy (at least that's how insurance companies see it). One way to get around this is to buy a rider (an optional add-on to your policy) that guarantees your right to purchase more insurance in the future without submitting to another medical. 

How to compare permanent life insurance policies

Comparing permanent insurance plans takes more effort than comparing term plans. There’s more at stake because premiums cost more, and you might need to use the policy’s cash value before you die. Here are some areas of comparison to consider:

Is the policy participating or non-participating?

Some policies will pay you dividends, which you can reinvest into the cash value. These are called participating permanent policies. 

What interest assumptions are being made?

When you first meet with a life insurance agent, they will provide illustrations to show how much cash value you will have accumulated by the end of your policy. 

But to create a projection, certain assumptions have to be made. For example, an agent might show you a plan that assumes you’ll be able to pay off your policy within 10 years and earn an 8% return on your cash value each year. Is that really realistic, though? More likely, you won’t be able to earn that big of a return year after year.  Financial planners agree that a balanced portfolio will deliver returns of around 5% to 6%. Keep that in mind when you’re assessing a plan. 

What features are guaranteed?

Permanent policies come with guarantees. Namely, that your premiums will stay the same for the duration of the policy and that you will never be denied coverage because of a health condition.

Riders are extra coverages that can be added to a policy. They also come with guarantees. For example, one might allow you to purchase an extra $250,000 a year in insurance, regardless of your health. 

What are the underwriting standards of this insurer?

Life insurance companies don’t offer markedly different products, but there can be a wide variance in price. Each insurer chases a different demographic and will price policies accordingly.

If you’re not the ideal customer according to their underwriting standards — every insurer has a slightly different approach to risk management — you can expect to pay higher premiums.

It can be difficult to figure this out on your own, but an experienced broker will be able to tell you which companies to consider and which ones to avoid based on their underwriting guidelines. 

The main advantages of permanent life insurance

To sum things up, here are the three biggest selling points for permanent life insurance:

  • It can be a lucrative long-term investment. 
  • You’ll never have to apply for insurance again and your premiums will stay the same. 
  • You can take advantage of the policy’s cash value while you’re alive. 

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