Term vs Permanent Life Insurance: A Plain-Language Guide

Life insurance is really about one question: if something happened to you, would the people who depend on you be okay financially? Once you know what you want to protect, choosing a type of policy gets much easier.

There are two broad families of life insurance in Canada: term and permanent.

Term life insurance

Term insurance covers you for a set period, such as 10 or 20 years, or until a certain age.

• If you pass away during the term, your beneficiaries receive the death benefit.
• If the term ends and you're still living, the coverage ends and nothing is paid out.
• Premiums are generally lower than permanent insurance when you first buy, which is why term is often used to cover big temporary needs, like a mortgage or the years your kids are growing up.
• Many term policies can be renewed, but the premium usually goes up at each renewal because you're older.

Permanent life insurance

Permanent insurance is designed to cover you for your whole life, as long as the policy stays in force.

• Premiums are generally higher at the start than term premiums for the same coverage.
• Most permanent policies build a cash value over time. Depending on the policy, you may be able to access it: for example, by surrendering the policy for its cash value or borrowing against it (loans have to be repaid).

The two most common types are:

• Whole life: premiums are typically fixed, and there is a guaranteed minimum cash value.
• Universal life: combines insurance with an investment account. The cash value, and in some cases the death benefit, can go up or down depending on how the chosen investments perform.

Side by side

How much coverage might you need?

There's no universal formula, but people commonly add up:

• Debts you'd want paid off, such as a mortgage, loans or credit cards
• Income replacement: how many years of your income your family would need
• Future costs, like childcare or your children's education
• Final expenses, such as funeral costs and taxes owing at death

Then subtract savings and any existing coverage, such as a group plan through work. Keep in mind that group coverage usually ends if you leave your job.

Try it with your own numbers:

Don't forget your beneficiary

• Name a beneficiary. If you don't, the benefit is generally paid to your estate, which can mean delays and costs.
• Consider naming a contingent (backup) beneficiary, in case your first choice passes away before you.
• Review your beneficiaries after big life events: marriage, separation, a new child.
• Designations can be revocable (you can change them) or irrevocable (you generally need the beneficiary's consent to change them). Make sure you understand which one you're choosing.

Be honest on the application

Applications ask about your health, habits and lifestyle. Answer fully and accurately. Incomplete or incorrect answers can give the insurer grounds to deny a claim later, which is exactly when your family can least afford it.

Questions worth asking yourself

There is no one-size-fits-all answer. Tick each one off as you think it through:

The bottom line

Term and permanent insurance solve different problems, and many families use a combination. The right choice depends on what you want to protect, for how long, and your budget. Every recommendation should start with a proper review of your needs and circumstances.

Sources:

• Life insurance, Financial Consumer Agency of Canada