Term vs Permanent Life Insurance: What is the Difference?
“23 million Canadians own $5.7 trillion in life insurance coverage”. Over the last ten years, the purchase of individual life insurance plans has seen a consistent rise. This growth could be attributed to the necessity of covering larger mortgages and escalating living expenses. Individual life insurance now represents 65% of the total value of in-force policies, an increase from 58% in 2013, largely fueled by term life insurance.
Growth of individual life coverage over time
But how do you choose which life insurance policy you need? Many people feel stuck when deciding between term and whole life coverage. These two types of insurance work differently, and each has its own benefits that can significantly affect your long-term financial plans. Term life insurance keeps things simple with protection for a set time period. Whole life insurance (or Permanent life insurance, as this article frequently refers to) covers you for life and comes with extra perks.
Term and permanent life insurance differ in more ways than just how long they last. Your age, money goals, and what you can afford can play a big role in picking the right one.
The Basics: Term vs Permanent Life Insurance
Term Life Insurance
Think of term life insurance as renting a safety net. It provides coverage for a specific period of time, usually 10, 20, or 30 years (options may vary among insurers).
Permanent Life Insurance
On the other hand, permanent life insurance is like buying that safety net outright. It covers you for your entire life with no expiration date so long as the premium remains paid.
The biggest difference is that permanent policies come with a cash value component that grows. You can tap into these funds through loans or withdrawals while you’re alive. Whole life insurance’s premiums stay the same and don’t go up as you age or your health changes.
Term insurance works differently. Your rates will increase based on your age if you need to renew after your original term ends. This makes term insurance cheaper at first but potentially more expensive if you need coverage beyond your original term.
Cost Analysis and Premium Structure
The price/premium gap between term and permanent life insurance is quite different. Permanent life insurance policies can cost about 17 times more than term policies. This huge difference comes from permanent insurance’s lifelong coverage and cash value features.
Age is a vital factor in setting premiums. Insurance rates go up by 8% to 10% each year you wait to buy coverage.
Term life insurance gives you predictable fixed costs throughout your chosen term. Premium increases based on your current age will apply once your original term ends if you decide to renew.
For example, say you buy a 20-year term life policy when you’re 30. This means when you’re 50, your policy will come up for renewal. If you choose to renew your term policy, it will be subject to a higher price as you’ll be subject to the rate being charged based on your current age. So to recap, a healthy 30-year-old non-smoking male can get a 20-year term policy with a $348,340 death benefit for about $25 per month. The same coverage would cost this person $93 monthly at age 50 if he chooses to renew the term life policy.
Permanent insurance costs more upfront but gives you guaranteed rates that remain stable for life.
The average cost of permanent life insurance for a 30-year-old male in Canada is approximately $65 to $75 per month for $100,000 in coverage, assuming good health and non-smoking status.
*Unless you decide to add additional coverage later on, the additional coverage purchased will be subject to the age rate you are currently at the time of the policy change.
Comparison Table
Feature | Term Life Insurance | Permanent (Whole) Life Insurance |
Coverage Duration | Fixed term (e.g., 20 years) | Lifetime coverage |
Premium Structure | Lower initially, may increase on renewal | Higher, but fixed for life |
Cash Value Component | None | Yes, grows over time |
Access to Funds | No | Available through loans/withdrawals |
Policy Features | Pure death benefit | Death benefit plus investment component |
Conversion Options | Convertible to permanent coverage | N/A |
When to Choose What?
Term Life Insurance is Great For:
- Young individuals with mortgages
- Parents with young children
- People with specific, time-limited financial obligations
Real-world example: Sarah and Mike, both 28, just bought their first home in Saskatoon and are expecting their first child. A 30-year term life insurance policy could cover their mortgage and provide for their child’s education if something were to happen to either of them.
Permanent Life Insurance is Great For:
- Estate planning
- Lifelong dependents
- Business owners
Real-world example: Alex, 35, owns a successful small business in Regina. Permanent life insurance can provide lifelong coverage, accumulate cash value for future business needs, and offer estate planning benefits.
Your age, budget, and long-term money plans determine which insurance type fits best. Term insurance works well if you need affordable protection for a set time. Permanent coverage makes more sense when you want lifelong protection with an investment option. Both choices give you reliable coverage through easy-to-use digital tools that match your needs.
Remember, the best life insurance policy is the one that gives you and your loved ones peace of mind. Don’t hesitate to reach out to a local Saskatchewan insurance professional to get personalized advice tailored to your unique situation.
FAQs
- Which type of life insurance offers better value: term or permanent? Term life insurance generally offers more affordable coverage. Permanent life insurance, while more expensive, provides lifelong coverage and includes a cash value component that can be used as a financial tool during your lifetime.
- Is converting a term life policy to a permanent one beneficial? Converting from term to permanent life insurance can be advantageous for some individuals. The main benefit is that your coverage will last your entire lifetime, ensuring your beneficiaries receive a payout regardless of when you pass away. However, it’s important to consider that permanent policies typically have higher premiums. The decision to convert should be based on your current financial situation, long-term needs, and whether you require lifelong coverage.
- What are the potential drawbacks of permanent life insurance?
- Higher Premiums: Costs are significantly higher than those of term policies.
- Limited Investment Flexibility: The investment component may not offer as many options as other financial products.
- How do whole life and term life insurance compare in terms of suitability?
- Term Life: Better for those needing coverage for a specific period (e.g., while raising children) due to more affordable premiums.
- Whole Life: Preferred for those wanting lifelong coverage and additional features like cash value accumulation. Consider your long-term financial goals, budget, and protection needs when choosing between these options.
*The information provided in this article is intended as a general guide. Please consult your specific insurance policy for precise coverage details, including conditions, definitions, and exclusions that apply to your individual insurance.
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