Should I buy term insurance or permanent insurance?
Which life insurance is best, term or permanent? This is likely the most frequently asked life insurance question. Many insurance and financial “experts” will give a uniform answer, but reality is not so simple. Life insurance is not a uniform product: the right insurance depends on the applicant’s objectives.
Term insurance offers low-cost protection for a temporary period, say 10 or 20 years. But the cost rises dramatically at renewal. A 40-year-old male non-smoker can take out $250,000 of term-20 coverage with Canada Life for $37.58 a month. But if he wants to renew it without a medical at age 60 he is in for a major shock – the premiums will jump to $502.20 a month. He could re-apply for a new plan and get a lower rate, assuming his health hasn’t changed in the 20 years since he was 40. Most term plans also expire after a certain age, usually 75–85 years. If the insured decides to cancel the plan before the term expires, there is no return of premium.
At first glance this doesn’t seem like a very good deal. But for many applicants on limited budgets, term insurance is a good fit: it provides low-cost protection for a fixed period. This can be invaluable to a young couple during their most critical years, when their debt is high and their children are small. Term insurance also makes sense for applicants who need to cover a temporary insurance need, such as a mortgage, line of credit, or business loan.
Permanent insurance is usually of two types, whole life or universal life insurance. These policies have higher initial premiums than term policies, but generally provide a constant cost and lifetime protection. Depending on the plan, the policy can generate a cash value and be paid up in a set number of years.
That same 40-year-old male non-smoker can get $250,000 of 20-pay whole life coverage with Empire Life for $214.20 a month. The premiums are obviously much higher, but rather than the plan renewing in 20 years it is then paid up. The insured’s total contribution over the 20 years is $51,408. The policy also has a cash value after 20 years of $51,500, which rises to $64,500 at age 65. The insured can usually access up to 90% of this cash value in the form of a policy loan, but it would be deducted from the death benefit along with any interest.
The downside of a permanent policy is that the initial premium is higher, which may affect an applicant’s ability to obtain the amount of insurance needed. Many permanent plans also impose surrender penalties if the policy is cashed out in early years. So when choosing a permanent plan, it must fit the applicant’s budget. If possible, allow a financial buffer just in case there are unexpected budgeting issues.
Another potential solution is to combine permanent and term coverage. This can allow applicants to get the insurance they need with a permanent component at a more affordable rate. Many policies allow term coverage to be added as a rider, letting the applicant avoid paying two policy fees.