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.

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13 Comments

  1. Term or Permanent? 05/16/2008 at 4:04 am

    […] Should I buy term insurance or permanent insurance? 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. In the latest addition to our Life Insurance Tips section we’ve tried to answer this classic question, which insurance is best, term or permanent? […]

  2. Janelle Mann 02/19/2010 at 4:12 pm

    “A 40-year-old male non-smoker can take out $250,000 of term-20 coverage with Canada Life for $37.58 a year.”

    Is the $37.58 a year a type-error?

  3. LSM Insurance 02/19/2010 at 4:45 pm

    Thanks for the note Janelle. The rate has since gone down it is now $35.55 a month. Best Regards …

  4. LuCynda 09/13/2010 at 12:32 pm

    Please include in your details about term insurance – buy term, invest the difference. If a person buys term, invests the difference (what they would save if they purchased a permanent life policy) they are moving toward being self-insured and will not need to renew their term. (self-insured: have enough invested to live on)

  5. LSM Insurance 09/13/2010 at 12:55 pm

    Thanks for the note. We examine the issue further in the attached article link to lsminsurance.ca

    The most important issue is 1) to determine the right amount of insurance needed and than 2) determine the best type of insurance to fit the that need. Which leads to the final step 3) shopping for the best rate.

  6. Victor J. 07/29/2011 at 12:43 am

    I find your site very usefull but I still am not totally decided,I will be continuing my shopping untill I do find the Plan that best soots my needs.
    Thanx

    Victor

  7. LSM Insurance 07/29/2011 at 8:34 am

    Hi Victor,

    Thanks for the kind words. We are happy to help! Regards, LSM

  8. Victoria 10/27/2011 at 12:21 am

    Your site is very helpful especially for the person like me who is undecided to stay in this country, I will difenitely recommend your site for those who are looking for what kind of lnsurance they have to get, I was shock to know about what kind of insurance should I get, all I know that when I pay for ten years then my family will be covered, especially they not canadian.

  9. LSM Insurance 10/27/2011 at 8:41 am

    Thanks for the kind words Victoria. I’m glad you found the site helpful.

  10. relly 11/27/2012 at 2:48 pm

    how sure that the beneficiaries are going to get the money.. and if they do.. what is the process and who does it? and are they going to get the whole amount or what are the deductions?

  11. LSM Insurance 11/27/2012 at 4:03 pm

    As long as the questions are answered truthfully and the death is not the result of suicide in the first 2 years or another excluded cause the benefit would pay out to the beneficiary. Certain non medical life insurance policies limit the payout on no accidental deaths to a return of premium during the first two policy years.

    In terms of the process the beneficiary contacts his/her broker or the insurance company directly. They would complete a claimants statement and provide a copy of the death certificate.

    Life insurance insurance proceeds are paid out tax free in the event the beneficiary is an estate the death benefits would be subject to probate fees.

  12. Rav 11/08/2014 at 2:02 pm

    Term Life Insurance is always a best choice.

  13. LSM Insurance 11/08/2014 at 4:15 pm

    Thanks for the note but I would disagree. Each persons situtation must be reviewed on a case by case basis. Things like Estate Planning, Charitable Giving and Final Expenses all require Permanent life insurance solutions

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