Understanding Permanent and Term Life Insurance
Choosing life insurance isn’t just about protecting your loved ones after you’re gone — it can also protect your wallet while you’re alive. The two main types are permanent life insurance and term life insurance, each serving distinct purposes in financial planning.
Permanent life insurance provides coverage for life and can include tax benefits and dividends, though premiums are higher. Term life insurance covers a specific period, offering affordable protection to replace income when needed.
Renting vs. Owning: A Helpful Analogy
Brooke Dean, founder of BMD Financial Ltd. at Raymond James, compares the difference to renting versus owning. “Term life insurance is like renting an apartment,” she said. Payments provide coverage for a set period, and when the term ends, there’s no equity or ownership.
Permanent life insurance, by contrast, is like buying a home. Although premiums are higher, the policy accumulates cash value over time, which can be borrowed against — similar to building home equity.
Wealth Transfer and Tax Strategy
Jeffrey Talor, director of sales at CanWise Life Insurance Services, notes that permanent life insurance can simplify wealth transfer. When adult children inherit assets like homes or businesses, taxes on capital gains may apply. A permanent policy can provide cash to pay taxes without selling inherited assets.
Permanent policies may also generate dividends. Dean explains that part of the premiums is typically invested to maximize returns. However, she cautions that younger individuals with limited investments should not view permanent insurance as their primary investment strategy.
“It’s better to use permanent insurance as an investment after maximizing registered savings accounts,” she said.
Creating a Legacy
Permanent life insurance is sometimes used to establish a legacy. Talor describes grandparents purchasing policies for grandchildren, creating a nest egg that grows over time and can be borrowed against when the grandchildren reach adulthood. The younger the policyholder, the more time the policy has to accumulate cash value.
Term Life Insurance: Affordable and Accessible
Term life insurance remains appealing for young families with mortgages and children. It can be 10 to 15 times cheaper than permanent coverage, providing substantial protection without breaking the bank. Many Canadians combine term and permanent insurance to cover short-term needs while building long-term equity.
Some insurance providers also allow term policies to be converted to permanent coverage without losing premiums already paid, offering flexibility as financial goals evolve.
Choosing the Right Mix
Dean advises asking key questions before buying both types. “Do you still have a mortgage? Are there children to provide for? Are your RRSPs and TFSAs maximized?” She emphasizes that term insurance provides affordable protection, while permanent coverage can diversify investments and build long-term wealth.
Finding the right balance between term and permanent life insurance ensures both immediate financial protection and future financial growth.
