Permanent insurance is substantially more expensive than termTerm The period of time that a contract covers. Also, the period of time that an investment pays a set rate of interest.+ read full definition insurance, especially in the early years of a policy. It is best suited for long-term insurance needs. It is most often used to:
- generate additional retirement income for people who are already contributing the maximum to their RRSP each year, and TFSA each year, or
- provide cash for estate planningEstate planning The plans you make to build and manage wealth for your lifetime and thereafter. Goals may include leaving the most money possible to your loved ones, with the least amount of taxes. Other goals may include caring for children, paying off debt or passing on a business.+ read full definition purposes, such as covering taxes or donating to a charity.
3 types of permanent insurance
- Universal life
- Whole life
- Term to 100
1. Universal life insurance
Universal life insuranceUniversal life insurance A type of permanent life insurance that lets you save up some of your payments (your premiums) in a cash account (the cash value). You can change your premiums any time. The amount your insurance pays will vary based on your premiums.+ read full definition provides guaranteed lifetime coverage, but also includes an investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition component that generates taxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition-deferred savings. Here’s how it works:
- You make ongoing deposits to the policy – with some flexibility in terms of the amount.
- A portion of the deposit is used to pay the premium.
- The rest is invested and grows tax-sheltered, allowing you to boost the value of your long-term savings.
When you die, the beneficiaries you name in your policy receive the insurance amount and the investment proceeds – tax free.
You may also be able to borrow against the savings you’ve built up and use this money to supplement your retirement income. When you die, the policy proceeds can be used to pay back the loanLoan An agreement to borrow money for a set period of time. You agree to pay back the full amount, plus interest, by a set date.+ read full definition.
2. Whole life insurance
Whole life insuranceWhole life insurance A type of permanent life insurance that lets you save up some of your payments (your premiums) in a cash account (the cash value). Your premiums are set, as is the amount of money your insurance will pay.+ read full definition also provides guaranteed lifetime coverage, but the premium you pay is fixed and doesn’t change from year to year.
Whole life insuranceLife Insurance Insurance that pays cash to your family or other beneficiary after your death. This can give them income and help pay your funeral and other final costs.+ read full definition also has a cash value, with savings that build over time. You can use the savings as collateralCollateral Property or assets that you pledge as a borrower as a guarantee that you will repay the loan. You may lose your collateral if you dont pay back your loan.+ read full definition to take out a loan or use the money for any reason if you surrender the policy before you die. Some whole life policies also entitle you to dividendDividend Part of a company’s profits that it pays to shareholders in proportion to the total number of shares held. The Board of Directors sets the amount. For common shares, the amount varies. It may skip dividends if business is poor or the directors invest money in things like new equipment or buildings.+ read full definition payments from the insurance companyInsurance company A company that sells insurance products. Some companies sell only life insurance. Some sell only property insurance. Others sell all types of insurance.+ read full definition.
3. Term to 100
Despite its name, term to 100 insurance is not term insurance – most policies provide coverage for your lifetime. If you live past 100, you no longer have to pay premiums, but the coverage will continue. Your premiums remain level for your lifetime, or in some cases, may be payable over 20 years.
Term to 100 typically has no savings component or cash value. For this reason, it is the lowest cost permanent insurance available.
A term to 100 policy can be a good choice if you need long-term insurance protection but don’t want or need the additional savings of a universal life or whole life policy.
Permanent insurance guarantees coverage for life and has other savings benefits. It is best suited for longer-term planning needs.
2 key points
Use permanent insurance to:
1. Generate additional retirement income
2. Provide cash for estateEstate The total sum of money and property you leave behind when you die.+ read full definition planning purposes