Life insurance: Term, permanent – or both?

Understanding the difference between permanent and term life insurance will help you choose the protection you need – and prevent regrets in the future.

How would you feel 20 to 30 years after buying a product that has done exactly what it was supposed to do? Pretty good, right? No regrets?

Not so fast.

“I’ve been a financial advisor for over 22 years and I sometimes get calls from clients who bought term life insurance through me 15 or 20 years ago. And you know what? If term insurance is their only life insurance, some of them are no longer happy.” So says Mark Coutts, CFP, CHS, CFDS, RPA, FCSI and president of Coutts Financial Services Inc. in Toronto.

“Twenty years ago, they chose not to buy permanent life insurance. They chose term insurance. So, the reason they’re sometimes unhappy after 15 or 20 years is that the ‘term’ of their term insurance is about to expire and if they want to renew their coverage, the cost is 3 or 4 times what they’ve been paying. They’re not happy, but that’s how term life works and I explained that to them when they bought it, but now they’re facing reality.”

So how do people handle buyer’s remorse after such a long time?

Sadly, some cancel their term policies and lose that protection, so they’re leaving their family’s finances at risk

“When you’re buying life insurance, you’ve got to think long term,” says Coutts. “Mentally, you’ve got to ‘put on your high beams,’ so you’re looking farther down the road when deciding whether term insurance is always going to be right for you, whether permanent insurance is the right choice, or whether it’s a combination of the two.”

The table below compares the features of each type of life insurance. So, put on your ‘high beams’ and consider what you expect from life insurance today and decades from now.

Term life insurance

Permanent life insurance

What is it for?
  • Temporary protection from the financial impact of death
  • Lifelong protection from the financial impact of death
  • Combining protection with tax-advantaged cash value growth
  • Estate planning
Who is it for, mainly?
  • Young families and homeowners with a mortgage
  • Business owners
  • Adults with a long-term perspective
  • People who already make full use of registered investment accounts such as RRSPs and TFSAs
What are the advantages?
  • It’s initially inexpensive, if you’re young.
  • You can buy lots of coverage.
  • It’s easy to understand.
  • Guaranteed lifetime protection continues even if your health fails
  • The cost is guaranteed to never go up (with most types of permanent insurance).
  • Later in life, it’s less costly than term insurance.
  • It provides tax-advantaged cash value growth opportunities for people whose RRSPs and TFSAs are topped up.
  • You can cash in or borrow against its accumulated value.
What are the disadvantages?
  • Coverage is temporary; the protection ends when the term ends (if you don’t renew).
  • The cost goes up if you renew when the term ends (usually after 10, 15, 20 or 30 years).
  • There’s no cash value to borrow against or cash in.
  • For young people, it’s more expensive than term insurance.
  • Key benefits aren’t obvious; professional advice will help you use it effectively.
When is it most cost-effective?
  • When you’re young
  • When you need only temporary protection (e.g., until your mortgage is paid off or children are no longer financially dependent)
  • Later in life
  • When you have built up cash value in the policy
  • When you have a sizable estate to pass along to heirs or charities
  • If you’re in a higher tax bracket
Can you convert it to the other type of insurance?  Yes  No
Can it supplement the insurance you have at work?  Yes  Yes
Trends to consider
  • Rising mortgage and consumer debt: You could still be in debt after temporary term life insurance stops being the cheaper option (or even becomes unavailable).
  • Adult children are financially dependent on parents longer than ever, perhaps even after your term policy expires.
  • The trend toward increased longevity makes this an increasingly attractive option because protection is lifelong, not temporary.

So, what’s the best way to protect your family and achieve your other financial goals? Depending on your circumstances, your choice could be either – or both. And there are more ways permanent insurance can help you that I haven’t addressed here. Ask a professional financial advisor to help you understand the full implications of your available options, and to help you make the best decision for your situation.