Key takeaways:
- How term life insurance works and who it’s designed for.
- The key features of permanent life insurance and how it can do far more than just replace your income.
- The pros and cons of permanent versus term life insurance.
- The growing “cash value” of permanent life insurance.
- How to work out the right kind of life insurance for your situation.
When you’re considering options for providing financial protection for your loved ones, you'll find that life insurance is split into two main categories: term life insurance and permanent life insurance.
While both will provide a lump sum payment (called the death benefit) to the people you name in your insurance policy (your beneficiaries), they work in fundamentally different ways. Term life insurance is a temporary insurance policy that covers a specific time period, while permanent life insurance is a policy that lasts your whole life. Let’s go over the key differences between these two types of life insurance to help you choose the most suitable protection.
How does life insurance work?
Life insurance is essentially a contract: you agree to pay premiums, and in return, the insurance company promises to pay your chosen beneficiaries a lump sum upon your death.
A key role of life insurance is to ensure your family’s financial well-being. It can replace your income, cover funeral expenses, pay off debts (such as your mortgage) and help sustain your family’s standard of living. Some life insurance policies can also help with tax planning, asset preservation and making your will fairer for all your beneficiaries.
How does term life insurance work?
Term life insurance is often called “pure” insurance; it covers you for a specific period. If you pass away during this time, your beneficiaries will receive the death benefit. If you reach the end of your term, your coverage ends, unless you renew your policy (which generally comes at a higher cost than the previous policy).
Term policies are straightforward: they provide coverage only, with no investment component, which helps keep premiums lower than permanent policies. They’re a more economical way to obtain substantial protection during your highest-earning years.
Who is term life insurance for?
Term life insurance is best suited for people with temporary financial obligations, such as:
- Parents who want to secure their family’s future and ensure mortgages and other essential expenses are covered if they die during their working years.
- People who may need replacement income in the event of an unexpected loss.
- Budget-conscious individuals who need significant coverage at a lower price point.
- Business owners who want to ensure the continuation of their business, or who want to insure key personnel.
- Anyone with a mortgage or other debts to pay off over a defined period.
How does permanent life insurance work?
Permanent life insurance is made to last your whole life. It will provide your beneficiaries with a specified amount of money when you die, as long as you keep paying the premiums. It also includes a cash value component that grows tax-deferred over time. Because the payout is inevitable and because of the added investment feature, permanent policies have higher premiums than term policies.
Who is permanent life insurance for?
Permanent life insurance is typically chosen by:
- People with substantial assets who are looking for efficient ways to pass wealth on to future generations.
- Those focused on estate planning who want to minimize estate taxes or ensure the family holds on to key assets, such as a vacation property or a business.
- Parents of dependents with lifelong support needs.
- Conservative investors looking for stable, tax-advantaged growth and an additional layer of retirement planning.
- People who want to ensure their final expenses are covered when they pass.
What are the main types of permanent life insurance?
You’ll generally come across these forms of permanent life insurance:
- Whole life: this type of permanent life insurance offers fixed premiums, a guaranteed benefit and predictable cash value growth. It has two main subsets:
- Participating whole life: these whole life policies share the insurance company's profits with policyholders. The profits are usually paid out as dividends, which can be used to improve coverage, lower future premiums or be paid out as cash.
- Non-participating whole life: these policies don’t pay out dividends, but they do offer a guaranteed benefit and cash value growth (usually with lower premiums than participating life policies).
- Universal life: this combines a death benefit with an investment component. It offers flexibility as relates to cost of the premiums, size of the death benefit and how your money is invested.
What is cash value? And why does it matter?
With most permanent life insurance policies, part of your premium builds a “cash value” that grows over time. This is a living benefit: you can access this value while you’re alive, and use it for any purpose, such as boosting your retirement income, investing in business opportunities or funding a child’s education.
Cash value grows tax-free (it’s only taxable when it’s accessed), making it a valuable addition to your traditional retirement investment accounts.
What are the pros and cons of term life insurance?
Term life insurance pros:
- More affordable initial premiums, allowing for more coverage.
- Easy to understand and maintain.
- Suits temporary needs or debts.
Term life insurance cons:
- Coverage ends when the term expires (when you may still need protection).
- Premiums can rise considerably when renewed.
- No cash value or investment component.
What are the pros and cons of permanent life insurance?
Permanent life insurance pros:
- Lifelong, guaranteed protection.
- Tax-advantaged cash value growth.
- Highly useful for complex estate or tax needs.
Permanent life insurance cons:
- Higher premiums.
- More complex, with greater choices to consider.
- Potential fees if cancelling the policy early.
Your IG Advisor can build your insurance strategy
Understanding the difference between term and permanent life insurance is an important first step. However, finding the right fit for your broader financial plan takes professional help. For example, many people benefit from blending term and permanent policies for both immediate affordability and future security.
An IG Advisor can help you analyze your debts, goals and tax considerations to design a tailored insurance strategy. They can model how different choices could affect your family’s future income, your will or your retirement income, so insurance becomes a core part of your financial plan, not just an expense.
Talk to your IG Advisor today about creating the right insurance strategy for you. If you don’t have an IG Advisor, you can find one here.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Advisor.
Trademarks, including IG Wealth Management and IG Private Wealth Management, are owned by IGM Financial Inc. and licensed to subsidiary corporations.
Insurance products and services distributed through I.G. Insurance Services Inc. (in Québec, a Financial Services Firm). Insurance license sponsored by The Canada Life Assurance Company (outside of Québec).
