Understanding the difference between term life insurance and permanent life insurance will help you get the coverage to suit your needs. Each type meets a different need and has a different cost.

Term life insurance:

• Provide short-term protection for a specified period of time or to a specified age. On the expiry date, the insurance expires.
• The premiums are inexpensive for those who are younger because the chance of premature death is very low.
• Most term life insurance can be renewed for another term or be converted to permanent life insurance without the need to provide medical evidence.
• When the policy is renewed the premium will increase. The premiums at each renewal will be higher than the premium of the previous period.
• It provides a tax free death benefit to the beneficiary in the event of the death of the policy holder.
• If the person does not die while a term policy is in force, there is no refund of premiums to the policy owner or payment to the beneficiary.

Who buys Term Life Insurance?

Term life insurance is a great product for people who have temporary financial liability, like a mortgage, a car loan, etc. It is also a good choice for some people who have a tight budget, but still need insurance to protect the family. It’s a great entry level life insurance.

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Permanent life insurance:

• It provides life time protection. It does not expire.
• It is more complex than term life insurance. There are lots of features you can choose to help you meet your individual needs. It also has different types of plans. Most common permanent insurance policies are: whole life insurance; term-to-100 insurance; universal life insurance.
• With some plans, your premium will go into a policy reserve to build up savings for you. The cash value increases with every premium payment. You have the following options for your policy reserve:
  • If you no longer want the insurance, you can surrender part of its cash value in the form of cash surrender value.
  • You also may borrow from the cash surrender value, you either can borrow from your insurance company or any financial institutions to get a lower interest rate.
  • As the years go by, you may choose to stop paying the premium and use your cash reserve to offset your premium.
• Some participating whole life policies pay policy dividends to the policy owner. It is mandatory for the insurance company to keep reserves to meet its insurance obligations but once those reserves are exceeded, the excess is distributed to the par policy owners as a dividend. Dividends are not guaranteed and the amount can vary year to year.

Who buys permanent life insurance?

• Estate planning: It can be used to provide the fund to loved ones, to pay capital gains tax on property willed to beneficiaries, and to cover final expenses, etc.
• Creditor protection: a small business owner, self-employed or someone who has significant debt, may be protected from the claims of creditors.
• Tax-deferred savings: the cash value in the policy will not be taxed annually provided the growth falls within the limits set out in the Income Tax Act.
• Use as collateral: the cash surrender value can be used as collateral for a secured loan at a lending institution. A secured loan is easier to obtain and may able to get a lower interest rate.