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Permanent Life Insurance

Permanent Life Insurance

Life insurance in Canada is split into two broad categories, term life insurance and permanent life insurance (often referred to as whole life insurance, though whole life is only one type of permanent insurance available today). For a primer on the various types of life insurance, see our article on types of life insurance.

Understanding Permanent Life Insurance

Permanent life insurance provides life insurance protection for your entire life- it does not expire. What does that mean? It means that you will always have life insurance coverage and it will not expire or end (unlike term life insurance).

Canadians are in a position where they have the ability to choose from different permanent life insurance products. The main three life insurance products available in the Canadian life insurance market in 2020 are…

All of these types of permanent life insurance policies are constructed differently and designed for different situations and people. For most Canadians term life insurance is actually perfectly fine as it provides affordable life insurance coverage to cover temporary needs (examples are family protection and mortgage debt). 

There are certain scenarios where permanent life insurance should definitely be considered. Some of these situations include but are not limited to covering final expenses (funeral costs), taxes incurred at the time of death (e.g. capital gains), leaving a legacy or inheritance, charitable giving, business buy sell agreements, estate planning and equalization.

Some permanent life insurance policies can even have an investment component built-in to the policy which can provide tax advantages to the policy owner. These investment components can be found in whole life insurance and universal life insurance policies. More information on this is explained in detail below.

How Permanent Life Insurance Works

The underlying cost of all life insurance goes up every year as we get older. Term life insurance smooths that process out by leveling our premiums over periods of time called ‘terms’.

Now what happens if the life insurance company takes the cost and averages them out over an even longer period of time? Let’s say the insurance company averages your cost of insurance (that go up every year) over your entire lifetime? If they did that, we would see premiums that are level for life. And that’s the core definition of permanent life insurance – level premiums for life.

As mentioned, there are different types of permanent life insurance policies which can be designed differently and customized to suit the needs of the client. It is highly recommended to speak with one of our licensed life insurance brokers if you are considering purchasing permanent life insurance. It is a long-term financial commitment and should be given a lot of thought and consideration before purchasing.

In summary, term life insurance has premiums that go up every so many years and permanent life insurance has premiums that are level for life.

What is Whole Life Insurance?

Whole life insurance is a permanent life insurance product which means that it lasts your entire life (it never expires). It has two main attributes which are the death benefit and the cash value. The death benefit starts at a specified number chosen by the policy owner (e.g. $100,000). This is the amount that is paid out to your beneficiaries, tax free in the event of death. The cash value starts at $0.00. As you fund the policy premiums over time, the death benefit and the cash value will both increase (for most policies).

Whole life insurance premiums in the early years of the policy exceed the actual insurance costs of the company. Later in life whole life insurance premiums (the cost that the policy owner is paying for the policy), because they typically remain level, will actually be lower than the insurance costs of the company on an annual basis. What you are effectively doing is overpaying the true annual insurance cost in the early years of the policy. This over funding of premiums is then saved up or reserved inside the policy (called the cash value). In the later years of the policy when the costs exceed what you’re paying in premiums, there is money from the early years to make up that cost differential. Pay more now to pay less later.

Now, if you cancel the policy after a period of time, the insurance companies will typically refund you a portion of that over payment in premium. This is known as a cash value or cash surrender value. It is important to note that most of that cash value will be a refund of over payment in premium, especially in the early years.

In past years, many insurance companies were mutual. Mutual companies typically declared a non-guaranteed dividend to participating whole life insurance policy owners. These dividends were then used to automatically create various other options including small units of paid up insurance, or increasing cash value, or one of 2 or 3 other options. Dividends were projected as being used to pay up premiums in later years. In the 1980’s and later, dividends being paid out did not meet earlier projections and as a result many policy owners had policies, they had assumed would have premiums that became paid up but in reality, did not. Consumers then launched various ‘vanishing premium’ lawsuits against insurance companies and were successful with these suits.

What is Universal Life Insurance?

Universal life insurance is from the family of permanent life insurance products. It’s intended for use if you want life insurance for the rest of your life.

Universal life consists of two basic parts to the policy- the insurance and cost portion of the policy, and the investment portion. These two sections of the policy are mostly discrete.

The insurance portion of your policy is generally available in two basic formats- level for life or increasing every year.

The investment portion of a universal life insurance policy looks similar to many mutual funds. They are not actually mutual funds, but conceptually they are very similar. For example, you will find a wide array of investment options from different companies and many of these options are actually tied to specific and well-known mutual funds. Other common investment options are similar to GIC’s, equity and stock type options and various indexes.

The investment portion of most universal life policies does behave like a mutual fund in another very important aspect. The investment options are typically not guaranteed, just like a traditional mutual fund. And that means, like a traditional mutual fund, investments inside your universal life insurance policy can crash and burn. Many universal life insurance policies investment options crashed by 30-40% in 2008-2009 right alongside the rest of the markets.

You can have a universal life insurance policy and not take advantage of the investment options. Doing so reduces your insurance policy to something that is similar to a term life insurance or term to 100 policy (e.g level or increasing insurance costs, no cash or investment options).

It’s important to note that your annual premiums are not necessarily the same as your insurance costs – money going into and out of the investment options can have an affect. You should be very, very clear on how your premiums are actually being divided inside the policy – what portion covers insurance and what portions covers investments. Many life insurance advisors will sell universal life insurance policies with annual increasing costs of insurance to convince their customer to purchase the policy because the premiums appear to be very low. Every year the cost of the insurance policy increases and gets to the point where it becomes unaffordable, resulting in the policy owner to cancel the policy and lose out on having life insurance. This is why you want to be very aware to see what the cost of insurance is with a universal life insurance policy.

Two other cautions when considering universal life insurance… First, even using a conservative interest rate may not be reflective of the actual policy. Let’s say you use 0% interest – can’t get much lower than that, can you? Well, as noted above, many universal life investments performed at -20%–40% in recent years, quite a bit below ‘0%’. Secondly in terms of investments options, most consumers will be better served by RRSP’s and TFSA’s than starting to invest inside a universal life insurance policy.

Universal life insurance can be an attractive insurance product for those looking for permanent insurance. All universal life insurance polices we recommend have the following features…

  • Fully guaranteed costs of insurance.
  • Level costs of insurance (we typically do not recommend products with level premiums but increasing insurance costs inside of the policy).
  • Minimal to no investments. Treat your insurance policy as insurance, not as an investment.

You can quote guaranteed, level costs of insurance using our online quoting system. When purchasing any type of life insurance, it is very wise to seek out independent, unbiased advice from a life insurance broker who represents all of the life insurance companies in Canada. Feel free to reach out to us by email or phone at 1-877-344-4011 to speak with one of our licensed brokers and determine what product is best for you and your family.

What is Term to 100 Life Insurance?

Even though the word ‘term’ is in the name of the product, Term to 100 is actually not a term life insurance product and is in fact a type of permanent life insurance designed to last your entire life. Term to 100 use to be a very popular product, but now since Universal Life Insurance (LINK) pricing is basically the same, most consumers will purchase a Universal Life Insurance (LINK) product instead because of the added flexibility.

With that being said, Term to 100 life insurance is a very easy product to understand. The premiums of the policy (the cost) are level for your entire life. The death benefit (coverage amount) is also level for your entire life. The premiums on the policy are required to be paid until age 100 at which point the policy would be paid up and no future premiums are required. If you are still living at age 100, the policy would still be in force, no premiums would be required to be paid and the death benefit gets paid out at death.

As Term to 100 does not have any cash values so premiums are typically less expensive than other permanent insurance products that do have cash surrender values, such as whole life insurance.

Term to 100 is commonly used if you are looking for low cost life insurance for the rest of your life for such needs as creating an estate, burial expenses or covering taxes at death.

Understanding the Differences

Now that we have explained in detail the three different types of permanent life insurance policies available to purchase in Canada, see below for a brief outline of the differences of permanent life insurance products.

 Term to 100Whole LifeUniversal Life
Coverage for life?YesYesYes
Are premiums level for life?YesYesYes and No (depends on policy)
Does policy expire?NoNoNo
Is there an investment component?NoYesYes
Does it have cash value?NoYesYes
Cost ratingLowest CostHighest CostMiddle Cost
Detailed InformationClick HereClick HereClick Here

What Does Permanent Life Insurance Cost?

The cost for permanent life insurance is dependent on the permanent life insurance product and the company. Not all companies offer permanent life insurance and not all companies offer all three types of permanent life insurance. Permanent life insurance products tend to be much more complex when compared to term life insurance so we highly recommend that you speak with one of our experienced life insurance agents to see what is right for you.

We have constructed some approximate costs for the different types of permanent life insurance products to give you an idea of the costs associated with whole life insurance, universal life insurance and term to 100 life insurance.

Whole Life Insurance

$50,000$100,000$250,000
Male – Age 30$35.82$60.03$140.85
Female – Age 30$32.45$53.55$126.00
Male – Age 40$46.85$84.78$204.75
Female – Age 40$42.57$74.16$178.20
Male – Age 50$74.84$133.92$327.60
Female – Age 50$61.79$114.66$279.45

*Rates are monthly and based on standard health, non smoker from Foresters Life Insurance Company.
**Rates were quoted June 2020 and are not guaranteed. Final rates are determined after an application has been submitted.

Universal Life Insurance

$50,000$100,000$250,000
Male – Age 30$34.44$55.69$127.77
Female – Age 30$30.18$49.83$111.40
Male – Age 40$52.08$89.20$197.70
Female – Age 40$45.70$78.14$172.19
Male – Age 50$81.00$132.06$304.21
Female – Age 50$67.35$115.48$261.69

*Rates are monthly and based on standard health, non smoker from Desjardins Insurance.
**Rates were quoted June 2020 and are not guaranteed. Final rates are determined after an application has been submitted.

Term to 100 Life Insurance

$50,000$100,000$250,000
Male – Age 30$35.28$60.75$129.83
Female – Age 30$31.68$55.08$114.98
Male – Age 40$48.56$84.60$198.00
Female – Age 40$42.26$72.36$163.35
Male – Age 50$73.85$126.90$307.80
Female – Age 50$61.38$111.33$266.40

*Rates are monthly and based on standard health, non smoker from Industrial Alliance.
**Rates were quoted June 2020 and are not guaranteed. Final rates are determined after an application has been submitted.

What is Cash Value?

Cash value (also referred to as cash surrender value) is the investment portion of a permanent life insurance policy. Whole life insurance (LINK) and universal life insurance (LINK) policies can both have cash value.

You may have heard of someone cashing their life insurance policy in. This means that they had an investment value that had accumulate over years of paying for their life insurance. They may had run into financial issues or just needed money to go towards the down payment of a home they were looking to buy. As a result, they cancelled the life insurance policy and they received the cash value of the life insurance policy back. Beware- you may have to pay tax to the CRA if you cancel your life insurance policy with cash value so be sure to check with your life insurance company before doing so.

The cash value of a permanent life insurance policy is an amount that has accumulated in basically what is a side investment account attached to the policy. Every time you pay a premium to the life insurance company the money is essentially divided into three separate categories.

  1. Cost of insurance. The insurance company takes the majority of the premium payment to cover the actual cost of the insurance. This is the amount that they charge you to provide you with the insurance coverage.
  2. Operating costs and expenses. The insurance company has costs to operate their company and a portion of the premium payment is used to help pay for these expenses.
  3. Cash value. The investment account value which accumulates within the life insurance policy over time. Performance is dependent on a number of factors (policy type, company, investments, etc.).

The cash value is separate from the death benefit, so your beneficiaries do not receive the cash value and the death benefit at the time of death- only the death benefit is paid out. This is a common misconception with whole life insurance policies as many consumers believe that at death both the cash value and death benefit are paid out.

Cash value predominately exists in whole life insurance (LINK) policies. It is the amount of money that accumulates over time and can be accessed in different ways. The main ways of accessing the cash value of a life insurance policy are,

  1. Withdrawal. You can request to withdrawal (or cash in) a portion of your cash value or entire amount. If you cash in a portion of your cash value, you will have a reduction in the death benefit. If you cash in the full amount of your cash value, the policy will no longer exist and will be cancelled.
  2. Loan from Insurance Company. You can request to take a loan against the cash value and be charged an interest rate which is determined by the insurance company. We typically see interest rates of between 6-8% charged. If the loan amount exceeds the total cash value amount, the policy will be cancelled/forfeited.
  3. Loan from Bank. If you have a large amount of cash value, the policy is considered an asset by banks. There are banks that will secure a line of credit against the cash value of the life insurance policy. You can then draw from the line of credit to access money tax free from your life insurance policy. This is a very popular financial strategy for many. Interest rates charged from a bank are typically much lower than what you would pay from the bank.

The growth of cash value inside of a life insurance policy is tax deferred. This means that you do not pay any tax on the growth of the investment while it is growing. The tax is deferred until you withdrawal money from the cash value. Even though the tax is deferred, it will still take many years for this amount to grow to be significant.

Life insurance with an investment component (cash value) is a long-term financial strategy. Every policy from every company is designed differently so we highly recommend speaking with one of our experience brokers to see what is right for you.

Summary

Permanent life insurance is not for everyone. In fact, it is not designed for the majority of Canadians. We recommend looking at purchasing term life insurance for most Canadians as it is affordable and can provide a high amount of life insurance coverage for when it is needed the most.

We are here to help, free of charge to provide you with assistance when trying to determine what is right for you and your family. Please do not hesitate to reach out to us to discuss your specific situation and needs to see what option suits you and your family.

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