Term vs. Permanent Life Insurance: What You Need to Know

Both types of insurance can protect your loved ones and their futures, but not all life insurance policies are the same. Different products have features that can help you meet your personal needs and goals, whether you’re growing your family, getting ready for retirement, or just planning ahead.

Key takeaways

• Life insurance helps protect your loved ones from unexpected costs when you pass away.
• There are two main types of life insurance: term and permanent life insurance.
• Term life insurance provides coverage over a fixed amount of time with often affordable monthly or yearly payments. However, your beneficiaries won’t receive a payout if you live beyond your policy’s term.
• Permanent life insurance costs more upfront but covers you for life, even if there are changes in your health.
• Some permanent life insurance policies also work like investments. If you cancel early, you can receive the policy’s cash value.

Life Insurance Basics

Life insurance is a great way to help your loved ones meet financial goals or commitments, after you pass away. It’s also a way to ensure they’re able to:

• Pay for final expenses, such as funeral costs
• Pay off a mortgage or other debt
• Cover the costs of raising children
• Put aside funds for retirement

There are two basic types of life insurance: term and permanent. The cost of your life insurance policy depends on your personal situation, factoring in things like your age, gender, health status, habits (like smoking and drinking), and any activities that may be considered risky (like motorcycling). However, in general, term policies are more affordable than permanent ones.

It’s important to note that not everybody is insurable. There are instances where something like a pre-existing health condition may affect eligibility to buy life insurance. However, there could still be options, like guaranteed life insurance policies that offer a lower death benefit (the amount paid out by the life insurance company) at a higher premium.

What is term life insurance?

Term life insurance is often the most straightforward and affordable way to get coverage. You pay an affordable premium (a regular monthly or yearly fee), and in return, receive life insurance coverage for a defined amount of time (called a term), such as 20 years. When your term ends, your insurance fees also end, and your loved ones are no longer eligible to receive a death benefit when you pass away.

Term life premiums

With term life insurance, you choose how long you’d like to pay premiums for, such as 10, 20, 30 or 40 years. The length of your term and the amount of coverage you choose affects the price you’ll pay each month, which could be as low as $13 a month[1] (paying for policies yearly is also an option). While coverage is temporary, you may have options to convert to long-term coverage later if needed.

Benefits of term life insurance

There are many benefits to term life insurance, including:

• Flexible terms: Flexible policy terms commonly range from 10-40 years.
• Affordable rates: Monthly or annual fees are guaranteed to stay the same for your entire term.
• Accessible policies: Medical exams may not be required depending on your policy and terms.
• Customizable add-ons: Policies can be adapted to meet changing needs over time or include coverage for children (such as a children’s term rider, which provides life insurance for children as well).
• Tax-free death benefit: Your beneficiaries will receive a lump sum, tax-free benefit if you pass away, offering extra stability at a critical time.
• Convertible options: Some policies have the ability to convert to a permanent or universal life insurance policy before the age of 71, with no health or medical exams needed.

Drawbacks of term life insurance

Terms can run out: Living beyond your term means your policy ends without your beneficiaries getting a benefit payout. However, there may be options to continue or renew your policy or convert it into a permanent policy.

Eligibility can change: As we age, our health circumstances also change. Buying life insurance when you’re younger can make policies more affordable. For example, term insurance is usually easier to qualify for when you’re younger and may be more challenging to qualify for when you’re older, or become more expensive to buy.

What is permanent life insurance?

Permanent life insurance covers your entire life, regardless of your age, how long you live, and your health status. Depending on the policy it can also help with estate planning needs, like costs associated with transferring assets to your partner or kids. Permanent life insurance premiums can be paid monthly or yearly, just like term insurance, but coverage remains in place when your payments end. Like term insurance, buying life insurance when you’re younger and healthier can make policies more affordable. If you cancel a permanent life policy before your death, you’ll receive the cash value of your policy (minus any fees from managing the plan associated with the policy).

Some permanent policies also allow parents or grandparents to transfer a life insurance policy to a child. That way, they have life insurance coverage as they grow up, and if the child develops an illness or health condition that would make them uninsurable.

Common types of permanent life insurance are:

Participating Whole Life Insurance: These policy premiums and benefits don’t change over time. Because you’re paying into the policy it can be structured so that it’s paid up (reaches full value and monthly payments end) after a certain period of time, like 10 or 20 years, or once you reach 100 years old. Once a policy is paid up, coverage still remains in place. With participating whole life insurance the policy’s invested assets are professionally managed by the insurance company, not the policy holder.

Universal Life Insurance: These flexible policies allow you to update policy premiums and benefits over the years. They can be structured so that you overfund your policy (pay more than the minimum monthly fees required) earlier in life to raise the cash value up front, and offset the cost of premiums later. This can be really helpful for people anticipating retirement or another fixed-income situation down the road. With universal life insurance the policy holder is involved with managing the assets in the policy.

T100 permanent life insurance: This type of permanent life insurance policy covers you for life but without the investment and cash-value benefits of other permanent policies. Like term policies, you pay your monthly or annual contribution fees and are covered.

Benefits of permanent life insurance

Permanent policies have a range of benefits, on top of paying out a benefit when you pass away. Additional benefits include:

• Dividend reinvestment: The dividends you earn in the policy can be reinvested, increasing the value of the policy’s death benefit over time. As the value of your death benefit grows, so does the cash value of your policy.
• Tax-deferred growth: Your policy’s annual cash value can grow without incurring annual taxes, but it is subject to limits set by the Income Tax Act.
• Options to use your cash value: You may request to use your policy as collateral for a loan from a financial institution, subject to the lender’s requirements. You can also access the funds in your policy to supplement retirement income or if you have an illness.

Drawbacks of permanent life insurance

As these policies last your lifetime, they tend to cost more than term life insurance, making them less affordable in the near term.

What are the differences between term insurance vs. permanent life insurance?

Below is an overview of the differences between RBC Insurance term and permanent life insurance policies and some answers to common questions.

 

	Term Life	Permanent Life
Coverage Timeframe	Usually varies: 10 to 40 years, with the option to renew for another term	For life
Coverage amounts	$50,000 – $25,000,000 Amounts depend on type of product and age of the insured.	$25,000 to $25,000,000
Medical Exam	May, or may not, required depending on the term product	Typically required
Tax-free death benefit	Yes*	Yes*

*Note that probate fees are applicable if you have not designated a beneficiary and the proceeds of your policy become part of your estate.

How Do I Know Which Policy Is Right For Me?

While both permanent and term life insurance provide a payout when you pass away, permanent life insurance offers additional benefits that may be worth the additional cost to you.

Here are some questions to consider when choosing a life insurance policy:

• Do you want the guarantee of life insurance coverage in place for as long as you live?
• Are you concerned that you may become uninsurable over time?
• Are you seeking an additional tax-deferred growth opportunity to build up savings beyond your Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP)?
• Are you more interested in ensuring affordable life insurance coverage now, versus a product that combines insurance and investing?
• Will you only require life insurance coverage for a defined period? For example, you might want to ensure you have funds available to pay the costs of your child or children’s post-secondary education or to cover your remaining mortgage balance.

Term Life Insurance	Permanent Life Insurance
	Universal Life Insurance	Participating Whole Life Insurance
An option for shorter-term needs if: ●      Others depend on your income ●      You have debts that need to be paid off in the event of your death ●      You are in need of a cost-efficient solution	An option if in addition to lifetime insurance coverage: ●      You’re looking for a tax-deferred growth opportunity ●      You want to take a hands-on approach to managing the investment risk of your life insurance policy	An option if in addition to lifetime insurance coverage: ●      You’re looking for a tax-deferred growth opportunity combined with the comfort of guarantees ●      You want to take a hands-off approach to your life insurance policy by benefiting from the investment expert

Common Questions:

How long does a life insurance policy last? Permanent life insurance provides coverage for as long as you’re alive, regardless of age or health status. Term life insurance covers you only for a specific period, known as a term, such as 10, 20 or 30 years. As you age, term insurance may be more challenging to qualify for and more expensive to buy.

What do life insurance premiums pay? With both types of policies, you’re entering into a contract with an insurance company to pay the death benefit you’ve agreed on if you die while the insurance coverage is in force. This death benefit can range from $25,000 to $25 million, depending on your selected coverage level.

Is my life insurance policy considered an investment? In addition to the guaranteed death benefit, some permanent insurance policies, such as Universal Life and Whole Life, include an investment component. This component, called the embedded cash value, grows without being taxed yearly. You can use the cash value as an emergency fund by withdrawing or borrowing against it before the person insured under the policy passes away. If you withdraw or borrow from the policy, some income tax might be payable.

Will my beneficiaries need to pay taxes? When the person insured under the policy passes away, the beneficiary will receive a lump sum death benefit that isn’t taxable.

Will I need to manage my life insurance policy? Different options are available, depending on how hands-on you want. Some permanent life insurance policies that include investment options, such as RBC Growth Insurance^® are managed by RBC Insurance, so you can be hands-off and let the company manage ongoing changes.

1. Rate based on a $100,000, Term 10 policy for a male, age 37, non-smoker.

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