Menu
Getting a life insurance policy is an important life decision that we all need to make at one point in our lives. Many people find themselves under-informed about how the different insurance plans work, and can feel overwhelmed with the amount of options and information there is out there.
While many people would like to simply know what the best life insurance plan is to get, unfortunately it’s not that easy. Trying to apply a one-size-fits-all approach to life insurance can potentially leave many vulnerabilities to your financial portfolio as well as your family.
The good news is, we’re here to make it simple today. There are two paths you can take when it comes to getting a life insurance plan, and those paths are the term insurance way and the permanent insurance way. We are going to inform you about what each path entails, the benefits they provide, and the type of person who fits in each one.
Term insurance, also known as traditional life insurance, is the type of life insurance that most people are familiar with. The paradigm that we are usually taught about life insurance is that “you pay into it, and if something happens to you then they will pay your family money.” That understanding is the simple way to explain how term insurance works. You pay into the plan on a monthly basis for the duration of the term, and if you pass away during the term, your beneficiary(ies) will receive a tax-free death benefit.
Term insurance is also the cheapest form of insurance, allowing people to get higher coverage amounts for the most affordable monthly premiums.
You can view term insurance in a similar way that you view car insurance. With car insurance they charge you a monthly premium based on your age, driving record, type of car, etc, and you can choose to add options of extra coverage and protection into your insurance package for a more expensive monthly premium. Based on the coverage in your insurance plan, the insurance company will cover the claim of anything agreed upon under terms of the contract.
Term insurance works just in that way. The insurance company will take a look at your age, medical history, and other personal information, and determine how much your monthly premium will be depending on how much coverage to apply for. Once approved, you will be covered for anything stated under the terms of the contract for as long as your policy is active and within its term. The policy will expire however after the term is complete, and most companies offer term contracts between 10-30 years. You can also have the option to add on additional riders into your plan if you choose to, such as; waiver of premiums in case of a disability, critical illness protection, accidental death and dismemberment, disability credit, and more.
To get a quote from Industrial Alliance, one of Canada’s leading insurance and investment companies, click here.
What’s also similar between term insurance and car insurance is that if nothing happens to you during the term, none of the money you paid into the plan will be refunded to you. So in a sense it’s like renting insurance. The difference between term insurance and car insure however, is the cost over time. With car insurance, theoretically your premiums will get lower (or remain relatively level) over time as you improve your reputation with the insurance company by maintaining a good driving record.
With term insurance, the premium is level during the course of the term, but when the term is over and you want to renew for another x amount of years, you will see a huge spike in your monthly premiums. Why you may ask? Because once your term is over, you need to reapply again for insurance. So assuming your health and other information checks out and you can get approved, it still doesn’t change the fact that you’re 10, 20, 30 years older now and more of a liability to the insurance company. So many people find themselves in a pickle when their term insurance plans expire and they see their premiums jump from $50/month to $500/month!
Term insurance is ideal for people who have a short term need that they want to protect at a low cost. Some examples could be to cover their mortgage (if you want to see why life insurance is better than mortgage insurance check out our other blog *here*), if they have young kids and want to ensure that their family will be taken care of financially if something happened to them, or any other short term loan or liability that would cause financial devastation to their loved ones if something happened and it was passed on to them.
Term insurance is not for people who want coverage for life without worrying about increasing premiums in the future. It’s also not for people who want to turn their insurance plan into an investment that can create tax-free, generational wealth for them and their families to enjoy while they are alive, and also for the next generation to come. These are some of the things that permanent insurance can offer, which we are going to dive into now.
If you asked most people if they thought life insurance was an expense or an investment, what do you think most of them would respond with? Typically they would call it an expense. That’s understandable because most people have only heard about term insurance, which is like renting insurance, but there’s also a way you can own your insurance policy. We all know that if we own a house instead of renting one, it comes with a whole lot more benefit, a.ka. Equity. The same goes with insurance. If you have term it’s considered renting, but if you have a permanent, you can actually build equity and turn it into a life-long investment and asset.
While there are a few different types of permanent insurance out there that function in different ways, such as; universal life, whole life, and t-100, we’re going to stay on the topic of permanent insurance in general so you will know if this is the path for you to go down or not.
Generally speaking, permanent insurance offers you level premiums for the duration that you pay (those durations can vary), and coverage for your entire life. This means that even once your payment term of the policy is over, you will still be covered, and no matter when you pass away your beneficiary(ies) will receive a tax-free death benefit. Like term insurance, permanent life insurance also offers a variety of riders and add-ons, such as; critical illness riders, disability riders, waiver of planned premiums, supplementary disability benefits, etc, all which get built into the monthly premium.
The big separator is that most permanent life insurance policies (except the t-100) build up a cash value inside of the plan. Depending on the type of plan you get, the premiums are either invested into the market into different stocks, mutual funds, index funds, bonds, fixed income, etc, which you can have flexibility over, or they can go into dividend pools where the insurance company itself pays out guaranteed dividends on an annual basis. So now instead of your monthly premiums going to an insurance company that you’ll never get back (term), your premiums actually get invested and grow within your insurance plan for you to be able to use and leverage at will.
The cash value that builds up can be used for anything the owner desires. Whether that be a graduation present for their kids, a trip with their spouse or family, a new vehicle, a new investment, a tax-free retirement, the possibilities are endless. What many wealthy and successful people do is leverage their cash values to purchase more investments and assets, and then take the profit of those investments to put back into their insurance plans to continue growing tax-sheltered. This is similar to a concept we teach called infinite cash flow banking, which we will have another blog posted about soon.
Why do wealthy people love permanent insurance?
If you talk to many wealthy people about their investing strategies and portfolios, you will be surprised to learn how many of them use huge permanent insurance policies as a keystone of their wealth creation and preservation. The reason they love it so much is because permanent insurance policies are one of the only tax-sheltered investment accounts in Canada other than a TFSA. That means that money can be invested and grow to virtually any amount within the policy, which can then later be accessed on a tax-free basis using something called a collateral loan. So, many of them have millions and millions of dollars in permanent life insurance, because the more coverage you have, the more room you have to invest inside of the plan.
Another reason why wealthy people love permanent life insurance is because of the word legacy. They are interested in creating generational wealth for their families and utilizing permanent insurance is one of the best ways to do it. They can buy millions of dollars worth of insurance for them to use as tax-sheltered investment accounts while they are alive, but once they pass away one day, millions of dollars of tax-free death benefit will be passed along to their next generation (and what do you think the next generation will do with that money? hint* buy even more insurance!).
The good news is you don’t have to be wealthy to buy permanent insurance. You can easily get covered for a permanent insurance plan that’s well within your monthly savings budget. But the sooner you do it, the more opportunity you are giving yourself to let your policy and investments compound over time, allowing you to create tax-free, generational wealth for you to enjoy while you’re alive, and for your next generation to be set for life.
Let’s look at a real life example of a permanent life insurance plan from one of Canada’s leading insurance companies, Industrial Alliance. A 30 year old male, non smoker, healthy, can get UL policy with $500,000 in permanent coverage on his life, $50,000 in critical illness benefit if he gets any major disease or critical illness, and a $1200/month supplementary disability benefit for 2 years in case he’s disabled and unable to go back to work. That plan will run him for $270 a month and most of that monthly premium will be going to his cash value inside of the plan. By the time he turns 65, the cash value inside of his plan has grown to nearly $500,000, which he could access on a tax-free basis for his retirement. His death benefit also increases over time, giving his family a tax-free benefit of over $1,500,000 if he died at the age of 85.
For a total investment of $270/month for 25 years ($81,000 total investment), he just built a million dollar asset for him and his family!
After understanding the two paths, you should have some sort of idea of which one to take and for what purpose. Remember, there’s two paths for a reason because they each fulfill different needs and wants. There’s also no saying that you can’t go down both paths at the same time. Many clients we have worked with would love to put all their money into permanent life insurance plans, but they also have higher debts they want to ensure in the shorter term, which term can help with easier. So many times we set clients up with permanent plans that will build up over time, and cover any leftover vulnerabilities with term insurance plans until those vulnerabilities no longer exist.
To summarize and compare term vs permanent life insurance in one short paragraph, the biggest things to look at are; price, coverage, cash value. Term insurance is the cheapest form of insurance in the beginning, allowing you to get the highest coverage for the cheapest premium. The coverage will last the duration of the term, and once the term is over the contract will end. If you wanted to renew for another term, you would have to reapply for insurance, and pay a more substantial monthly premium for the same coverage. Term insurance has no cash value, so the premiums paid are non refundable if nothing happens to you during the term. Permanent insurance is more expensive than term insurance, meaning you pay a higher premium for the same amount of coverage, because the premiums aren’t just going towards insurance, they are being invested and grown inside of the policy’s cash value for you to use and access in the future. With permanent insurance you are covered for life, no matter how old or young you were when you got the policy.
This is why we like to call term insurance death insurance, and permanent insurance life insurance. Because permanent insurance covers you for when you’re gone, but it also provides you with a tremendous benefit for you to enjoy while you’re alive.
If you want to explore your insurance options and see how you can utilize the benefits that both paths have to offer, you can book a free consultation with a Wealth Strategist here. Our Wealth Strategists work with all the major insurance and investment companies in Canada, so they will be able to search the market for the best plan for you based on your specific needs and goals.
If you want to learn more about these products you can schedule a FREE consultation with one if our wealth strategist.
Schedule NOW!