How term insurance works
Term insurance covers a specified period, subject to the policy's terms. It can suit responsibilities with a timeline, such as the years a family relies on an income.
Many policies offer a fixed premium for an initial term. Renewal costs, expiry ages, and the ability to convert to permanent insurance vary. Read those provisions before choosing a term based only on its initial price.
Term insurance generally does not build cash value. If coverage ends without a payable claim, there is generally no payout or refund of premiums.
How permanent insurance works
Permanent insurance is designed for lifetime coverage, provided its requirements are met and it remains in force. It can be relevant when the financial goal is expected to continue throughout life.
Different products work differently. Whole life and universal life are examples, and cash value, payment commitments, guarantees, and investment features vary by contract.
Some policies have cash value that can be accessed. Loans or withdrawals can carry costs and tax consequences and may affect policy benefits. Understand the particular policy before treating that value as readily spendable savings.
A practical comparison
| Question | Term insurance | Permanent insurance |
|---|---|---|
| Intended coverage period | A specified period | Lifetime, if policy requirements are met |
| Initial premium for comparable coverage | Generally lower | Generally higher |
| Cash value | Generally none | Depends on the product |
| Future payments | Check renewal schedule and expiry | Check required payments, guarantees, and assumptions |
| Planning focus | Needs with an expected end date | Needs that may continue throughout life |
| Detail to examine | Renewal and conversion rights | Guaranteed versus non-guaranteed values |
Match the policy to the purpose
A parent seeking protection during a child's dependent years may begin by comparing term options. Someone planning for a lifelong dependent or a particular estate objective may also explore permanent coverage.
Some people use a combination to address different needs. That decision should come from the plan and budget rather than an assumption that one type is always better.
Look beyond the first premium
A short initial term may have a lower starting cost but renew at a substantially different price. Ask to see the future schedule and consider how long you expect to need the coverage.
With permanent insurance, understand which payments and benefits are guaranteed and which depend on assumptions. For participating policies, illustrated dividends are not guaranteed. Ask how the policy would work under less favourable results.
Understand conversion before you need it
Some term policies allow conversion to permanent insurance without new medical evidence, within the contract's conditions. There may be deadlines, age limits, and restrictions on the products or amounts available.
That option can be valuable, but it needs to be understood on the actual policy. The word “convertible” isn't the whole explanation.
Questions to bring to a comparison
- When do I expect this financial need to end, if at all?
- What are the initial premium and later payment requirements?
- Which benefits and values are guaranteed?
- What happens if I stop paying or want to reduce coverage?
- What renewal, conversion, or expiry dates apply?
- How would loans or withdrawals affect a permanent policy?
Ask for illustrations and contract explanations in language you understand. Taking an extra few minutes here can make years of payments easier to evaluate.
Make the choice specific to your life
The right comparison brings together the purpose, time period, benefits, and cost. Once those are clear, the terminology becomes a lot less intimidating.
Keep reading.
YOUR NUMBER.
How much life insurance do I need?
Start with the financial support you'd want in place if you died. Add the costs you want covered, then account for the resources already available.
WITH A PURPOSE.
Is life insurance worth it?
It can be, when a policy protects against a financial loss your household couldn't comfortably absorb. Start with that loss and the people it would affect.
COST.
How much does life insurance cost in Canada?
Your premium depends on the person being insured and the policy being considered. A meaningful price comes with a coverage amount, a duration, and the assumptions used to produce it.