Want to protect your loved ones in the event of your death while making a low-risk financial investment? Permanent life insurance is the product for you!
In this article:
What is permanent life insurance?
Permanent life (whole life) insurance is an insurance product that provides insurance coverage throughout the entire life of the insured person. That means it only expires when the person dies or if it is terminated. In addition to its duration, it is characterized by its cash value, making it an attractive, low-risk investment vehicle. Every time you pay your premium, a percentage of the amount is invested in a tax-deferred savings account, at a rate determined by your insurer. That’s what constitutes the cash value.
What are the types of permanent life insurance?
There are two types of permanent life insurance: whole life and universal life. Permanent life insurance, whether whole or universal, is suitable for those who wish to pay the costs associated with death (funeral expenses, taxes), or who wish to leave an inheritance. Both have the same characteristics, the difference being that universal life insurance can also be used as an investment tool, and therefore meet the needs of those who have maxed out their RRSP and TFSA contribution limits and want to invest additional amounts tax-free.
What are the benefits of permanent life insurance?
Although slightly more expensive than term life insurance (see our article Term life or permanent life insurance?), permanent life insurance is a more economical choice in the long term. It is primarily for people who want to be insured for life. It also offers an impressive list of additional features that may be of interest, such as participating or non-participating.
Here are some examples of fictitious cases to illustrate what permanent life insurance is all about:
- Andréanne and Julie, a young couple in their 30s and the mothers of two children, want to leave their children an inheritance that will be tax-free at the time of death. They also want to be able to use the cash value if they need it.
- Julien, retired and recently widowed, wants to plan for his funeral expenses in advance so that his heirs are not left with that responsibility.
- Eric, a single parent, owns a secondary residence that could be sold upon his death and wants to make sure his children have enough money to pay the estate taxes.
Permanent life insurance as an investment tool
Participating whole life insurance includes an investment component that is entirely managed by the insurer. The money that is invested can be used in a variety of ways (to get cash, let the money grow and add to the premium upon death, reduce the premium, etc.). It’s important to understand that because of the investment portion, it’s a more expensive product. The basic insurance amount is generally guaranteed, however, and a cash value may also be included.
In addition, you can draw funds from the value of your insurance without necessarily having to terminate your policy. You can simply choose from one of the following three options:
- Insurance policy loan;
- Reduced paid-up insurance;
- Extended term insurance.
A policy loan (or advance) is where you borrow money using your insurance (its cash value) as collateral. But because it’s a loan, you will eventually have to repay the amounts you borrowed plus interest. If you die before paying off the loan, the insurer will subtract the amounts owed plus accrued interest from the amount of insurance payable to your estate. Note that this option is also valid with other financial institutions using your insurance as collateral.
Reduced paid-up insurance can be negotiated when you assign the cash value to your insurer. This allows you to obtain an amount of life insurance that is lower than the amount specified in the original policy. However, you will never pay premiums again and you will be covered for life.
Extended term insurance involves assigning the cash value to your insurer. In exchange, however, you no longer pay premiums but continue to remain insured for a certain number of years.