Life insurance is a financial product designed to protect you and your loved ones, and in some cases, to grow your wealth. It can be divided into two main categories: term life insurance and permanent life insurance, offered in different forms.
While permanent life insurance is suitable for many situations, term life insurance is the one that satisfies most cases because it is less expensive and easier to understand. However, permanent life insurance does not expire and often offers a cash value (cash surrender value) that acts as an investment. Do you find it all confusing? It is! That’s why at Matcha Insurance, our Financial Security Advisors are here to support you and help you identify the type of product that corresponds to your needs and situation.
In this article :
What is term life insurance?
Term life insurance is designed for people with predetermined financial needs over a specific period. For example, when you take on a mortgage or other debt, or when you have dependent children. This is the most affordable type of insurance. It insures you for a specified period and for an amount you choose. You pay only the cost of the insurance. If you die during the term of this type of insurance policy, your beneficiaries will receive the amount for which you were insured. This type of product that will maintain the lifestyle of your loved ones after you die.
This insurance also offers a great deal of flexibility and can adapt as your needs change: renewal when the selected term expires, cancellation, change in coverage amount or conversion to permanent insurance. The new premium for this new policy will be adjusted based on your age and the new terms and conditions of the policy.
If you have group insurance, the life insurance that is part of it is term insurance. You are only covered for the duration of your employment or period of study. When you leave your job or finish your education, your insurance will end. In some cases, you can convert your group life insurance to individual life insurance.
What is permanent life insurance?
Permanent life insurance provides coverage for the entire life of the insured person. The policy expires if it is terminated, or when the insured dies. The main feature of this type of insurance is its cash surrender value (representing a percentage of your premium), which acts as an investment.
Although there are two types of permanent life insurance, whole life insurance is the more common. The other type — universal life insurance — has the same features as whole life, but it can also be used as an investment tool. This type of coverage may meet the needs of those who have maxed out their RRSPs and TFSAs and want to invest additional amounts tax-free.
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. Even though term life insurance has lower premiums, permanent life insurance is a more economical long-term choice for those who want coverage for their entire lifetime. It also offers a host of additional features that may appeal to clients.
Advantages and disadvantages of term life and permanent life insurance
The following table provides an overview of the main advantages and disadvantages of both types of insurance:
When is term life insurance preferable?
There are three main reasons why term life insurance can be useful and beneficial:
- You wish to cover a short- or medium-term debt or risk for which the repayment date is known;
- You want to cover declining debt;
- You want life insurance, but can’t afford to pay for permanent insurance.
In many cases, term insurance is not only the simpler but also the more appropriate choice to cover greater financial need more affordably. However, for some, the best formula lies in a combination of the two types.
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When is permanent life insurance preferable?
When you want to combine its protection with an investment that you can withdraw in several different ways, depending on your needs. Some by-products may consist of investment products.
Plus, if you want to leave a financial legacy for your loved ones when you pass away, permanent life insurance is a great tool.
Can I convert my life insurance policy?
Yes, you can convert your term life insurance products to permanent life insurance.
Let’s explore a few examples:
Louise, 65 years old and non-smoking, has worked as an employee her entire life and has always had life insurance through a group insurance plan. When she retires, she decides to take out life insurance to cover her debts.
The conversion costs of her life insurance could look like this:
|Type of life insurance
|Average monthly premium
|Term life insurance, 20 years – $50,000 purchased at age 65
|Whole life insurance – $50,000 purchased at age 65
Mia, 35, decides to start her own landscaping business. She leaves her current job and buys life insurance.
|Type of life insurance
|Average monthly premium
|Term life insurance 20 years – $50,000 purchased at age 35
|Second term life insurance 20 years at age 55 – $50,000
|Term life insurance 30 years — $50,000, purchased at age 35
|Whole life insurance – $50,000 purchased at age 35
As you can see, each individual’s age and health status affect the premium amount. Find out all about the factors that determine the price of life insurance here!
Group and individual life insurance may have different premiums, even if the insurance amount is the same. The main reason is the risk assessment by the insurer. In group insurance, the risk of death is spread over the entire insured group, whereas in individual insurance, it is only the risk of an individual that is taken into account.
Whether you opt for term or permanent life insurance, it is important to do a comprehensive analysis of your current situation, needs and goals. The two types of insurance offer a variety of appealing and economical products. Matcha Insurance’s financial advisors have all the necessary skills to guide you in your decision-making and offer you products that work for you and give you peace of mind.