If you have a limited budget, term life insurance is your only choice for maximum coverage today. If you have money, you have other options. Often, the wealthy buy permanent life insurance. Let’s look at reasons why.
An asset that increases in value
Life insurance grows in value because your statistical date of death keeps getting closer. Temporary term life expires or gets cancelled before most people die. So the insurance company “wins” by not paying a claim. With permanent life insurance, your beneficiaries “win” because a claim will be paid (provided you keep paying your premiums).
You save bundles in loan interest charges by paying off your mortgage early. Life insurance is similar. With permanent plans, you can often pre-pay all the insurance charges for life over a short period. The period can even be guaranteed, say with 20-pay life. This will likely give you guaranteed cash values too.
As you build up cash value, you build up equity. As with your home, you can borrow against this equity to get tax-free income. You aren’t required to repay the loan or the loan interest. The loan interest can grow instead, within limits. The tax-free death benefit then repays the outstanding loan with the remainder going to your beneficiaries.
Get permanent peace of mind
With permanent life insurance you don’t need to worry about losing your coverage. Term life insurance often expires at age 80 or 85 when many people are still alive. This helps the insurance company reduce claims. Since your premiums increase at the end of each term, your insurance becomes less affordable, each renewal. The insurance company makes money by getting rid of you while you’re alive.
You’re not betting against yourself
With term life insurance, the “jackpot” gets paid if you die before a specific date. You “lose” if you live and the insurance company “wins.”
With permanent life insurance, you are betting that you’ll die someday. That’s a sure bet. There will be a payout.
Your wealth grows
Your need for life insurance doesn’t end when you retire or pay off your mortgage. As you build wealth, you face a bigger tax bill at death on investments like your RRSPs and a cottage. The life insurance is often the cheapest way to preserve your estate because the death benefit is tax-exempt and premiums are usually much lower than the tax bill — especially if you buy when you’re younger.
Term life insurance won’t do. You could easily be alive when coverage ends. Most term plans allow you to convert to permanent coverage regardless of your health up to an age such as 65. However, the products to which you can convert may not be as good as what’s offered to new clients. The premiums will be higher than if you converted years earlier.
Your future health doesn’t matter
Suppose you buy Term 20 and discover you need insurance for longer. The renewal rates after the 20 years may shock you. A solution is to apply for new term life insurance instead of renewing. This is risky. You don’t know if you’ll qualify because:
- Your future health is unpredictable
- The requirements for qualifying are becoming more sophisticated
With permanent life insurance, your future health doesn’t matter when you pick a plan that’s affordable for life.
Well-structured life insurance has creditor protection. Does your RRSP, TFSA, home or non-registered portfolio? You may be surprised.
Creditor protection is less valuable with term life insurance because only permanent cash value life insurance has equity.
When you buy $1,000,000 of term life insurance, the death benefit remains $1,000,000 each year. After inflation, the real value is dropping. This may not matter over a short period but does over decades. Some permanent plans have a death benefit which is the face amount plus the growing equity.
If you miss a premium with term life you lose your coverage after a short grace period. Permanent life insurance with a cash value lets you stop paying premiums, possibly for years or forever, depending on how much equity has built up. This gives you flexibility if you’re out of work or need money for other purposes.
Warren Buffet says, “Our favourite holding period is forever.” That’s only possible with permanent life insurance.
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- When to Buy Both Term and Permanent Life Insurance
- How Do I Know I’m Paying the Lowest Price for My Life Insurance?
- 5 Reasons Term Life Insurance is Better Than Permanent Insurance
Flickr: David Hilowitz