Permanent Life Insurance
Table of Contents
In Canada, life insurance is divided into two categories: term life insurance and permanent life insurance (sometimes known as whole life insurance, but whole life is simply one type of permanent insurance available today). See our page on life insurance types for a primer on the many types of life insurance.
What is Permanent Life Insurance?
Permanent life insurance covers you for the entire of your life and does not expire. What does this imply? It means that your life insurance coverage will never expire or end (unlike term life insurance).
Canadians now have the option of selecting from a variety of permanent life insurance options. In 2020, the top three life insurance plans available in the Canadian life insurance market are…
- Whole Life Coverage (Hyperlink)
- Term to 100 Life Insurance (Hyperlink)
- Universal Life Insurance (Hyperlink)
How It Works
As the policy owner becomes older, the fundamental cost of all life insurance rises. Term life insurance smooths that process by leveling our premiums over time periods known as “terms.”
What happens if the life insurance company averages the cost over an even longer period of time? Let’s imagine the insurance company averages your insurance cost (which rise every year) over your lifetime. If they did this, we would pay premiums that are fixed for life. That is the fundamental definition of permanent life insurance: a stable premium for life.
As previously said, various types of permanent life insurance policies may be constructed and customized to meet the demands of the client. If you are considering obtaining permanent life insurance, we strongly advise you to speak with one of our licensed life insurance agents. It is a long-term financial commitment that should be given careful thinking and consideration before making a purchase.
In a nutshell, the term life insurance premiums increase every so many years, whereas permanent life insurance premiums remain constant throughout one’s life.
Types Of Permanent Life Insurance
Whole Life Insurance
Whole life insurance is a type of permanent life insurance that lasts for your entire life (it never expires). It has two key features: the death benefit and the cash value. The death benefit begins at a number selected by the policy owner (for example, $100,000). This is the amount that is tax-free sent to your beneficiaries in the case of your death. The cash value begins at $0.00. The death benefit and cash value will both increase over time as you fund the policy premiums (for most policies).
In the early years of the policy, whole life insurance premiums surpass the company’s real insurance costs. Later in life, whole life insurance premiums (the cost that the policy owner pays for the policy) will be lower than the company’s insurance costs on an annual basis because they remain steady. In the early years of the policy, you are effectively overpaying the actual annual insurance cost. This over funding premium is then retained or reserved within the policy (known as the cash value). When the costs surpass what you pay in premiums in the latter years of the policy, there is money from the earlier years to make up the cost difference.
If you terminate the policy after a period, the insurance companies generally repay you the amount of the premium overpayment. This is referred to as the cash value or cash surrender value. It is crucial to note that the majority of the cash value will be a refund of excess premium payments, particularly in the early years.
Many insurance businesses were mutual in the past. Mutual businesses have traditionally declared a non-guaranteed dividend to owners of participating whole life insurance policies. These dividends were then utilized to generate several alternative options, such as small units of paid up insurance, increasing cash value, or one of two or three other options. Dividends were expected to be utilized to pay down premiums in subsequent years. Dividends paid out in the 1980s and later did not meet prior forecasts, and as a result, many policy owners had policies that they anticipated would have premiums that became paid up but did not. Consumers then filed different ‘vanishing premium’ lawsuits against insurance firms, and these claims were successful.
Universal Life Insurance
Universal life insurance is a product in the permanent life insurance family. It is intended for people who want life insurance for the rest of their lives.
The insurance and cost component of universal life insurance policies is separated from the investing component. The two parts of the policy are mostly distinct.
The insurance component of your policy is frequently available in two basic forms: level for life and annual growth.
The investment component of a universal life insurance policy looks like many mutual funds. They are not mutual funds, but they are fundamentally quite similar. For example, you will find a diverse range of investment choices from various organizations, many of which are linked to particular and widely known mutual funds. Other popular investing alternatives include GICs, equities and stock options, and indexes.
In another crucial way, the investment part of most universal life policies behaves similarly to a mutual fund. Unlike traditional mutual funds, the investment possibilities are often not guaranteed. As a result, just like a regular mutual fund, investments inside your universal life insurance policy can go bankrupt. Many universal life insurance policy investment possibilities fell by 30-40% alongside the rest of the markets in 2008-2009.
It’s crucial to understand that your annual premiums aren’t always the same as the insurance costs; money moving in and out of investment options can have an impact. You should understand exactly how your premiums are allocated within the policy – what part funds insurance and what part funds investments. Many life insurance advisors would market universal life insurance policies with annual growing insurance costs in order to persuade their customers to buy the policy as the premiums appear to be extremely inexpensive. Every year, the cost of the insurance policy rises until it becomes prohibitive, forcing the policyholder to cancel the policy and forgo having life insurance. That’s why we should pay close attention to the cost of insurance with a universal life insurance policy.
Two further words of caution while thinking about purchasing a universal life insurance… First, even selecting a conservative interest rate may not accurately reflect the policy. Assume you use 0% interest – it doesn’t get much lower than that, can it? As previously stated, many universal life investments have performed at -20%-40% in recent years, much below ‘0%’. Second, when it comes to investing alternatives, most consumers will be better served by RRSPs and TFSAs rather than investing inside a universal life insurance policy.
Universal life insurance might be an appealing insurance policy for consumers looking for long-term protection. All of the universal life insurance policies we recommend have the following characteristics:
- Insurance prices are completely guaranteed.
- Insurance costs at a fixed level (we normally do not propose packages with fixed premiums but increasing insurance costs within the contract).
- Investments are minimal to none. Consider your insurance policy to be insurance rather than an investment.
Term to 100 Life Insurance
Despite the word ‘term’ in the name, Term to 100 is not a term life insurance plan, but rather a sort of permanent life insurance that will cover your entire life. Term to 100 was once a popular product, but considering that Universal Life Insurance cost is nearly identical, most people will go for Universal Life Insurance instead because of the extra flexibility.
Having said that, term to 100 life insurance is a relatively simple product to grasp. The coverage premiums (the cost) are fixed for the rest of your life. The death benefit (coverage amount) is also fixed for the duration of your life. The premiums on the policy must be paid until the age of 100, at which point the policy is paid up and no further premiums are necessary. If you are still alive at the age of 100, the policy remains in effect, no premiums are required, and the death benefit is paid out at death.
Because Term to 100 has no cash surrender values, premiums are often lower than those of other permanent insurance options that have cash surrender values, such as whole life insurance.
Term to 100 is usually a good option if you want low-cost life insurance for the remainder of your life for things like building an estate, paying for burial fees, or covering taxes after death.
Comparisons
Now that we’ve gone over the three main types of permanent life insurance policies available in Canada, have a look at the table below for a quick rundown of the differences between them.
Term to 100 | Whole Life | Universal Life | |
Coverage for life? | ✔ | ✔ | ✔ |
Are premiums level for life? | ✔ | ✔ | Depends on policy |
Does policy expire? | 🗶 | 🗶 | 🗶 |
Is there an investment component? | 🗶 | ✔ | ✔ |
Does it have cash value? | 🗶 | ✔ | ✔ |
Cost rating | Lowest Cost | Highest Cost | Middle Cost |
What is Cash Value?
The cash value (also known as cash surrender value) of a permanent life insurance policy is the investment element of the policy. Both whole life and universal life insurance plans can have cash surrender value.
You’ve probably heard of someone cashing in their life insurance policy. This means they had accumulated an investment value throughout the years of paying for their life insurance. They may have encountered financial difficulties or just required funds to help with the down payment on a home they were trying to purchase. As a result, they terminated the life insurance contract and received the cash value of the policy back. Be aware that if you terminate your life insurance policy with cash value, you may be required to pay tax to the CRA, so check with your life insurance company first.
The cash value of a permanent life insurance policy is the money that has accumulated in the policy’s side investment account. When you pay a premium to a life insurance provider, the money is divided into three distinct categories.
- Insurance cost. The majority of the premium payment is retained by the insurance company to cover the actual cost of the insurance. This is the fee they charge to provide you with insurance coverage.
- Operating expenses and costs. The insurance business incurs expenses in order to function, and a percentage of the premium payment is utilized to assist cover these costs.
- Cash value. The value of the investment account that accumulates within the life insurance policy over time. A variety of factors, including policy type, company, investments, etc., influence performance of the investment.
Because the cash value is distinct from the death benefit, your beneficiaries do not get both the cash value and the death benefit when you die; only the death benefit is paid out. This is a widespread misconception about whole life insurance policies, as many customers believe that the cash value and death benefit are paid out at the same time.
Whole life insurance policies have a lot of cash worth. It is a sum of money that accumulates over time and can be accessed in a variety of ways. The following are the primary methods for retrieving the cash value of a life insurance policy:
- Withdrawal. You can withdraw (or cash in) a portion or the total amount of your cash worth. If you cash in some of your cash value, the death benefit will be reduced. If you cash in the entire amount of your cash value, the insurance will cease to exist and be terminated.
- Loan from Insurance Issuer. You can apply for a loan against the cash value and be charged an interest rate set by the insurance company. Interest rates are normally charged in the range of 6-8%. The policy will be cancelled/forfeited if the loan amount exceeds the total cash value amount.
- Loan from Bank. Banks regard your insurance to be an asset if it has a big cash value. Banks will secure a line of credit based on the cash value of the life insurance policy. You can then use the line of credit to get money from your life insurance policy that is tax-free. For many people, this is a highly popular financial plan. Bank interest rates are often substantially lower than what you would pay to the insurance company.
The accumulation of cash value under a life insurance policy is tax-deferred. This means you don’t have to pay taxes on the investment’s growth while it’s growing. The tax is postponed until the cash value is withdrawn. Despite deferring the tax, it will take many years for this money to accumulate to a large amount.
Summary
Permanent life insurance is not appropriate for everyone. Indeed, it is not intended for the vast majority of Canadians. Most Canadians should consider obtaining term life insurance since it is inexpensive and can give a large amount of life insurance coverage when it is most required.
We are here to assist you, free of charge, in determining what is best for you and your family. Please do not hesitate to contact us to discuss your individual situation and needs in order to determine which choice is best for you and your family.
Get a free quote
FAQs - Life Insurance
Life insurance is essential for various reasons. It can replace lost income, cover outstanding debts like mortgages or loans, fund children’s education, and provide financial stability for your family in the event of your untimely death. It offers peace of mind and ensures your loved ones are protected financially.
There are several types of life insurance, including term life insurance, whole life insurance, universal life insurance, and variable life insurance. Each type has unique features, benefits, and premiums. It’s important to understand the differences and choose the policy that best suits your needs.
Term life insurance provides coverage for a specified period, typically 10, 20, or 30 years. It offers a death benefit if the insured person passes away during the policy term. Term life insurance is often more affordable and straightforward compared to other types of life insurance.
Whole life insurance provides coverage for the entire lifetime of the insured person. It offers a death benefit and accumulates a cash value over time. Whole life insurance policies also allow for policy loans and potential dividends, providing long-term financial protection and savings.
The amount of life insurance coverage you need depends on various factors such as your income, outstanding debts, lifestyle, future financial goals, and the number of dependents you have. It’s advisable to assess your financial situation and consult with a life insurance advisor to determine an appropriate coverage amount.
Yes, many life insurance policies offer customization options. You can tailor your policy by choosing the coverage amount, policy duration, additional riders (such as critical illness or disability riders), and premium payment options. Customizing your policy allows you to address specific financial needs and priorities.
Life insurance premiums are based on several factors, including your age, health condition, lifestyle habits (such as smoking), occupation, coverage amount, policy type, and duration. Generally, younger and healthier individuals with lower-risk factors tend to have lower premiums.
Yes, life insurance policies can often be updated or modified to reflect changes in your circumstances. You can typically increase or decrease coverage, change beneficiaries, add or remove riders, or adjust premium payment options. It’s important to review your policy periodically and make updates as needed.
When a policyholder passes away, beneficiaries need to file a claim with the insurance company. They usually need to submit a death certificate and any other required documents. Once the claim is approved, the insurance company will disburse the death benefit to the designated beneficiaries.
Term life insurance provides coverage for a specific period, while permanent life insurance offers coverage for the entire lifetime of the insured. Term life insurance is typically more affordable and straightforward, whereas permanent life insurance accumulates a cash value over time and provides lifelong coverage.
Yes, you can buy life insurance for someone else, provided you have insurable interest in their life. Insurable interest usually exists between spouses, immediate family members, business partners, or individuals who would suffer a financial loss due to the insured person’s death.
Medical exams may be required depending on the type of life insurance and the coverage amount you’re applying for. Insurers often request medical exams to assess your health condition and determine the risk. However, some policies, like no-medical-exam life insurance, may be available for smaller coverage amounts.
If you miss a premium payment, your life insurance policy may enter a grace period, usually 30 days, during which you can make the payment without coverage lapsing. If you fail to pay within the grace period, the policy may lapse, and you may lose coverage. It’s important to make premium payments on time or explore flexible payment options.
With certain types of permanent life insurance, such as whole life or universal life, you can borrow against the cash value of the policy. Policy loans allow you to access funds for various purposes, such as paying for education or emergencies. However, it’s crucial to understand the terms, interest rates, and potential implications before taking a policy loan.
Individual life insurance is purchased by an individual to cover their own life and offers personalized coverage based on their needs. Group life insurance, on the other hand, is typically provided by employers or organizations to a group of individuals. Group policies often offer lower coverage amounts and may not be portable if you leave the group.
Yes, it is possible to have multiple life insurance policies. Some individuals choose to have a combination of term life insurance for temporary needs and permanent life insurance for lifelong coverage and cash value accumulation. It’s important to consider your overall coverage needs and ensure you can afford the premiums for multiple policies.
A beneficiary is the person or entity designated to receive the death benefit payout from a life insurance policy. The beneficiary can be a spouse, child, family member, trust, or even a charity. It’s important to keep your beneficiary designations up to date and review them periodically to reflect any changes in your life circumstances.
Yes, you can cancel your life insurance policy at any time. If you cancel within the policy’s free-look period, typically 10-30 days after purchase, you will receive a full refund of any premiums paid. However, canceling a policy after the free-look period may result in surrender charges or a reduced refund, depending on the policy terms.
Choosing the right life insurance company is crucial for financial stability and reliable service. Consider factors such as the company’s reputation, financial strength ratings, customer reviews, policy options, customer service, and claims settlement history. Working with a licensed insurance agent or broker can also help you navigate the selection process.
Yes, some life insurance policies offer the flexibility to increase or decrease the coverage amount in the future. This can be beneficial if your financial circumstances change, such as getting married, having children, or paying off a mortgage. However, certain policies may require additional underwriting or approval for coverage adjustments.
In most cases, life insurance proceeds paid to a beneficiary are not subject to income tax. The death benefit is generally received tax-free. However, if you choose to receive the proceeds in installments with interest, the interest portion may be taxable. It’s always a good idea to consult with a tax professional for guidance on your specific situation.
The contestability period is a specific period, usually the first two years of a life insurance policy, during which the insurer can contest the validity of the application or deny a claim based on misrepresentation or omission of material facts. After the contestability period expires, the policy becomes incontestable, and the insurer cannot deny a claim based on application inaccuracies.
Many term life insurance policies offer a conversion option, allowing you to convert the policy to permanent life insurance without undergoing a new medical exam or providing evidence of insurability. This can be a valuable feature if you decide you need lifelong coverage and want to convert your term policy before it expires. However, there is usually a specific conversion period and limitations outlined in the policy.
An accelerated death benefit rider is an optional add-on to a life insurance policy that allows you to access a portion of the death benefit if you are diagnosed with a qualifying terminal illness or critical illness. This benefit can help cover medical expenses or other financial obligations while you are still alive. It’s important to review the terms and conditions of the rider, as there may be limitations and eligibility criteria.
In some cases, you may be able to reinstate a lapsed life insurance policy. The process typically involves paying any outstanding premiums, providing evidence of insurability, and possibly paying interest or penalties. However, the reinstatement period is limited, usually within a certain timeframe after the policy lapses. It’s best to contact your insurance company or agent promptly if you wish to reinstate a lapsed policy.
If you outlive your term life insurance policy, the coverage will expire, and the policy will no longer provide a death benefit. However, some term policies offer the option to renew or convert to a permanent policy at the end of the term. It’s essential to review your options and consider your insurance needs when your term policy is nearing expiration.
Yes, it is possible to obtain life insurance coverage even if you have pre-existing health conditions. However, the availability and cost of coverage may vary depending on the specific condition, its severity, and other factors. Some insurers specialize in providing coverage for individuals with pre-existing conditions, so it’s beneficial to work with an agent who can help you find suitable options.
The time it takes to receive a life insurance payout, also known as the claims settlement process, can vary depending on factors such as the complexity of the claim, the insurer’s procedures, and the required documentation. In general, insurers strive to process claims promptly and efficiently. Working closely with the beneficiary and providing all necessary information can help expedite the payout process.
The cash value in a whole life insurance policy serves multiple purposes. It grows over time on a tax-deferred basis and can be accessed through policy loans or withdrawals. The cash value can be used to supplement retirement income, pay premiums, fund educational expenses, or address other financial needs.
Yes, you can name a trust as the beneficiary of your life insurance policy. Doing so allows you to control the distribution of the death benefit and provide for specific beneficiaries, such as minor children or individuals with special needs. Consult with an attorney or estate planner to set up a trust and ensure it aligns with your estate planning goals.
If you stop paying premiums for your life insurance policy, it may lapse or terminate after a grace period. Once the coverage ends, the policy will no longer provide a death benefit. However, some policies may offer options such as reducing the coverage amount or using the accumulated cash value to continue the coverage.
Yes, you can generally change your life insurance beneficiary at any time if they are not irrevocable beneficiaries. Most insurance companies provide a beneficiary change form that you can submit to update your beneficiary designation. It’s important to review and update your beneficiaries as needed to ensure your policy proceeds go to the intended recipients.
In case the beneficiaries are irrevocable, you need to have their approval to change the name of the beneficiaries.
Remember, the FAQs provided here are for informational purposes only, and it’s advisable to consult with a qualified insurance professional to address your specific life insurance needs and concerns.
In Canada, life insurance companies are regulated by various regulatory bodies to protect policyholders and ensure the stability of the insurance industry. If a life insurance company were to go bankrupt, there are several measures in place to safeguard policyholders and their coverage. Here’s what typically happens:
– Assuris Protection: Assuris is an independent, not-for-profit organization that protects policyholders in the event of an insurance company’s insolvency. Assuris provides protection to policyholders by continuing their coverage or transferring it to another solvent insurance company.
– Assumption Reinsurance: When an insurance company becomes insolvent, its policies and liabilities may be transferred to a financially stable insurance company through a process known as assumption reinsurance. This ensures that policyholders’ coverage remains in force without interruption.
– Policy Continuation: In most cases, policyholders will continue to have their coverage in force and their policy benefits protected, subject to certain limits and conditions set by Assuris. The specific details of the policy continuation will depend on the terms and conditions of the original policy and the regulations in place.
– Coverage Limits: Assuris provides coverage up to certain limits to protect policyholders’ basic insurance benefits. These limits vary depending on the type of coverage, such as life insurance, disability insurance, or critical illness insurance. It’s important to note that coverage limits may apply, and policyholders may not receive the full amount of their policy if it exceeds the coverage limit.
– Communication and Support: In the event of an insurance company’s insolvency, policyholders will be notified by the regulatory authorities and/or the appointed administrators overseeing the insolvency process. They will provide instructions and support to policyholders, ensuring they understand their rights, options, and any necessary actions to secure their coverage.
It’s important for policyholders to stay informed, follow instructions from regulatory bodies and administrators, and reach out to them for any clarification or assistance. Additionally, consulting with a legal or financial advisor can provide further guidance based on individual circumstances.
Please note that the above information is a general overview, and the specific procedures and protections may vary depending on the circumstances and regulatory requirements at the time of the insolvency event. It’s advisable to consult with the relevant authorities or seek professional advice for the most accurate and up-to-date information.
- Contact the Insurance Company: Start by contacting the insurance company that the agent represents. Explain your complaint and provide them with all relevant details, such as the agent’s name, policy number (if applicable), and a clear description of the issue. The insurance company should have a designated department or process for handling complaints.
- File a Complaint with the Insurance Regulator: If your complaint is not resolved satisfactorily by the insurance company, you can escalate the matter to the insurance regulator in your province or territory. In Canada, insurance is regulated at the provincial or territorial level. Locate the appropriate regulatory body responsible for overseeing insurance agents in your region and submit a formal complaint. They will guide you through their specific complaint resolution process.
- Provide Documentation: When filing a complaint, it’s important to provide supporting documentation, such as correspondence, policy documents, or any other evidence related to your complaint. This helps the regulator understand the nature of the issue and assess it appropriately.
- Seek Legal or Financial Advice: If the complaint resolution process through the insurance company and regulator does not provide a satisfactory outcome, you may consider seeking legal or financial advice. Consulting with an attorney or a financial advisor who specializes in insurance matters can help you understand your rights, explore potential legal recourse, or negotiate a resolution.
- Ombudsman Services: In some cases, you can also approach an independent ombudsman or mediation service for insurance-related disputes. These organizations provide neutral third-party assistance in resolving complaints between policyholders and insurance companies or agents.
It’s important to note that the specific procedures and authorities may vary depending on your province or territory. Therefore, it’s recommended to visit the website of your provincial or territorial insurance regulator to access detailed information on how to file a complaint and the steps involved.
Remember to keep records of all communication, including dates, names of individuals spoken to, and copies of any written correspondence. This will help you maintain a clear record of your complaint and any actions taken.