What permanent life insurance is

The defining feature

Term insurance covers a period. Permanent insurance covers a life.

That single difference drives everything else. An insurer selling a 20-year term to a healthy 40-year-old is fairly confident it will never pay a claim on that policy. An insurer selling permanent coverage to the same person is confident it eventually will, because everybody dies and the policy is designed to still be there when it happens.

Pricing follows. Permanent coverage for a given amount costs several times what term costs at the same age, and the gap is widest when you are young.

In exchange, the premium is normally level for life, and the coverage does not expire, renew at a higher price, or require you to prove your health again.

The three types in Canada

Whole life. The most guaranteed version. A fixed premium, a guaranteed death benefit, and a guaranteed schedule of cash values. Participating whole life adds dividends, which are not guaranteed but which can increase the coverage or reduce what you pay over time. See whole life insurance.

Universal life. More flexible and less guaranteed. It separates the cost of insurance from a side account you direct, and you have latitude over how much you pay and how the account is invested. That flexibility cuts both ways, because an underfunded universal life policy can fail decades in. See universal life insurance.

Term to 100. The simplest. A level premium payable to age 100, permanent coverage, and normally little or no cash value. It is permanent insurance stripped of the savings component, and it is the least expensive of the three for the same death benefit. See Term to 100.

A side-by-side comparison is in comparing permanent policies.

Where permanent coverage genuinely earns its cost

An estate tax liability. In Canada there is no estate tax as such, but death triggers a deemed disposition of capital property. A cottage, a rental property, or a non-registered portfolio with large unrealised gains can produce a substantial tax bill in the year of death, and the estate has to find the cash. Selling the cottage to pay the tax on the cottage is exactly what families try to avoid. Permanent coverage supplies the money at the moment it is needed. See estate planning.

A dependant who will always need support. An adult child with a disability does not become independent at 22. A term policy ending at 65 does not solve a need that runs past your death whenever it comes.

Final expenses, for someone with no other liquid assets. Funeral costs and settling an estate need cash quickly, and a modest permanent policy provides it without anyone having to liquidate anything. See final expense insurance.

Business obligations without an end date. A shareholders’ agreement requiring a buyout on death does not stop applying because the shareholder reached 70.

Charitable giving. Some people use a permanent policy to leave a larger gift than they could fund from savings.

Where it gets oversold

The cash value component is the source of most of the pressure, and it deserves scepticism rather than dismissal.

Some permanent policies accumulate money inside the contract that grows without annual tax and that the owner can access while alive. That is genuinely useful in specific circumstances, most often for people who have already filled their RRSP and TFSA room and are looking at what comes next.

It is frequently presented to people who have not filled that room, in a comparison that would not survive contact with the alternative. In the early years, most of what you pay covers the insurance and the acquisition cost, so cash value builds slowly. The full argument is in is permanent life insurance a good investment, and it is worth reading before signing anything that leans on projected values.

The commitment

Permanent insurance is a long promise in both directions. The insurer promises coverage for life. You are agreeing to fund it for decades.

Lapsing a permanent policy after fifteen years is an expensive way to have bought term coverage. Before committing, the question worth asking is not whether you can afford the premium now, but whether you can afford it through a job loss, a period of reduced income, or retirement.

If the answer is uncertain, a smaller permanent policy you will certainly keep beats a larger one you might not. And if the need actually has an end date, term coverage at a fraction of the cost is the honest answer.