Life insurance is a way to protect your family (dependents) in the event of your death, but for some, they consider it a way to invest. This is particularly for the case of universal life insurance in Canada. Could life insurance in Canada be a bad investment? Well yes and no.
When I talked to my friends as a young adult, they tell me their parents bought universal life insurance policies as a way to invest and as a way to protect their loved ones. I remember wondering how it all worked. She told me “it’s kind of morbid, but my mom invests her money by paying premiums for life insurance, and she told me that when she dies, I will get the insurance payout money tax free”.
Hopefully this post can help you decide which type of life insurance is better suited for your current and future situation.
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Table of Contents
Why is LIfe Insurance Necessary?
Not everyone needs life insurance.
If you have no dependents, you don’t typically need life insurance. Most people who sign up for life insurance are in their mid to late 20’s to mid forties and this coincides with the time in life when you have young dependents and a large mortgage payment.
Why is life insurance necessary?
Basically, you should probably get life insurance if:
- You have dependents and your liabilities (e.g. big Canadian mortgage, big property taxes, and utilities) are large and you do not have liquid assets to pay it off
- If anyone (your aging parents, your children, your spouse) depends on you and your income for financial support and there would be financial hardship if you were not around
WHat Types of LIfe Insurance Are Available?
First of all, let’s get this clear. Life insurance is meant to provide financial assistance to your dependents and loved ones in the event of your death.
If your family and dependents will struggle with mortgage payments, tuition, and putting food on the table WITHOUT your income, then you should look into life insurance.
It is cheaper to apply for life insurance when you are young and healthy, but usually people don’t apply for life insurance when they are single because at this time you wouldn’t really need it.
There are two types of life insurance in Canada:
- Permanent Life Insurance– This umbrella includes universal life insurance and whole life insurance. There is cash value to permanent life insurance and if you decide to cancel the policy you will still receive a payout guaranteed. Permanent life insurance is usually much more expensive compared to term life insurance because your beneficiaries will get paid out the monthly premiums that you put in.
- Term Life Insurance– There is no cash value to this policy if the policy is cancelled. The terms can be as short as 5 years or as long as 25 years. Usually people choose this option when they have a mortgage to pay. When you don’t need it anymore and you cancel, you don’t get back the monthly premiums that you put in.
Term Life Insurance vs Permanent Life Insurance
What is term life insurance?
Term life insurance means that you pay your premiums for a certain length of time and your coverage is also for a certain length of time. For example, if you have a mortgage for the next 25 years, term life insurance would be a good idea because if you died during that time and no one was available to help pay the mortgage, it will affect your dependents well being.
The other life insurance option is permanent life insurance. Permanent life insurance is more expensive compared to term life insurance, but permanent life insurance provides insurance for your lifetime.
Here’s a chart to summarize the above permanent life insurance vs term life insurance:
|Permanent Life Insurance
|Term Life Insurance
|Universal Life Insurance and
Whole Life Insurance
|It’s just term life insurance
|Payout is guaranteed if you decide to cancel
|No payout or cash value if
policy is cancelled or
if there is no death during the policy term
What is the cost difference between Permanent vs Term Life insurance?
According to Ratehub.ca, Permanent life insurance’s monthly cost is around 4 times the cost of term life insurance (or more, depending on the policy amount that you take out).
Is Permanent Life Insurance a Good Investment?
With permanent life insurance, there is something called the policy’s cash surrender value (CSV). A portion of your monthly insurance premium goes towards the cash value which is invested.
The cash value doesn’t start building up though until you are paying a few years of your monthly premium. The money within the cash value is tax-sheltered, so you don’t have to pay taxes on the gains.
With Universal Life Insurance, your insurance premiums can change depending on the company and your policy. The amount of death benefit can also change and is negotiated with the insurance company as your beneficiaries’ needs change. With Universal Life Insurance, you can decide what to include in your investment component.
With Whole Life Insurance your insurance premiums will stay the same throughout the entire duration of the policy. For the investment portion of Whole Life Insurance, the insurance company decides what the investments will be made up of.
Essentially, there are better investment options out there in Canada, especially if you have not taken advantage of maxing out the tax sheltered investments such as your RRSP and TFSA.
Nonetheless, a lot of Canadians like to avoid paying the tax man and would prefer to pay premiums instead to life insurance agencies rather than the Canada Revenue Agency. With permanent life insurance, the tax benefits would likely benefit those who have lots of money.
Another Reason why Permanent LIfe Insurance is a bad Investment
I don’t know about you, but I have met my fair share of life insurance agents (sales people) and I tend to find them pushy and aggressive. Especially those who are peddling whole or universal life insurance (the commissions for these can be 12 times that of term life insurance).
One time, my husband and I were even taken out to lunch by an insurance agent trying to convince us to purchase whole or universal life insurance (I can’t remember which one). Insurance agents are not looking out for you, they are looking out for themselves and their commissions.
Insurance agents receive high, huge commissions for sales of permanent life insurance. This is the reason why we were taken out for lunch by an eager insurance agent.
She tried to explain whole life insurance and why it’s a good investment to us on a napkin, and I swear, she just drew concentric circles over and over again.
I always get a little suspicious with overzealous sales type people so I was curious why she was so eager to sell us permanent life insurance.
Here’s an infographic from LSM Insurance that illustrates the marked differences paid out to insurance agents average first year commissions for term compared to universal and whole life insurance (2016 numbers):
Yes, that’s right you the payout to insurance agents for permanent life insurance is almost 10 times that of term life insurance.
Compared to term life insurance, permanent life insurance is much more expensive and insurance agents receive a bigger payout.
I know someone in their 50’s who started paying insurance premiums for permanent life insurance in his late 20’s and he’s still paying it (because he says it’s too late to quit now) but he states he regrets ever signing up for permanent life insurance.
A Good Option for Life Insurance in Canada
here are a number of life insurance companies in Canada that provide life insurance policies (for both term and permanent life insurance).
I personally would prefer to skip the high pressure sales tactics from insurance agents and would prefer to first get a quote online to compare the life insurance premiums and companies available. Personally, I would just stick to term life insurance. It’s the more affordable option.
When a company recommends just sticking to term life insurance instead of recommending permanent life insurance, you know they have some integrity (that’s what PolicyMe recommends).
One option for online life insurance quotes is PolicyMe.
PolicyMe provides term life insurance through by Canadian Premier Life Insurance Company, one of Canada’s most reputable life insurance companies.
PolicyMe’s policies can be 10-20% cheaper than other Canadian life insurance providers. They claim to have the cheapest life insurance rates in Canada.
It only takes about 5 minutes to get a quote.
Here’s my PolicyMe review.
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Do you have term or permanent life insurance?
GYM is a 40 something millennial writing about personal finance since 2009 and interested in achieving financial freedom through disciplined saving, dividend and ETF investing, and living a minimalist lifestyle. Before you go, check out my recommendations page of financial tools I use to save and invest money. Don’t forget to subscribe for a free dividend yield spreadsheet and the free Young Money Bootcamp PDF.