What is Permanent Life Insurance and How Does It Work?

At some point, you may be wondering how you can protect your family’s finances after you’re gone. Many Canadians face the challenge of choosing the appropriate type of permanent life insurance that can support estate planning and the transfer of assets to their loved ones.

Understanding permanent life insurance can give you peace of mind and help you protect your loved ones financially long-term.

In this guide, we’ll walk you through and explain what permanent life insurance is, the benefits and drawbacks, the different types available, and what you need to know when considering whether it’s a good fit for the financial legacy.

Key takeaways

• Permanent life insurance provides lifelong coverage with fixed premiums.

• Permanent life insurance usually includes a death benefit and a growing cash value component.

• Whole life insurance, universal life insurance, and term 100 life insurance are the main types of permanent life insurance.

• If you have lifetime financial obligations, are involved in tax planning or estate planning, have a high net worth, and have a family with dependents, permanent life insurance may be a suitable choice.

• Although permanent life insurance has higher premiums compared to term life insurance, it does offer lifetime coverage, tax advantages, and accumulating cash value.

Understanding permanent life insurance

It’s important for individuals and families to understand what permanent life insurance is so you can make an informed decision about the best type of coverage for your circumstances.

Simply put, permanent life insurance provides you with lifelong coverage with stable premiums that don’t change from the time you purchase the policy. Permanent life insurance means your loved ones receive a tax-free death benefit when you pass away, if your premiums are maintained.

Some permanent life insurance products also include a cash value that may increase over time and allows you to withdraw or borrow funds from your cash value.

There are three types of permanent life insurance: whole life insurance, universal life insurance, and term 100 life insurance. These products differ slightly, and we’ll explain more about how each one works below.

What are the pros and cons of permanent life insurance?

Each type of insurance policy has its benefits and drawbacks. There’s no exception when it comes to permanent life insurance. That’s why it’s important to understand both sides of the equation so that you can determine whether permanent life insurance is the right fit for your circumstances.

Pros of permanent life insurance

There are a wide variety of benefits of permanent life insurance, including:

Lifetime coverage: Unlike term insurance (which ends after a defined period, typically from 10 to 40 years), permanent life insurance gives you lifelong coverage, even if you experience changes to your health.

Guaranteed payout: Because this policy doesn’t expire, your beneficiaries will receive the death benefit as long as you maintain your regular premium payments.

Accumulating cash value: With the cash value acting as your savings account, you’re automatically building long-term wealth.

Tax advantages: The tax-free death benefit and tax-deferred cash value growth can help to preserve your wealth and provide accessible funds for settling the estate.

Potential for dividends: Depending on the type of insurance you choose, you may be eligible to receive dividend payouts from your investment accounts.

Reinvesting dividends: You can reinvest these dividends to potentially increase the value of your policy’s death benefit and cash value.

Cashing out options: If you need to withdraw the cash value from the policy, you have flexible options to do so.

Customizable add-ons: Based on your unique needs, you may top up your coverage (known as riders), such as to protect you in the event of accidents or disability.

Estate planning: Permanent life insurance gives you the flexibility to leave an inheritance to your beneficiaries, which provides them with a liquid asset that they can access after you pass away.

Cons of permanent life insurance

The disadvantages of permanent life insurance include:

Higher premiums: Compared to term life insurance, permanent life insurance typically comes with pricier premiums, which may impact how much insurance you can afford. Review your finances to ensure you can comfortably cover your recurring payments.

Intricacy: On top of insurance coverage, you’ll need to understand the savings, investing, and dividend components. These add additional layers of complexity and require periodic management.

Lack of flexibility: With this long-term commitment, you’ll be responsible for lifelong payments. If you’re looking for short-term coverage (e.g. 10 to 20 years), this may not be the right product for you.

Lower returns: Any cash value may experience lower returns compared to other types of investment products, particularly during the early years of taking out a policy.

Potential charges: If you cancel the policy before it matures, be aware of the taxes and surrender charges that may be applied.

Policy may lapse: You need to make regular payments to keep your policy active. If you’re unable to maintain premium payments, then your policy may lapse, and you’ll no longer receive coverage.

Types of permanent life insurance and how they work

There are different permanent life insurance products, including: whole life insurance, universal life insurance, and term 100 life insurance. The type you choose will depend on your specific needs. Here we’ll explain each one, how they work, the benefits, who is eligible to apply, and provide a comparison.

Whole life insurance

If you want a policy that provides lifetime protection and the ability to leave a legacy, whole life insurance may be a suitable choice. You’ll pay fixed premiums, and in return, your beneficiary receives a tax-free death benefit, along with the tax-deferred cash.

With a participating whole life insurance policy, the earnings from your investments may be distributed to you as dividends. Depending on the type of product you choose, you have different options to leverage your dividends, such as purchasing additional coverage, receiving it in cash, or reducing your premiums. Plus, you’ll enjoy the long-term tax-deferred growth.

RBC’s Participating Whole Life Insurance is available to people from birth to age 80, and you must complete a medical questionnaire. Whole life insurance ideal for those seeking predictable growth or if you wish to withdraw or borrow against the cash value. Having access to the cash value may come in handy if you believe you’ll have unexpected expenses.

Compared to universal life insurance, whole life’s premiums are fixed but offer less flexibility. Unlike Term 100, whole life insurance offers cash value and dividend payouts.

Universal life insurance

For lifelong protection that offers flexible solutions, universal life insurance is one option. It combines lifelong insurance coverage and a tax-sheltered investment account that lets you decide how your money is invested. As a result, your premiums are divided to pay for the cost of insurance and the investment portion.

Other unique features of this type of permanent life insurance include access to the funds to help supplement your retirement or to cover medical bills. You may also receive living benefits such as a compassionate advance or a disability benefit. You can also adjust your premiums to fit your needs and choose from various death benefits and interest options.

With RBC Insurance, coverage is available from birth to age 85 and will require a medical questionnaire. It’s best suited for individuals who understand the basics of investing and prefer flexibility in their payments and investments.

While whole life insurance doesn’t provide investment options, you can choose from a range of investments based on your risk profile with universal life insurance.

Term 100 life insurance (T100) 

Term 100 life insurance (also known as T100 insurance) is a more affordable option that removes the savings and investment components. It’s called T100 because you’re required to pay lifelong premiums, but if you reach age 100, you no longer need to pay them.

The main benefits of Term 100 life insurance include lifetime coverage (starting from $50,000 and up with RBC Insurance), a tax-free death benefit, and guaranteed fixed premiums.

If you’re between the ages of 18 and 85, you’re eligible to apply for coverage. In most cases, you’ll need to complete a medical exam and answer some health questions for screening purposes.

The key difference between Term 100 and universal life and whole life insurance is this product doesn’t have cash value or investment accounts.

Is permanent life insurance right for you?

Determining whether to obtain permanent life insurance is a personal choice. To help you decide, these are the key factors Canadians should consider before purchasing permanent life insurance:

Financial goals: Permanent life insurance could help you reach your long-term savings goals by building wealth through the cash value portion. This strategy also helps with estate planning, as it allows you to provide an inheritance to your beneficiaries.

Budget: Typically, permanent life insurance costs are steeper compared to term life insurance. Be sure to assess your finances to determine your ability to cover the higher premiums.

Lifetime coverage: Instead of having temporary coverage that will expire after a set time, permanent life insurance provides lifetime coverage. You don’t have to worry about the policy expiring if you maintain paying your premiums.

Wealthy individuals: If you’re a high-net-worth individual, permanent life insurance can be advantageous as it provides tax efficiencies and gives you the ability to transfer wealth to a partner or the next generation.

Families with dependents: Long-term insurance coverage offers emotional and financial assurance for those who want protection that will provide financial support after you’re gone.

Long-term protection for you and your family with permanent life insurance

There can be many uncertainties in life. With the proper life insurance, you can help guard against the unexpected.

Whether you have dependents or you’re looking to pass on your wealth, having the right life insurance helps you provide financial security, build wealth, and provide a legacy for those who matter most.

Be sure to research and compare policies to find a solution that will protect you and your family throughout different life stages. An accredited insurance advisor can help.

Even if your health or life circumstances change, permanent life insurance keeps you protected for a lifetime.

FAQs about Permanent Life Insurance

Can you cash out permanent life insurance?

Yes, it’s possible to cash out permanent life. There are typically three options available:

1. You can withdraw your cash value. However, it may lower your policy’s death benefit, so your beneficiaries may receive a reduced amount after your death. There may be tax implications if you decide to access your cash value.
2. You can borrow against your cash value as a loan. Interest is charged, and you can repay the loan at any time. If you don’t repay, the loan amount and the interest is subtracted from the death benefit.
3. You may cancel your policy and receive any applicable cash value. Your policy will end, and part or all of the money you receive may be taxed.

What is the best age to get permanent life insurance?

If you’re looking to get the lowest premiums, then you’ll want to secure permanent life insurance in your 20s or 30s.

However, you may wish to obtain it in your mid-30s or 40s when you may have a more stable income, have started a family, and still have sufficient time to grow your cash value.

If you wait until your 50s or 60s, the premiums may be higher. Ideally, get insurance coverage before any medical issues arise. 

Can you have both term and permanent life insurance?

Yes, you can have both term insurance and permanent life insurance. Term insurance covers you for a fixed amount of time, whereas permanent life insurance gives you life-long coverage.  

You can purchase both types of insurance as two separate policies. Alternatively, you can get a combination policy, known as blended policies, where you get benefits of both products under a single contract.

What are the disadvantages of permanent life insurance?

While there are plenty of advantages to permanent life insurance, there are a few drawbacks to consider. First, it may be more expensive compared to term life insurance. It’s also more complex as it involves an investing component, a death benefit, a cash value, and more. Remember, these premiums are a long-term obligation that could last decades. If you miss making payments, the policy may lapse. Lastly, the cash value may experience slow initial returns but could grow exponentially in the later years.

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