Do I need permanent life insurance?

How it works

income that does not convert to cash

Three questions a property investor faces

1. 01Liquidity for the years of drawing income
2. 02A plan for the deemed disposition at death
3. 03Less dependence on a single class of asset
4. 04Wealth that produces income but converts slowly

A need with an end date is a term need: a mortgage, dependent children, an obligation that closes. A need without one is permanent: a tax liability arising on the final return, a shareholder agreement, a dependant with a lifelong disability, an estate the family intends to hold together.

Term coverage is priced to match that closing date. The insurer prices the risk over the stated period only, using a rate that rises at each renewal because the pool of insureds still holding the coverage grows older each time, and the contract stops on the day the term ends whether or not the insured is still alive to renew it again. Permanent coverage is priced differently from the start, because the insurer is committing to pay a claim on a death that is certain to happen eventually rather than one that may or may not fall inside a fixed window, and that certainty is reflected in a premium that does not rise with age the way a renewing term premium does. The insurer that issues either contract underwrites the applicant once, at the outset, and the health class assigned that day generally follows the contract for as long as it stays in force, which is a large part of why buying either kind of coverage earlier, while still in good health, tends to cost less over the coverage's lifetime than waiting.

The cost or the catch

two columns, two different documents

How to read an illustration honestly

1. Read the guaranteed column on its own, first
2. Treat the other column as an assumption
3. Ask which dividend scale the projection uses
4. Ask what changes if that scale is reduced
5. A projection is not a promise

A permanent contract bought without a permanent need has been bought for the wrong reason, and the cost of that mistake is paid in the early years where the pricing sits. Writing the obligation and its end date down first is what prevents it.

The reverse mistake exists too, and it costs differently. A household that carries only term coverage against what is actually a permanent obligation, such as a tax liability the final return will generate regardless of when death occurs, can find the coverage has expired or become prohibitively expensive to renew by the time the obligation is still very much alive. Term insurance that lapses at age sixty five or seventy does not know that the tax bill it was meant to offset arrives whenever death actually happens, and a term contract nearing its final renewable age is not a comfortable position from which to discover a permanent need, particularly if health has changed in the meantime and a fresh application for permanent coverage would now be underwritten on less favourable terms than an earlier one would have been.

How to decide

Listing the household's obligations and writing an end date, or its absence, beside each one is an exercise that takes an evening and answers the question better than any sales pitch. An obligation with no end date calls for coverage with no end date, and an obligation that closes in ten or twenty years calls for coverage that closes with it. Whichever coverage is chosen, who continues paying for it if the insured becomes disabled is a separate question, answered in who pays the premium if I become disabled.

A mixed household, one holding both kinds of obligation at once, commonly ends up holding both kinds of coverage at once rather than choosing a single answer for every need. A young family with a mortgage and a business owner's permanent tax exposure inside the same household is not an unusual combination, and there is no rule that a single policy or a single type of coverage has to answer every obligation on the list. Some households later convert a portion of term coverage to permanent as obligations firm up, where the contract allows it, rather than deciding everything on the day of the first application, and whether that option exists at all is itself a term written into the original contract rather than something available by default.

What this depends on

different taxation, different timing

Where retirement income comes from

1. 01Government benefits
2. 02Registered plans
3. 03Savings held outside a registered plan
4. 04Employer plans, where there is one
5. 05A business or a property, for many households

How much either kind of coverage actually costs depends heavily on age and health at the time of application, and the gap between term and permanent pricing narrows the longer a permanent contract is expected to run and widens sharply for coverage bought later in life. It also depends on the insurer, since underwriting classes, rate tables and available riders differ from one company to another for what looks like the same coverage on paper, which is why the same obligation priced at two insurers rarely produces the same premium, and why a quote from one company says little about what another would offer the same applicant.

The contract's wording matters as much as the label attached to it. Two policies both called permanent can differ in their guaranteed schedule, their conversion or renewal terms if any portion is term, and what happens if a premium is missed, so reading the specimen contract, not only the illustration summary, is part of answering whether a given product actually matches the obligation it is meant to cover. Two contracts marketed under similar names by different insurers are not interchangeable simply because both would be described the same way in a single sentence.

Who this suits least

different timelines, different failures

Two questions inside a succession plan

1. 01A succession planThe two run on different timelines, and they fail in different ways.
2. 02Who will lead the businessA plan covering only leadership leaves the harder one open.
3. 03Who will own the businessThe ownership question is the one that is usually left open.

Someone whose obligations are entirely time bound, with no dependant expected to need lifelong support and no anticipated estate tax exposure, is generally not well served by permanent coverage bought for reasons unrelated to an actual permanent need, since the premium for the permanent portion is doing work the household does not need done. A household still building an emergency fund or paying down high interest debt is also not usually well positioned to add a permanent premium on top of those priorities, regardless of what obligations may eventually appear.

At the other end sits the household most suited to it: a business owner bound by a shareholder agreement that will trigger a payment on a partner's death whenever it occurs, a parent supporting a dependant whose needs will not end at a fixed age, or a family whose estate is expected to owe tax on its final return no matter which decade that return is filed. For that household the absence of an end date is not a marketing phrase. It is a description of the obligation itself, and the coverage is simply built to match it.

What this page will not tell you

This page does not tell you which specific obligations your own household carries, nor whether a given one is temporary or permanent in your particular circumstances, since a shareholder agreement, a dependant's condition or an estate's plans are facts about your situation that only you and the people who drafted those documents can confirm. It also does not size the tax liability a final return might generate, since that number depends on assets, adjusted cost bases and rules that change.

An accountant is the professional positioned to estimate a tax liability at death, and a lawyer or notary is the one positioned to say what a shareholder agreement or a will actually requires. This page describes how the two kinds of coverage differ. It does not advise on which obligations exist in a specific household or what should be done about them, and it does not weigh a permanent contract against a registered savings vehicle, since both can be used by the same household for different purposes and the choice between them is not a question this general answer is positioned to settle.