I know I should be considering life insurance but I’m confused about the difference between term and permanent. I’ve heard that term insurance is a lot cheaper and the best way to go. Can you help me understand the options so I can figure out what’s best for me and my family?
Sam from Mississauga
Everyone in the world has a permanent need and a number of temporary or term needs and everything fits into one or the other. Both options have assorted products underneath involving length of term, frills, and investment features.
The permanent need that never really goes away for people is ‘end-of-life’ costs. For those, all you’re really choosing is whether you are going to self-insure or cover the expense with insurance. If you want to save the money and put it aside for your funeral, casket, or the party—whatever you want—you can just stick the money in a savings account. Or, for usually significantly less money, you can buy a permanent policy, such as whole life, and that will take care of those expenses for you.
Another permanent need that may happen at end-of-life involves capital gains. So, if you have a cottage you want your kids to inherit, you have to be considering the capital gains tax on the property or they could be pinned with not being able to afford to keep it.
There’s a bunch of term products that come into play and it’s generally a matter of choice. Mortgage Insurance is a term product where—if you die before the debt is cleared—you can pay off or significantly reduce the mortgage burden of your house for your spouse or other survivors.
There are well-documented reasons why term insurance is better than buying mortgage insurance from a bank. One of the principal problems is that bank products pay the bank debt first and leave only the leftovers to your heirs.
And paying the mortgage immediately is not always the best use of available funds. There could be a great investment interest rate to take advantage of as an alternative to paying off the property—survivors may want to use the money for another investment. Similarly, in the case of a rental property, your rental income may be covering your mortgage just fine, leaving other uses for term insurance.
Other transitory expenses that come into play involve kids going through school, should you want to pay for their tuition, books, and accommodations. Those are temporary needs because twenty years from now the kids are going to be done with school.
Another important piece to figure out is how much insurance to have. Figuring out the amounts you need and in which instrument is important, or even just identifying that everybody needs something. This is where speaking with a broker is most helpful.
It’s true that the cost difference between products can be huge. There’s the famous line:
buy term and invest the rest where you cover your short-term pieces and save for your long term needs. Then when you pass, your family decides what they want to do with the money. They may want to just take the cash and continue to invest. Everyone has their own level of comfort and discipline when it comes to saving for the future. It’s always a personal choice.
There is a significant number of tax strategies in insurance for individuals and for business owners who have amassed retained earnings. Insurance products can be purchased to help lower your tax burden. For the average person, life insurance is not much of a pure investment vehicle. If you’ve covered off your basic needs, the investment may apply at the next level of sophistication where it can play into an investment strategy.
But trying to layer an investment strategy into insurance is like trying to set record lap times before you’ve got your G2. Better to get the basics covered and then start deciding what you’re going to do with the excess.
You first have to cover the areas like: kids going to school; what’s your surviving spouse or partner going to do for income and mortgage payment; are you going to cover your own end-of-life expenses or is that a burden you prefer to insure; is your cottage or vacation property going to become a noose around your kids’ necks, because you had the means to carry it but they don’t. Once you’ve covered off those areas, it makes sense to look at wealth building options.
Life insurance is a highly personalized product and the Mitchell & Whale team is more than happy to assist customers in identifying life insurance strategies and products that best fit their personal circumstances and objectives.