Money Management Newsletter: Insurance Products
Term vs. Permanent life insurance
By Michael Matheson
Life insurance is a fairly broad topic and there is a great deal of information available on the subject of which type of insurance coverage is best. At the same time however, a fair amount of misinformation is also circulating.
Many financial advisors advocate the use of one type of Life insurance coverage over another through their articles, books, websites and even in person. This may be short sighted thinking however, since both Term and Permanent insurance have their place and benefits.
In essence, an individual should consider Term insurance to take care of temporary needs while the purchase of Permanent insurance provides coverage on a more permanent, long term basis. Quite often, the difficulty lies in determining which needs are temporary and which are permanent.
One example of a temporary need consists of covering the time known as the "dependency period". This is the time period when a family depends on money from the income earner(s) to enjoy basic necessities such as food and shelter. Typically, this period lasts until the youngest child is no longer dependent on his or her parents. The family's debt obligations, such as loans and mortgages, are often greatly reduced by this time as well. With the obligations toward dependents minimized, the necessity for life insurance to fund these specific needs is reduced or eliminated.
In terms of permanent needs, an example would be estate conservation. After many years of accumulating assets, many people are still unaware of the fact that taxes may seriously reduce the value of their estate. Upon the death of an individual, assets can move laterally which means that they can be transferred to a spouse free of tax implications. On the death of the spouse however, the government deems all assets disposed of, thereby triggering tax.
A cottage or vacation property, certain valuables, stocks, bonds and mutual funds could all be exposed to tax on the gain in value. In addition to this, the balance of money in an RRSP or RRIF will be taxed at the top marginal rate of the deceased. The government will not accept real estate, jewelry or securities as it must be paid in cash. Because of this, many people find it more efficient to carry life insurance to fund the taxes. This is often the easiest and least expensive way to fund one's estate.
Obviously, both needs and wants must be taken into account when determining whether Term or Permanent insurance is warranted. Our life insurance specialists can help you assess your situation and ensure that you get the best value for your life insurance dollar.
Some advisors have concluded that Permanent insurance is simply a cash drain and that it keeps people from getting ahead. To determine if this mimics your way of thinking, it may be useful to take the following test. Keep a record of the amount of money that is spent over the course of one month. Document everything right down to the cent that is added to the "Leave a Penny" bin. For most people, there will be the somewhat surprising discovery that the difference in premium amounts between Term and Permanent is not their greatest extra expense.
Also, in the case of a Permanent policy, it should not be thought of so much as an expense but instead as a savings. After all, no one fails to get ahead financially just because they purchased a Permanent life insurance policy.
That being said, Permanent insurance (such as Universal Life) is not for everyone. In some cases, there are true temporary needs that do not warrant a permanent solution. In other cases, a permanent problem or situation may exist but Term insurance might be the only way to afford the proper amount of coverage at that time.
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