- Elias Zeekeh, MBA, CPA, CMA
Buy Term and Invest the Difference
If you’ve shopped around for life insurance before you probably know there are two categories: term insurance and permanent insurance, and that the prices between the two vary dramatically. In fact permanent insurance (universal life, whole life, and variable life) can be ten to twenty times the term premium. So what is the difference?
Under a term insurance policy you pay a set premium for the term of the policy for a death benefit. So if you have a 15 year term, your premiums will stay the same during that period. When the term expires you will not receive cash back. Some term policies have the option to convert to permanent life insurance.
Under a permanent life insurance policy they are put in place until the time that you die, therefore there is a significant increase that the insurance company will have to pay a death benefit. Secondly, permanent policies have a tax deferred savings component attached to your policy. The savings portion of the policy is often referred to as a cash value.
Conclusion: Though the savings vehicles in permanent insurance policies have tax benefits, they are rarely as effective as an RRSP or TFSA invested in a low fee index fund. Unless you’ve maxed out these other savings vehicles and have substantial cash reserves you are better off going with a term insurance policy. Permanent insurance is usually only beneficial to accredited investors, who have an individual income above $200,000 or over $1,000,000 in assets.
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