Term or permanent life insurance: how do you choose?

Two protections, two needs

When people talk about life insurance, they often lump together products that answer very different needs. Term and permanent both protect your loved ones, but they do not answer the same question.

The first asks: “What needs protecting during a specific period of my life?” The second asks: “What needs to be guaranteed whenever death occurs?” Choosing between them is therefore less about comparing two prices than about clarifying what you want to protect, and until when.

This article presents the difference in plain terms, the situations where each type is often considered, what to compare beyond cost and the questions to ask before signing. It contains no premiums and no amounts, because those depend on your profile and the insurer. It does not replace the advice of an authorized person, registered with the Autorité des marchés financiers (AMF), who can apply these ideas to your situation.

What each type covers

Term insurance pays a benefit if death occurs within the chosen period, known as the term. If death occurs after the term ends, nothing is paid, unless the contract has been renewed or converted. It is protection for a fixed duration, a bit like cover that stops on a known date.

Permanent insurance pays the benefit whenever death occurs, as long as the contract’s conditions are met, notably paying premiums as agreed. Some permanent contracts also include a component that builds up value, and how it works varies greatly from one product to another.

That last feature deserves a careful read. Accumulated value is not a guaranteed return, and its access conditions, fees and effect on the cover depend on the contract. Always ask for a written explanation of what is guaranteed and what is not.

In both cases, the protection exists only if the contract is kept in force and the statements made at application were accurate.

Who needs what

Some needs come to an end. A mortgage is eventually repaid, dependent children become independent, a life project reaches its term. For these situations, term is often considered, because it matches the length of the need.

Other needs last a lifetime, or cannot be fixed in time. Final expenses, an estate to settle, a relative who will depend on you with no time limit, a bequest you want to guarantee: these situations lean more readily toward permanent.

Many people actually have a bit of both: a large but temporary need during the years when obligations are heavy, and a more modest but lasting one. People then sometimes combine the two types, or choose a term product with a conversion option.

There is therefore no single answer. Your family situation, debts, income and plans determine what is relevant. An authorized person can discuss it with you, with no commitment on your part.

How long the need lasts

A good starting point is not the product but your own list. Take stock of what your death would make hard to pay, then note until when each item would remain relevant.

• Debts: mortgage, loans, lines of credit, and their expected end date.
• Income to replace: how many years your family would need it.
• Children’s education or plans: their horizon in time.
• Final expenses and the estate: what must be settled, whenever it happens.
• The needs of a dependent relative: expected or open-ended duration.

That end date, or the absence of one, guides the choice better than comparing price alone. An inexpensive product that stops before the need does not do its job, just as a lasting product that far exceeds the need may not be relevant.

Review this list at each major event: a birth, a purchase, a separation, a new loan. The need changes, and the original choice may deserve a second look.

What to compare beyond cost

Cost matters, of course, but it does not say everything. Two contracts of the same length can offer very different conditions, and those differences can weigh heavily at the moment you need the cover.

Here are the points to look at closely:

• the renewal conditions at the end of the term, and how premiums could then change;
• whether you can convert the term policy to permanent, and until when that option stays open;
• the exclusions, meaning the situations in which the benefit would not be paid;
• how stable the premiums are under the contract: fixed for the whole term, or liable to change;
• the conditions for keeping the policy in force and the consequences of a late payment.

Ask for these items in writing and read them calmly. A contract that looks less attractive on a single criterion may prove better suited once the whole is considered.

If a term eludes you, ask for it to be restated. Clarity is part of the comparison, and a serious authorized person will take the time to answer.

A hypothetical scenario

Imagine a person we will call Éric, who has just bought a first home and whose family is growing. He wonders which type of life insurance to consider. Rather than starting with products, he makes his list: a mortgage to repay over many years, young children, and the wish that his family not have to sell the house if he dies.

He notes until when these needs apply, and sees that they stretch over a long period but do have an end. He then prepares questions: what happens at the end of the term, is conversion possible and until when, can premiums change, what are the exclusions.

He asks an authorized person to present suitable products and compare their conditions, not just their cost. He takes the time to read the documents before deciding.

This scenario is fictional and guarantees no outcome. It shows an approach: start from the need, estimate its length, compare complete contracts, then decide without rushing.

Mistakes to avoid

A few mistakes come up often when choosing between term and permanent. Knowing them helps you avoid them.

• Choosing on price alone, without looking at how long the need lasts or at the contract’s conditions.
• Forgetting the end of the term and discovering too late that cover stops or premiums change.
• Not checking the conversion option before buying, even though that right can be limited in time.
• Assuming group insurance is enough, when it generally ends if you leave the employer.
• Giving inaccurate or incomplete answers at application, which can cause difficulties at the time of a claim.
• Never reviewing your cover after a major life change.

None of these mistakes is beyond repair if caught in time, but several are hard to fix afterwards, for example when your health has changed.

A conversation with an authorized person, registered with the AMF, helps spot them before you sign, and you have no obligation to follow up on the discussion.

Questions to ask before signing

Here are simple questions to put as they are and to have answered in writing.

• What happens at the end of the term: does cover stop or renew, and on what conditions?
• Is conversion to permanent possible, and until when does that option stay open?
• Can premiums change during the contract, and in what circumstances?
• What are the exclusions, and in which cases would the benefit not be paid?
• What happens if I miss a payment or want to end the contract?
• Would my current group insurance end if I leave my job?

You do not need to ask everything at once, but the more written answers you gather, the better you can compare.

If an answer seems evasive, rephrase calmly. An authorized person, registered with the AMF, owes you clear explanations. You can also consult the resources of the AMF, the FCAC or the Canadian Life and Health Insurance Association to check a specific point.

What comes next

Once the need is pinned down and the questions prepared, the next step is to speak with an authorized person, registered with the AMF. They can compare products suited to your situation, explain the differences and answer your questions. You sign nothing to get that comparison.

CompareTaux is a referral service. It shows no premiums, makes no automated decision and sells no product. You briefly describe your situation and your request is routed to an authorized person, who contacts you. It is that person, not the site, who can make a recommendation suited to you.

You have no obligation to follow through. If you prefer to think it over, compare with other opinions or wait, you are entirely free to do so.

To check a person, consult the AMF’s public register. To read further on your own, the bodies listed below publish independent, free and up-to-date information, including ways to file a complaint if a problem arises.

Revisiting your choice over time

A life insurance choice is not set in stone. The situation that justified a contract at application changes: debts shrink, children grow up, income evolves, new plans appear. It is therefore reasonable to reread your contracts from time to time.

The end of a term deserves particular attention. Several months before it ends, ask what is planned: renewal, conversion or the end of cover. The earlier you act, the more options you have, since some rights are limited in time.

Before changing or replacing a contract, always understand the consequences. An authorized person, registered with the AMF, can explain what changes and what is kept.

Frequently asked questions

Sources

• Autorité des marchés financiers (general public)
• Financial Consumer Agency of Canada
• Canadian Life and Health Insurance Association (CLHIA)
• OmbudService for Life & Health Insurance