The argument has been raging around financial circles for years now – is it better to rent or buy?
Those on the "Rent" side argue that it's cheaper to rent; you can invest the savings in the stock market to improve returns.
The "Buy" camp counters that it's "the best investment you'll ever make"; it's an excellent opportunity to build equity. "Who wants to throw money away on something you don't own?" they say.
While this debate typically surrounds the housing market, it also occurs in the world of life insurance.
Let's take a closer look.
As I outlined in my last post, there are two main types of life insurance: term and permanent.
Term insurance is the most basic type of insurance. It provides a death benefit for a set period. With premiums guaranteed for a certain length of time (the "term").
This is the life insurance equivalent of renting. You pay the monthly premium (the "rent") and get the protection you are looking for. Then, when you no longer need it, you walk away.
Permanent insurance provides coverage for life (not a set period), often with level premiums and the potential for a cash value build-up. This is the "buy" side of this argument.
Your costs are typically higher than a renter (term insurance), but you can build up equity (cash value). When you sell (surrender the policy), you can access the equity you have built up.
Digging into the differences between the types of policies can be very helpful in determining which is best suited for you.
Cost: Term is by far the most cost-effective solution, especially initially. Since there is no cash value, the premium only represents the cost of insurance. This cost difference can be somewhat significant, with Whole Life policies often costing ten to twenty times as much as a Term Life policy with the same death benefit.
Length of Coverage: Permanent is designed to cover your life-long insurance needs. Term, on the other hand, covers you until the term expires or when you renew. Keep in mind that most term policies have a termination age (for example, age 80).
Cash Value: Only permanent policies build up any cash values. Term policies do not. While this might be beneficial to your situation (as always, it depends!), permanent policies are not to be confused with a get-rich-quick scheme. Cash values typically take many years to build up, and a better alternative might be to invest those additional premiums into your RRSP or TFSA.
Commission to the Insurance Advisor: This one is a no contest. Your insurance advisor stands to make a lot more money from selling a permanent product over a term policy. Keep this in mind if you are being told that a permanent policy is better for your situation.
In our next article, we'll examine how you can determine which type of insurance fits your situation and how much life insurance you need.
Please join us.