Term vs. Permanent life insurance in Canada: Differences, costs & use cases

Choosing between term and permanent life insurance is less about picking a “best” product and more about matching coverage to the stage of life, cash flow, and legacy goals. Term excels at pure protection for defined obligations like a mortgage or childcare. Life insurance provides a one-time, tax-free payment called a death benefit.

Permanent adds lifetime coverage and a cash value account that behaves more like a long-horizon asset. Costs, flexibility, and eligibility all vary by product and insurer, which is why structure matters as much as price. The death benefit from both term and permanent life insurance policies is generally tax-free for beneficiaries.

In this guide, we’ll map the tradeoffs, common use cases, and when to combine both.

What is term life insurance?

Term life insurance is the purest form of life insurance. Term life insurance covers death benefit protection for a specific period, such as 10, 20, or 30 years, providing financial security for your loved ones during that time. It does not have an investment component, so it offers one thing and one thing only: insurance coverage in the event of your death. 

Term life policies are temporary protection with a specified duration that typically ranges from 1 year for yearly renewable term policies up to 30 years. Permanent life insurance often requires a medical exam, while term life insurance may not depending on the product.

Term life insurance policies tend to cost considerably less than permanent life insurance and are also easier to qualify for in many cases.

There are four primary types of term life insurance. Here is what each has to offer:

Level term life insurance

• Level term policies are the most common term life insurance policies. They offer a fixed death benefit at a fixed premium amount.
• The lower your age and the better your health condition, the lower your premium payment will be.

Increasing term life insurance

• This type of policy offers the flexibility to increase your death benefit later. Some insurers offer different options when and how you can increase that death benefit. Most policies limit how much you can increase the death benefit and how far down the road you can increase it.
• Increasing term life is ideal if you expect increased financial obligations in the future, such as buying a house or growing a family.

Decreasing term life insurance

• Decreasing term policies have death benefits that are reduced over time at predetermined rates. This is ideal for those who expect fewer financial liabilities as they age. If your dependent children are approaching adulthood and your mortgage is almost paid off, you won’t need that much coverage.

Convertible term life insurance

• Convertible policies offer the option to convert from a term to a permanent life insurance policy later. These policies make it easier for you to get much more coverage at the beginning, when you may need it most, at the lowest price.
• When your priorities and needs change, you can convert to a permanent life insurance policy. This covers most of the term life insurance plans you will encounter. Term life insurance policies also offer a variety of riders that will give you even more flexibility in selecting the coverage you need. There is typically no fee associated with converting a term life policy to a permanent policy.

Who needs term life insurance?

Term life insurance is ideal for those needing the most death benefit coverage at the lowest cost. Young people with a family that depends on their income and limited budget can benefit from term life insurance more than from a permanent life insurance policy.

What is permanent life insurance?

Unlike term life insurance, permanent life insurance policies provide lifelong coverage to the insured. A permanent life policy is designed to offer ongoing protection for your entire life, as long as the premium payments are paid, coverage is guaranteed. Permanent life insurance has two features: a death benefit and a cash value component.

Several types of permanent life insurance offer unique features and benefits. Let’s look at the most common types of permanent life insurance.

Whole life insurance policy

• Whole life is by far the most common type of policy issued. With this type of policy, the death benefit and premium amount are fixed for as long as the policy is in force.

• An attractive feature of whole life insurance is the guaranteed rate of return on the policy’s cash value component. That cash value will grow at a predetermined rate for the entire policy life.
• Additionally, some permanent whole-life policies offer dividends on the cash value accumulation. You can use these dividends to lower your premiums, leave them to accumulate interest or take them as cash payments. Whole life insurance can also be a participating life insurance policy, which allows policyholders to earn dividends that can be used to reduce premiums, increase coverage, or be received as cash.
• Permanent life insurance policies may also provide additional benefits, such as tax-deferred growth and investment management options, which can enhance the overall value of your policy.
• Policyholders can withdraw money from the cash value of their policy, but depending on how the funds are accessed, they may have to pay taxes on the amount withdrawn.

Universal life insurance policy

• Universal life insurance policies offer greater flexibility in death benefits and monthly premiums. Universal policies allow you to increase the death benefit of the policy or apply a portion of the accumulated cash value to your monthly premium payments.

• Universal life insurance still offers permanent life insurance features and the flexibility to manage the death benefit amount and premiums.

Variable universal life insurance policy

• Variable life policies give you further flexibility over your insurance policy’s cash value accumulation component. Whereas universal and whole-life policies have a guaranteed rate of return, the rate of return is also fixed; it can not increase.

• With a variable life policy, life insurance companies let you invest in sub-accounts that offer various investment options tied to financial markets. Since there are multiple sub-accounts, you can get very granular and set up each with different investment options. You can have an aggressive blend on some and a more conservative mix on others.
• If your investments do well, your cash value will increase, and conversely, if the investments do poorly, the cash value component will decrease.

Indexed Universal life insurance policy

• Indexed universal life policies offer the ability to capitalize on the stock market’s growth. The insurer will have a stock market index tied to the policy, such as the Nasdaq Composite or the S&P 500.

• IUL policies do not have a fixed interest rate feature. The rate of return on your investment component will vary based on the index tied to the policy. However, a minimum interest rate guarantee assures you won’t go in the negative while you can still participate on the upside.
• These different types of permanent life policies offer the critical protections of permanent life insurance: A guaranteed death benefit, lifelong coverage, and a cash value component.

Who needs permanent life insurance?

Permanent insurance is ideal for those looking for lifetime coverage and can afford higher premiums for the same death benefit amount as term life insurance. You will need a permanent life insurance policy to leave money to your heirs without paying estate taxes.

Now, let’s compare the features of term life insurance vs. permanent life insurance.

Term vs. permanent life: Features

There are some marked differences between permanent life insurance and term life insurance. Here is a comparison of the most essential features of each:

Term life insurance:

• Coverage is for a specific, defined period. Terms are typically offered in 10, 15, 20, and 30-year terms.

• You can renew your policy at the end of the term, but your monthly premiums will change when you renew.
• The policy expires at the end of the term. If you outlive the policy, the benefit is received only after being protected during the term.

Permanent life insurance:

• Coverage is permanent for your entire life.

• Coverage does not expire as long as you pay the premiums required, so you don’t have to be concerned about renewing it.
• When the policy is paid up, you continue to benefit from coverage and the cash value accumulated.

Comparing the cost

One of the most striking differences between term and permanent life insurance is the cost for the amount of coverage. Permanent life insurance rates are much higher than term rates as it offers guaranteed lifetime protection and a cash value benefit. A whole life policy, which is a type of permanent life insurance, typically comes with a higher premium because of its lifelong guarantees and the cash value component.

Advantages

Advantages of term life insurance:

• Lower in cost

• Easier to qualify for
• Simple and easy to understand

Advantages of permanent life insurance:

• Permanent coverage that lasts for your entire lifetime

• You can build cash value
• You can use it to transfer wealth tax-free to your heirs
• You can withdraw or borrow against the cash value of the policy.
• You must name a beneficiary to receive the death benefit; otherwise, it will go to your estate.

Disadvantages

Disadvantages of term life insurance:

• It is only offered for a period of time,  then it expires.

• Your insurance cost will be higher if you renew or buy a new policy.

Disadvantages of permanent life insurance:

• It is more expensive than term life insurance

• It is harder to qualify for

Why is term insurance often better than permanent insurance?

Term life insurance is usually better than permanent life insurance for several reasons. First, it gives you the most coverage for the money. Permanent life insurance costs 3-10 times more for the same death benefits depending on your circumstances, such as health and age.

Term life insurance is easier to get. If your health is not good enough for permanent life insurance, term life can be covered practically regardless of your health. Guaranteed-issue and simplified-issue policies are common and easy to get. Though the coverage may be limited, you can still get covered.

What happens when a term policy ends?

At the end of the term, coverage ends unless you renew or convert. Renewal keeps the same death benefit but the premium jumps because it is based on your attained age.

Many policies include a conversion option that lets you switch to a permanent policy within a set window and age cap without new medical evidence. Converting to a permanent policy can allow you to bypass the underwriting process, making it easier for those with health issues to maintain coverage. If neither is exercised, the policy lapses and there is no payout or cash value. 

When you convert your term life policy to a permanent one, your premium will likely increase due to the nature of permanent coverage being more expensive. Planning 12 to 24 months ahead of expiry helps you compare renewing, converting, re-applying, or reducing coverage as needs decline.

How does cash value work in permanent life insurance?

Permanent policies pair lifelong insurance with a tax-advantaged cash value that grows inside the policy. With whole life, growth is driven by guarantees and potential dividends. With universal life, growth depends on credited rates or chosen investment options, subject to fees and policy design.

Cash value can be accessed through withdrawals or policy loans, which reduce the death benefit if not repaid. Funding level, expenses, and market performance determine outcomes, so illustrations and ongoing reviews are key to avoid underfunding or unexpected costs.

Additional considerations for Canadian life insurance buyers

Beyond choosing between term life insurance and permanent life insurance, there are several important factors Canadian buyers should keep in mind. One key benefit of life insurance is the potential for a tax-free payment to your beneficiaries, which can help your family pay off debts, cover funeral expenses, or provide ongoing financial support.

It’s essential to name a beneficiary on your life insurance policy to ensure the death benefit goes directly to the person or people you intend, avoiding delays and potential probate fees. If your needs change over time, many term life insurance policies offer the option to convert to a permanent life insurance policy, providing lifelong protection and the opportunity to build cash value.

Consider your financial goals when selecting a policy. For example, you may want to use life insurance to leave a legacy, fund your children’s education, or ensure your family can maintain their lifestyle if you’re no longer there to provide for them. Regularly reviewing and updating your life insurance policy ensures your coverage keeps pace with changes in your life, such as marriage, the birth of a child, or a new mortgage.

By keeping these considerations in mind, you can make sure your life insurance policy continues to meet your needs and supports your family’s financial security.

Term vs permanent life insurance – Conclusion

Term and permanent are tools, not rivals. Term prioritizes maximum protection per dollar for time-limited risks like mortgages and childcare. Permanent prioritizes lifetime coverage, estate planning, and cash value that can supplement long-term strategies. Many Canadians blend them, starting with term and converting a slice later as income grows or needs evolve. The death benefit can be used by beneficiaries for various payments such as debt repayment or education expenses.

The right mix depends on budget, horizon, and tax planning. To see numbers tailored to your goals, get a personalized quote with Oneday. Coverage for eligible applicants is subject to underwriting and provincial regulation.

Frequently asked questions about term life insurance vs permanent life insurance

Sources:

1. CLHIA, “A Guide to Life Insurance”