Why Permanent Life Insurance May Not Be Your Best Choice

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Article Contents
Picture of By <span>Matthew Roberts</span>
By Matthew Roberts

Updated on February 24, 2025

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Picture of By <span>Matthew Roberts</span>
By Matthew Roberts

Updated February 24, 2025

Visit author page

4 minute read

Article Contents

Life insurance is an important part of financial planning, but choosing which type to get will depend on several factors. For example, many Canadians look into permanent (aka whole) life insurance for its lifelong coverage and cash value, but the high costs and complexity can make it less appealing than other options.

Is permanent life insurance the right choice for you? Keep reading to explore who benefits from permanent life insurance, its potential downsides, alternative options, and real-life case studies to help you decide.

Permanent Life Insurance At a Glance

  • Permanent life insurance guarantees coverage for your entire life, but there’s a trade-off: premiums are significantly higher than term policies, which can take a toll on your budget.
  • One perk of permanent life insurance is that it builds cash value over time, which you can borrow against or withdraw. However, the growth is typically slow, making it a less attractive option if you’re looking for strong investment returns.
  • Permanent life insurance policies come with layers of fees and potential surrender charges that aren’t always obvious upfront. If you decide to cancel early, you could face unexpected costs that eat into your investment.

Who Is Permanent Life Insurance For?

Permanent life insurance is best suited for those who need lifelong coverage and want to build cash value as part of their long-term financial strategy, such as adding a return of premium to their policy.

It’s often marketed to the following people:

Individuals with complex estate planning needs:

If you anticipate a large estate or simply want to keep death benefits outside your taxable estate, a life insurance policy is a useful source of funds. Instead of worrying about tax burdens or having to sell assets like real estate, your heirs could use the policy’s death benefits to cover the cost.

Those looking to leave a financial legacy:

Families that need to balance inheritances or have multiple heirs with different financial needs may use a policy’s benefits as a guaranteed source of funds to pass down.

People looking for long-term cash accumulation:

Permanent life insurance policies grow tax-deferred cash value and can be accessed for emergencies or other needs.

Who Should Consider Permanent Life Insurance

What Are the Downsides of Permanent Life Insurance?

While permanent life insurance has its advantages, it also comes with some notable drawbacks:

High premium costs

Premiums are significantly higher than those for term insurance. The extra cost may make some people hesitate to buy a permanent policy if it doesn’t fit their current budget.

Slow cash value growth

Yes, the policy builds cash value, but the growth rate is often slow. Canadians may find alternative savings and investment options provide better long-term gains.

Complex fee structures

These policies come with various fees such as surrender charges, which are fees insurers impose if you cancel or withdraw money early. Hidden costs make it hard to gauge the real value of the policy over time.

Limited flexibility

After taking out a permanent life insurance policy, making changes to your coverage or premiums can be tricky and may come with restrictions. Term policies, on the other hand, allow you to modify or renew coverage as your needs change.

What Are the Alternatives?

If permanent life insurance doesn’t fit your needs, here are some other options worth considering:

Term life insurance has lower premiums and is fixed for a specific period (e.g., 10, 20, or 30 years). This type of policy is ideal for covering temporary needs like a mortgage or raising kids.

This type of policy is a mix of life insurance and investment savings. Universal life insurance provides more flexibility with premium payments and death benefits.

This policy is ideal for those who may not qualify for traditional life insurance, as it requires no medical exam or health questions. It provides modest coverage and is often used for final expenses like funeral costs and debts.

Combining life insurance with investment options like stocks, bonds, or mutual funds, this type of policy offers growth potential. While it grants financial gain, returns are not guaranteed due to market risks.

Here’s a quick comparison of permanent and term life insurance to give you a clearer picture:

FeaturePermanent
Life Insurance		Term Life
Insurance		Universal Life
Insurance		Guaranteed
Life Insurance		Variable Life
Insurance
PremiumsHigh, fixed
for life		Lower, fixed
for the term
period		Flexible (can
increase or
decrease)		Typically higher
due to guaranteed
acceptance, often
fixed		Varies; can be higher due
to the investment
component
Coverage DurationLifetimeSpecified
Period (e.g.
10,20, or 30
years)		LifetimeLifetimeLifetime
Cash ValueYes,
accumulates
over time		No cash
value
component		Yes, accrues
over time based
on credited
interest		Minimal or noneYes, grows or shrinks
with market performance
FlexibilityLimited
adjustments
allowed		Greater
flexibility
with
renewals		High (can adjust
premiums and
death benefit
within certain limits)		Low; coverage
amounts are
usually modest and fixed		Moderate; can choose
investment options, but
returns depend on
market performance

Real-Life Scenarios & Case Studies

Understanding your coverage options is easier when you see how they apply to different life stages. Here’s how different individuals might approach life insurance:

Investment view: A term policy makes sense because it’s affordable, allowing young professionals to allocate more money toward high-growth investments like stocks or real estate. By keeping insurance costs low, they can build wealth more efficiently over time.

Coverage needs: At this stage, key financial responsibilities include mortgage payments and children’s education. Term life insurance provides coverage for those on a limited budget during these critical years, ensuring financial security if anything unexpected happens.

Investment view: By investing the cost difference between term and permanent insurance, middle-aged individuals may feel that they can build a stronger financial portfolio over time.

Coverage needs: At this stage, financial responsibilities often include mortgage payments, children’s education, and retirement planning. For those within this age bracket who already have a permanent policy, it may provide peace of mind that there’s a financial safety net for their loved ones. But for those yet to get coverage or many financial obligations, term life insurance provides necessary protection while keeping costs manageable.

Investment view: For senior policyholders who have permanent life insurance policies, it can be more than just coverage – it can also be a valuable financial tool. It helps protect wealth, provides tax-free benefits to heirs, and offers flexibility through cash value that can be accessed in retirement.

Coverage needs: For seniors on a tighter budget, the high cost of permanent life insurance may outweigh its benefits, but they still have plenty of options based on their needs. They can explore funeral assistance programs, guaranteed life insurance, rely on savings, or use a pension plan to provide financial security.

Key Advice From MyChoice

  • Note your outstanding debts and future obligations (like mortgage payments) before deciding which policy to get, as this influences how much coverage you may need and can afford.
  • Some policies are more adaptable than others, so consider options that can adjust as your life changes. A flexible plan now can save you from scrambling for additional coverage later.
  • Consult a trusted advisor. A little professional guidance can go a long way in helping you make a confident, informed decision. Look for someone who prioritizes your needs rather than just making a sale – transparency and expertise are key.

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