Term insurance is the most economical type of life insurance one can buy but only for the short term. Therefore when we are young and low on income and high on liabilities we need lots of life insurance and cheapest cost at the same time. Term insurance is exactly the plan you would get for the first 10 or 20 years. Hope fully by then your income has increased and you have accumulated some cash or paid of some of the mortgage or reduced some of the other liabilities. Biggest problem with the term insurance comes up when the term is coming to an end and policy needs to renew for another term of the same length. The cost for the same amount of insurance for the next term will jump 3-4-5……even upto more than 10 times the original premium because you are now 10 or 20 years older. So that’s how it goes every 10 or 20 years until the policy expires. Here is an example of the standard premiums for a 35 year old male non-smoker in good health showing the rates based on a 10 year term.                  

This example is based on standard rates RBC 10 year term for a 35 year old male non-smoker at the time of writing this article. Rates are subject to change without notice.

As you can see the cost increases every 10 years and at age 80 this policy will expire and all the premiums paid have gone to waste if you are still alive until the policy expiry.

But as a smart money manager and if you were given the correct advice, you would not keep renewing the policy till the end. That leads us to the big question, what do you do?

If you need insurance beyond the first term, in most cases you always have the option to convert your term policy to a permanent insurance plan before the conversion expiry date.

What is permanent life insurance?

Permanent life insurance is the better way to buy life insurance if you need to keep the coverage for the rest of your life. As you saw above how the cost for term insurance keeps going up every 10 years to the point where it does not make any sense to keep the policy. Permanent life insurance levels the premiums so that it would not keep going up every 10 years. Instead it would definitely cost more than 39.87 per month to start with but it would also not increase to as high as $5672.25 per month by age 75 and the policy would not expire at age 80, in fact it would never expire. Basic permanent life insurance would cost $586.17 (based on current rates for a BMO T100 plan, subject to change without notice) per month for the same person to cover a million dollars of benefit and it would never increase and the policy would keep going for as long as you live. Premiums will stop at age 100 in most cases and the coverage will continue. As I mentioned above this is a basic policy with no cash value. For a few dollars more one could buy the permanent plan that can have significant cash value and that can also have some paid up life insurance component in case you want to stop making the premium payments.

Different types of permanent life insurance, paidup life insurance, cash values and dividend options will be discussed in another article.

What is the best way to buy?

You may say that I only need the whole million dollars of life insurance for the short term while the kids are young and mortgage and other liabilities are high. You need a smaller amount of permanent insurance for long term liabilities and to cover final expenses and funeral costs etc. That’s fair comment, that is where the combination plan be used, meaning that you can combine large amount of term insurance and a smaller amount of permanent life insurance all under one policy or two separate policies. This can be done very easily and it can suit your budget and needs for the short term and long term needs. 

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