Friday, December 14, 2018

When Does Permanent Life Insurance Make Sense?

The vast majority of people who need life insurance are best off with term life insurance. Salespeople have tried to sell me permanent life insurance (universal life and whole life), but I never got a good feel for when this type of insurance might make sense. Recently, the Rational Reminder podcast interviewed Glenn Cooke, an expert in insurance who communicates very clearly. Glenn’s explanations allowed me to understand when permanent life insurance may make sense.

Before launching into my take on Glenn’s explanations, let me be clear that Glenn may not fully agree with me. In particular, he might find that the conditions I set out below are too narrow.

Permanent life insurance only makes sense to me when all of the following conditions are met:

  1. You have maxed out both your RRSP room and your TFSA room.
  2. You definitely have more money than you’ll ever need, and you want to leave a legacy (which might include cash to pay off capital gains taxes on a property, such as a cottage, that you want to stay in the family).
  3. You are satisfied that the tax advantages of permanent life insurance outweigh its high fees so that the insurance will likely outperform investments you make in a taxable account.

Explanations of these conditions

1. As Glenn explains, “your RRSPs and TFSAs need to be fully maxed out” because “the management fees inside a universal policy are almost always far higher that they would get outside of a universal life policy.”

2. The cheapest way to protect your family during your working years from the loss of your income is with term life insurance. Getting permanent insurance means you want an insurance payout no matter how long you live. Permanent life insurance “is not liquid and it’s not very flexible. Once you’re in, you’re in, which is why you don’t want any money going into an insurance policy that you might ever need.”

3. If you’re in the position of wanting to grow your legacy as large as possible, all that matters is whether some form of permanent life insurance is likely to outperform other investment options. I’d have to study the details of a universal policy to form an opinion on whether its tax advantages outweigh its high fees.

Some people might argue that condition 2 on its own would be enough to justify buying a universal life policy. Glenn says he has such a policy because he wants to “guarantee there’s an estate there for my kids.” However, if you’re actually running out of money, you’re likely to “cash in” a permanent life insurance policy, so I don’t see any guarantee that the kids will get much money. In fact, if using RRSPs and TFSAs produces better returns than permanent life insurance, then you’re less likely to spend your assets down to zero.

I’m satisfied that permanent life insurance never made any sense for my family. If I were helping a family member or friend with life insurance, I would use the three conditions above. But I’m open to changing my mind if I learn more about life insurance.


  1. I asked Glenn Cooke if he would comment on this article. He didn't address the article directly but said "If your goal is to simply save money for your own retirement then a universal life policy is rarely a good idea as the fees are high reducing your return far lower than just using a good financial adviser." I think that the tax deferral benefit of universal or whole life insurance is overwhelmed by the fees, so it doesn't make sense to uses these products as an investment for funds you need in your lifetime. If you have need for funds after death for a specific purpose such as paying capital gains on a cottage or a business, permanent life insurance may play a role. Then I think it would make sense to buy a universal policy with no investment component, just the death benefit in order to lower premiums.

    I don't agree with those who buy permanent insurance just to leave as much money as possible for the next generation. By the time many people die their kids are financially independent themselves, and don't really need a lot of money. I'd rather invest the premiums and give the better returns away while I'm alive and can have the pleasure of giving.

    1. @Grant: Any time I've looked at details of a universal life policy and compared it to a taxable investment approach, the policy didn't look good. If Glenn says this is true of all available universal life policies, then I can't see any use for them at all.