If you need life insurance and seek ways to minimize taxes on your annual growth from non-registered investments, consider permanent life insurance. It’s part of your total net worth that can allow you to grow assets without paying income tax on each year’s growth and ultimately pass it on to your heirs tax-free if you don’t need the accumulated funds.

While both permanent and term life insurance are effective at providing capital at the time of premature death, premiums for term life insurance are typically lower in the early years. Some financial security advisors suggest these low term life insurance premiums present an opportunity to save money in non-registered investments for future use.

However, unlike non-registered investments that are subject to annual taxation on income, permanent life insurance can provide tax-advantaged growth in the policy’s cash value within legislative limits (regulations 306 and 307 of the Income Tax Act define an exempt life insurance policy). 

And while permanent life insurance typically costs more than term life insurance initially, it often has a level premium for your lifetime. When you buy term life insurance and invest the premium difference in non-registered investments, it’s possible to build greater short-term investment values while living, compared to permanent life insurance. However, in the long run the “buy term and invest the difference” concept is likely to be outperformed by a permanent life insurance policy.

Comparing term and permanent life insurance

Term life insurance ƒ

  • Premiums are typically are lower in earlier years, but renewal premiums increase ƒ
  • Usually doesn’t have a cash value or account value associated with the policy ƒ
  • Typically expires at a particular age without further renewal, unless converted to permanent life insurance before the expiry date and at a higher cost

Permanent life insurance ƒ

  • Provides lifetime coverage often with guaranteed premiums that won’t increase ƒ
  • Provides tax-advantaged accumulation within the policy through cash value or account value To find out more about how investing using permanent life insurance fits into your financial security plan, please contact your financial security advisor.

The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature, and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate professional advisors.

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