Should you Buy Term and Invest the difference?
Here is a true case scenario of a Male aged 49 who needs life Insurance but of course who wants to pay for expensive insurance premiums.
The main goal of this situation is to ensure there is insurance protection in place.
But of course, we want to consider wealth, tax and all areas of a person's financial situation and how we can maximize all areas as well as what the opportunity costs are.
The least expensive option is to proceed with Term 10.
The premium will be $230.76 month. BUT our challenge is that this client needs coverage longer than 10 years.
He currently runs a company and his spouse also works at the business. If he passes away there is no business. They are also not yet going to reach retirement goals in 10 years so the insurance is needed longer than 10 years. If we proceed with Term 10, after 10 years the premium will increase from $230.76 month to $846.18 month. If he is not insurable after 10 years the $ 846.18-month premium is not going to be manageable for the cash flow at that time.
The challenge with buying permanent is that it is a heaped cost today but the benefit is that you could get all your money back if you cancel the coverage at a future point in time.
So which way are you better off?
My biggest recommendation is to ensure that you have your main goals in mind.
Again in this example, we need insurance today as well as need insurance past years.
Here is the conclusion:
1. Buying Term and investing the difference in a TFSA you will have $32,020 more assets but no life insurance.
2. if you invest the difference in a taxable non-registered account you will have $8,419 but no life insurance.
3. if you buy whole life and pay for premiums for 10 years you can have life insurance (at a reduced amount) for your lifetime.
However, if you cancel the policy in the 18th year after having the coverage in place for as long as you need you will receive back 100% of the premiums you have paid.
This scenario provides for all your money back and insurance. Every person`s scenario is different. If you have a TFSA room and only need insurance for 10 years, buying term and investing the difference is most likely best.
If you need the coverage longer than 10 years or if you do not have TFSA room buying Permanent Life insurance is most likely going to be a better option for you.