Term life insurance is a cost-effective, straightforward way for Canadians to protect their loved ones financially. As one of the most popular types of life insurance, it provides coverage for a specified term, typically ranging from 10 to 30 years.
At LifeBuzz, we have the experience and expertise to guide you through choosing the correct term life insurance policy. Our team stays up to date on the latest industry trends and offerings to provide you with accurate, trustworthy advice. Let’s explore the critical aspects of term life insurance in Canada.
What is Term Life Insurance?
Term life insurance is a type of life insurance that provides coverage for a specific period of time, like 10 years, 20 years or 30 years. Unlike permanent life insurance, which is designed to last a lifetime and includes a savings or investment component, term life insurance is pure protection. It provides a tax-free, lump-sum payment, known as a death benefit, to your beneficiaries if your death occurs within a specific period. The payout can help cover final expenses, mortgage balances, debts, and income replacement.
How Does Term Life Insurance Work in Canada?
The process of getting and using term life insurance in Canada is straightforward and can be broken down into a few key stages, from application to potential payout.
When you apply for term life insurance in Canada, you will answer questions about your health, lifestyle, and family medical history. This process, called underwriting, helps the insurer assess your risk. While some policies require a medical exam, many insurers now offer simplified or instant approval for healthy applicants seeking moderate coverage amounts.
Once your application is approved, you will begin to pay regular premiums, typically monthly or annually, to keep your policy active. A key feature of term life insurance is that your premium amount is locked in and stays the same throughout your entire policy term. The amount you pay is determined by factors like your age, health, smoking status, and the coverage amount you choose.
If you pass away during your policy term, your named beneficiaries are entitled to receive the full death benefit as a tax-free, lump-sum payment. To receive it, they must file a claim with the insurance company, which includes providing a copy of the death certificate. The payout is typically processed within 30 to 60 days. Your beneficiaries can use this money for any purpose, such as covering mortgage payments, funding education, paying off debts, or replacing your lost income.
If you are still alive when your term ends, the policy simply expires. In this scenario, no death benefit is paid out, and your premiums are not returned (unless you purchased a specific return-of-premium rider, which is rare and costly). At this point, you will have several options available to you, which we will discuss later in this guide.
Pros and Cons of Term Life Insurance in Canada
| Pros of term life insurance | Cons of term life insurance |
| Low-cost premiums Customizable term lengths Large death benefit payouts Simple to understand Available for almost all age groups up to around 75 years old Can get extensive coverage amounts to millions of dollars There are many options to customize coverage and terms. Includes living benefits riders in some policies | Temporary coverage, expires after the term ends Premiums rise as you age No cash value accumulation Health changes may prevent renewal Insurers may deny coverage due to pre-existing health conditions Require periodic medical exams to renew and maintain coverage Late payments can lead to a lapse in coverage Payout is limited only to death benefits during the term |
When Does Term Life Insurance Make the Most Sense?
Term life insurance is designed to protect against temporary financial obligations. It is the right choice in these common scenarios:
- You have a mortgage: If you have outstanding mortgage debt, a term life policy ensures your family can continue making payments or pay off the home entirely, preventing the risk of foreclosure. A 25-year mortgage, for example, pairs well with a 25-year term policy.
- Your income supports your family: If you have dependents who rely on your income, a term policy can provide funds for them to maintain their standard of living.
- You have significant debts: Term life insurance can be used to cover other outstanding debts, such as car loans, lines of credit, or student loans. This prevents your family from inheriting these financial obligations.
- You are funding education: A policy can guarantee that funds will be available for your children’s post-secondary education, even if you’re not there to provide them.
Other situations where term life insurance is beneficial include business owners who need to cover business loans, stay-at-home parents whose unpaid labour (childcare, home management) would need to be replaced at a significant cost, and young, healthy individuals who want to lock in low rates for future needs.
Conversely, you may not need term life insurance if you have no dependents, have sufficient assets to cover all your debts and final expenses, or are nearing retirement with substantial savings and no major financial obligations remaining.
What are the Different Types of Term Life Insurance?
There are four main varieties of term life insurance policies in Canada: level term, decreasing term, renewable term, and convertible term.
At a Glance Comparison
| Policy | Pros | Cons | Best For |
|---|---|---|---|
| Level Term | Premiums stay the same | No flexibility to decrease | Budgeting, income replacement |
| Decreasing Term | Matches decreasing debts | Less useful after debt repaid | Mortgages, loans |
| Renewable Term | Guaranteed lifetime renewal | Premiums increase annually | Long-term income protection |
| Convertible Term | Can convert to permanent | Slightly higher premiums | Long-term flexibility |
Level Term Life Insurance
This is the most common type of term life policy. With a level term life insurance, the death benefit amount and premium payments remain constant for the entire term length.
For example, a 20-year $500,000 level term policy would have the same $500,000 payout if you died at any point in the 20 years, while premiums are fixed at the initial rate.
Level premiums make budgeting straightforward. Your rates will stay the same as you age during the term. This is the most popular option.
Decreasing Term Life Insurance
Also referred to as mortgage protection, the death benefit for decreasing term life insurance policies incrementally decreases over the term while premiums remain static.
This works well to parallel a debt like a steadily paid mortgage. The payout aligns with the mortgage balance if you pass away during those years.
Renewable Term Life Insurance
With renewable term life insurance, also called annually renewable term, guarantees your right to renew it each year without proving your health, but the premium increases at every renewal.
Policies are typically renewable until age 85. The insurer cannot cancel your coverage regardless of changes in health. Converting to permanent life insurance is often advised before costs rise substantially at older ages.
Convertible Term Life Insurance
Convertible term allows you to exchange the term policy for a permanent life insurance policy with the same company without providing updated medical evidence. This guarantees future insurability even if health conditions develop during the original term that would otherwise make coverage unaffordable or unattainable.
Read the full review about renewable and convertible term life insurance here.
What Does Term Life Insurance Cost in Canada?
Term life premiums are based on personal factors like age, health, gender, and smoking status. However, here are some average monthly costs for healthy, non-smoking applicants:
- 30-year-old male, $500,000 coverage for 20 years = $29.33/month
- 30-year-old female, $500,000 coverage for 20 years = $22.99/month
- 40-year-old male, $400,000 coverage for 15 years = $43.55/month
- 50-year-old female, $300,000 coverage for 10 years = $44.25/month
Term life insurance rates for healthy non-smokers may range*:
| Age | Sample Monthly Premiums for $500K Coverage |
|---|---|
| 30 | $25 |
| 40 | $35 |
| 50 | $70 |
| 60 | $200 |
To secure the lowest cost, it is best to buy coverage when you are young, maintain a healthy lifestyle, quit smoking, and compare quotes from multiple insurers, as rates can vary by 20-30% between companies for the same profile.
The Underwriting Process: Full Medical vs. No-Medical Insurance
Before offering you a policy, insurers perform “underwriting” to assess your risk. In Canada, this generally falls into two categories:
Fully Medically Underwritten Policies: This is the most common type. It involves a detailed application, a phone interview, and a short medical exam with a nurse (which includes height/weight, blood pressure, and blood/urine samples).
- Pros: Provides the lowest possible premiums because the insurer has a complete picture of your health.
- Cons: The process can take 4-8 weeks.
Simplified & Guaranteed Issue (No-Medical) Policies: These policies allow you to skip the medical exam. With the simplified issue policy, you answer a series of health questions on the application, while you are not required to answer any health questions if applying for guaranteed policies.
- Pros: Fast approval (sometimes instant) and convenient. Ideal for those with moderate health issues or a fear of needles.
- Cons: Premiums are significantly higher than fully underwritten policies. Coverage amounts may be limited, and guaranteed issue policies often have a 2-year waiting period before the full death benefit is payable for non-accidental death.
Term Life Insurance vs. Whole Life Insurance: What’s the Difference?
| Factor | Term Life Insurance | Whole Life Insurance |
|---|---|---|
| Purpose | Provides temporary protection for a set period (e.g., 10, 20, 30 years). Pure insurance. | Provides permanent protection for your entire life. Insurance + a cash value savings component. |
| Premiums | Very low initially. Will increase significantly if renewed after the term ends. | Much higher than term, but are fixed and guaranteed never to increase for life. |
| Cash Value | None. It is a pure expense. | Builds a tax-deferred cash value that you can borrow against or withdraw from. |
| Cost Example | $35/month for a healthy 40-year-old non-smoker ($500,000, 20-year term). | $250/month for the same 40-year-old ($500,000, permanent coverage). |
You should choose term life insurance if your primary goal is to get the maximum amount of coverage for the lowest possible cost to protect against temporary financial obligations. It is the ideal solution if your financial needs have a clear end date, such as a mortgage being paid off or children becoming financially independent.
You should consider whole life insurance if you have a lifelong financial need, such as providing for a special-needs dependent, funding estate taxes, or leaving a guaranteed inheritance. It is also suitable for high-net-worth individuals who can afford the significantly higher premiums and wish to use the policy’s cash value component as a conservative part of their overall financial plan.
What Happens When Your Term Life Insurance Expires?
When your term life insurance policy reaches its expiry date, your coverage ends. However, you are not left without options. Planning ahead for this transition is important to ensure you maintain appropriate financial protection if you still need it, as most people’s circumstances change over the life of a policy.
Here are the four main options you have when your term expires:
Renew Your Policy
Most term life insurance policies in Canada include a renewal option that lets you continue your coverage every year without a new medical exam. The main advantage is guaranteed approval, regardless of any health issues you may have developed. The significant disadvantage is that the premiums will increase dramatically, often becoming 3-5 times higher. This option is best for those whose health has declined and would not qualify for a new policy.
Convert to Permanent Insurance
Many term policies also include a conversion option, allowing you to switch to a permanent policy (like whole life) with the same insurer without medical underwriting. Premiums will be higher than your original term policy but likely lower than applying for a new permanent policy at your current age. This is an excellent choice for those who have developed health issues or whose needs have shifted from temporary to permanent.
Apply for a New Term Policy
If you are still in good health, applying for a brand-new term policy is often more cost-effective than renewing your old one. This will require a new application and potentially a new medical exam. It is the best option for healthy individuals who still require temporary coverage.
Let the Coverage Lapse
If your financial obligations are satisfied, you may no longer need life insurance. In this case, you can simply let the policy expire; there are no penalties for doing so. This is the ideal outcome, as it means the policy has successfully protected you during your most vulnerable financial years.
How to Shop for Term Life Insurance for Canadians
Purchasing term life insurance involves researching different policies and companies to find the best rate for your situation:
- Calculate Your Needs: Add up debts, income to replace, final expenses and education costs. This provides an estimate for the term life death benefit you need.
- Compare Quotes: Don’t take the first offer. Rates for the same person can vary by more than 50% across companies. Use an independent online comparison tool.
- Work with a Broker: Independent brokers have access to policies from many insurance carriers. They can advise you on products that fit your budget and needs. This personalized service is free to consumers.
- Be Honest on Your Application: Failing to disclose a health condition or lifestyle choice is considered fraud and can lead to a claim being denied. It’s not worth the risk.
- Review Policy Details: Carefully inspect the policy terms before signing. Understand grace periods, renewals, exclusions, conversions to permanent insurance, and anything else that impacts coverage.
- Regularly Re-Evaluate: Re-examine your policy upon life changes to ensure you have adequate, affordable coverage that meets evolving needs.
Frequently Asked Questions: Term Life Insurance in Canada
How long should my term life insurance length be?
Choose a term length that matches the period you expect to need life insurance. Popular terms are 10, 15, 20, 25 and 30 years. The longer the term, the lower the annual costs.
Can I renew my term life insurance?
Many term life policies are renewable for an additional term when the initial term expires. However, renewal rates increase as you age. There is usually a maximum renewal age of around 80-85.
Is term life insurance cheaper than permanent life insurance in Canada ?
Yes, term life almost always has significantly lower premium costs than permanent life insurance for equivalent death benefit amounts.
Does term life insurance build cash value?
No, term life insurance is pure protection without investment components. Only permanent life policies build cash value that you can borrow against.
Does term life insurance pay for suicide?
Most term life policies will not pay the death benefit within the first 1-2 years if the death is from suicide. After the initial exclusion period, death by suicide is usually covered.
What happens at the end-of-term life policy in Canada?
You can renew coverage at a higher premium, convert to permanent insurance if you have that option, or let the policy lapse if no longer needed.
When does term life insurance payout in Canada?
The death benefit pays to beneficiaries if the insured dies while the policy is in force during the set term period.
What does convertible term life insurance mean?
A convertible term allows you to switch your term policy to permanent insurance with no medical exam required. This guarantees you can get lifetime coverage even if health issues develop.
What happens if I miss a premium payment of term life insurance in Canada?
You have a 30-day grace period to catch up on missed payments before the policy lapses. Most insurers allow 1-2 missed payments per year.
Can I cancel my term life insurance policy anytime?
Term life policies accumulate no cash value, so cancelling early results in a lapse. However, you can convert term policies to permanent insurance without underwriting in many cases.
The Bottom Line
Term life insurance is a powerful and affordable tool for protecting what matters most. By understanding your needs, comparing options, and working with a qualified professional, you can secure a policy that provides peace of mind and ensures your family’s financial security for years to come.
Article Source
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