Despite common misconceptions among many Canadians, not all life insurance policies are complex and costly. Term life insurance, in particular, shines as a straightforward and budget-friendly choice when it comes to purchasing life insurance.
Term life insurance is a financial safety net for your dependents and loved ones that provides coverage for a specified number of years and disburses a death benefit to your beneficiaries if you pass away within the policy term.
In this blog post, we will delve into all you need to know about term life insurance. We’ll explore what it is, how it works, its advantages and disadvantages, the various types available, and even highlight the best term life insurance companies in Canada.
What is Term Life Insurance?
Term life insurance is a specific type of life insurance that provides coverage for a defined period, typically ranging from five to thirty years. This kind of insurance is straightforward and cost-effective, serving to safeguard your family in the unfortunate event of your passing.
With term life insurance, your coverage lasts for a set number of years or until you reach a specified age, such as 65. During this period, you make monthly or annual premium payments, ensuring that your policy remains in force. In the event of your death within the policy term, your chosen beneficiaries will receive a tax-free lump sum payout.
Once the agreed-upon term expires, your coverage ends, and you are no longer required to make premium payments. If you are in search of a temporary, budget-friendly insurance option that offers customization to align with your unique needs, term life insurance plans should be a consideration.
How Does Term Life Insurance Work?
Term life insurance is a contractual agreement between you and an insurance company. In this arrangement, the insurance company commits to providing a tax-free lump sum, known as the death benefit, to your chosen beneficiary in the event of your demise during the policy term.
During the application process, the insurer employs detailed statistics and actuarial models to assess your level of risk and determine the premiums you will pay. These premiums are typically paid on a monthly or annual basis to maintain the policy.
Several factors come into play when calculating your premiums, including your age, health status, gender, family medical history, and other relevant information. The insurance company uses this data to gauge your life expectancy and the probability of paying out the full death benefit. As a rule of thumb, the higher the likelihood of a payout, the higher your premiums will be.
Selecting a beneficiary is a crucial step in this process. This individual or entity will be the recipient of the death benefit upon your passing. Beneficiaries can be family members like your spouse or child, as well as relatives, trusts, or charitable organizations.
In most cases, you’ll need to undergo a medical examination to prove your insurability and qualify for a term life insurance policy. However, for those who prefer to skip the medical exam, there are no medical exam insurance options available.
It’s important to note that term life insurance lacks a cash value or savings component. This simplicity is what makes it one of the most affordable and straightforward life insurance options for Canadians.
Learn more about how term life insurance works
What Does Term Life Insurance Cover?
The death benefit from your term life insurance policy is paid out to your chosen beneficiary, who can utilize the funds for various purposes.
These funds can be used to cover mortgage payments, settle outstanding school loans, car loans, or credit card debts, finance children’s educational expenses, replace your income to maintain the family’s financial stability and cover everyday living expenses for your dependents.
Furthermore, the policy’s death benefit can be allocated to handle funeral costs and associated expenses. This lump-sum payment not only aids your beneficiaries in coping with the emotional toll of your loss but also helps them maintain their quality of life in the aftermath of your passing.
Additionally, when dependents may require medical assistance or therapy following your demise, the death benefit can be instrumental in covering these necessary costs.
Learn more about what life insurance covers and does not cover
Pros and Cons of Term Life Insurance
Like all other types of life insurance, term life insurance has advantages and disadvantages. Let’s take a look at some of the pros and cons that you should consider before making a decision:
Pros
- Cost-Effective: Term life insurance stands out as the more economical choice when compared to whole life insurance. This is because it provides coverage for several years without involving a savings component.
- Ideal for Young Families: Given its affordability, term life insurance proves to be a valuable option for young families in Canada. Many young families face the financial pressures of mortgages, raising children, and various expenses. Term life insurance empowers them to secure their family’s financial future without straining their budgets.
- Remarkable Flexibility: Term life insurance offers exceptional flexibility. You can tailor the coverage and duration to meet your specific needs. For instance, if you wish to cover a long-term debt like a mortgage, you can lock in favourable rates for the next 20 or 25 years. Conversely, a 10-year term policy may be the perfect fit if you aim to cover tuition expenses.
- Simplified Policies: Term life insurance policies are far simpler to comprehend than their permanent counterparts. You must only make three crucial decisions: selecting a preferred insurer, determining the coverage amount, and specifying the term length. If you pay your premiums on time, the insurer ensures coverage throughout the chosen term.
- Conversion to Permanent Life Insurance: Most term life insurance policies have a “term conversion rider.” This valuable feature allows you to transform your term life policy into a permanent one without needing proof of insurability.
Cons
- No Cash Value: Term life insurance does not accumulate cash value over time, unlike permanent life insurance policies such as whole or universal life. This means that if you outlive the policy term, you won’t receive any return on the premiums you’ve paid.
- Limited Coverage Period: Term policies only provide coverage for a specific number of years, typically ranging from 10 to 30 years. If you require coverage beyond the policy’s term and want to renew it, the premiums may increase significantly, making it less cost-effective.
- Increasing Premiums: In some cases, renewable term life insurance policies may increase premiums as you age. This can become expensive in the long run, especially if you need coverage for an extended period.
Types of Term Life Insurance
There are three types of term life insurance available in Canada:
1. Level Term Life Insurance
A level-term life insurance policy offers consistent premiums and a stable death benefit throughout the term. This means your rates won’t increase as you age, and the death benefit remains the same whether you pass away in the policy’s first or final year. It’s an ideal choice for those seeking stability over an extended period.
2. Annual Renewable Term Life Insurance
An annual renewable term policy is characterized by increasing premiums with each renewal. The advantage is that you’re guaranteed to maintain coverage without the need to reapply. This type of policy suits individuals looking for temporary life insurance, although a short-term life policy might be a better alternative in some cases.
3. Decreasing Term Life Insurance
With a decreasing term life insurance policy, your premiums remain constant over the policy’s duration, but the death benefit gradually decreases over time. Mortgage life insurance falls under this category, linking the payout to your mortgage balance and designating the mortgage lender as the beneficiary. Opting for regular term life insurance is often a wiser choice because it ensures your family receives the payout, allowing them to use it for any expenses they deem necessary.
How Much Does Term Life Insurance Cost?
Meet Jake, a 28-year-old non-smoking male fresh out of university, eager to kickstart his career and save for his first home. With foresight, he secures the advantageous low rates available for his youthful age, rates that will remain unchanged throughout his lifetime. Jake applies for a $50,000 term life insurance policy with a 15-year term and receives a monthly premium of just $9.72 from Manulife.
This example highlights the affordability of term life insurance, making it the most cost-effective choice in Canada. The cost of term life insurance in Canada is influenced by various personal factors such as age, smoking habits, health conditions, occupation, hobbies, gender, and more. For individuals who are young, in good health, and non-smokers, term life insurance tends to be notably more economical.
It’s essential to note that there isn’t a one-size-fits-all premium rate that applies to everyone. While we can’t provide you with an exact rate, PolicyMe can assist you in discovering the best coverage options that align with your budget.
Who Needs Term Life Insurance?
Term life insurance is a versatile financial tool designed to provide temporary protection and financial security for specific needs. If any of the following situations apply to you, you may benefit from term life insurance:
- Family Protection: If you have dependents, such as a spouse, children, or ageing parents, term life insurance can ensure that they are financially protected in the event of your untimely death. It can cover living expenses, mortgage payments, education costs, etc.
- Income Replacement: If your family relies on your income to maintain their lifestyle, term life insurance can replace your earnings and help them maintain their financial stability if you pass away prematurely.
- Debt Coverage: If you have outstanding debts like a mortgage, loans, or credit card balances, term life insurance can be used to pay off these debts, preventing your loved ones from inheriting your financial liabilities.
- Business Obligations: Business owners may use term life insurance to protect their businesses. It can be used to fund buy-sell agreements, cover key person risk, or secure loans.
What Happens When Term Life Insurance Expires?
When your term life insurance policy expires before your passing, you have four options to consider for your coverage. You can opt to renew your policy, convert it into a permanent life insurance policy, or acquire a completely new life insurance policy.
Alternatively, if you no longer require the term life insurance coverage, you can allow the policy to lapse. This decision means that your coverage will no longer be in effect, so your beneficiaries won’t receive a death benefit when you pass away.
It’s worth noting that applying for a new life insurance policy is generally more cost-effective than renewing your term life insurance policy, as renewal often entails higher premiums. However, it’s important to mention that renewing your policy typically does not require you to provide any proof of insurability.
Learn more about what happens if you outlive your term life insurance
Term Vs Whole Life Insurance: Which is Best?
Term life insurance and whole life insurance are two distinctly different forms of life insurance. Term life insurance covers a predetermined period, while whole life insurance covers your entire lifetime.
Whole Life Insurance in Canada is a lifelong policy that remains effective as long as you continue paying your premiums. It is ideal for covering permanent needs and ensuring coverage throughout your lifetime.
You can use whole life insurance to address final tax expenses, cover funeral arrangements, or even create a tax-advantaged inheritance for your children and grandchildren.
Learn more about term vs whole life insurance
Best Term Life Insurance in Canada
When considering term life insurance in Canada, it’s essential to compare policies, rates, and coverage options from the providers to find the best fit for your specific needs and financial situation. Each term life insurance provider has its strengths and may be more suitable for certain individuals or families based on their unique circumstances and preferences.
Here is a list of some prominent providers offering term life insurance policies in Canada.
- PolicyMe: PolicyMe stands out for its user-friendly online platform. They offer a streamlined application process that can often be completed in minutes. PolicyMe is known for its transparency, providing clear and easy-to-understand policy details. They aim to make life insurance accessible to a wide range of Canadians.
- Ivari: Ivari, formerly Transamerica Life Canada, has served Canadians for over 80 years. They have a strong financial reputation and offer various term life insurance options to meet individual needs. Ivari is recognized for its commitment to customer service and providing tailored solutions.
- Manulife: Manulife is one of Canada’s largest financial services companies, with a long history of providing insurance products. They offer a wide range of term life insurance policies, along with various riders and optional features. Manulife’s financial strength and brand recognition make it a popular choice for many Canadians.
- Empire Life: Empire Life has been a trusted name in the Canadian insurance industry for over 90 years. They offer term life insurance with flexible coverage options, including the ability to customize your policy to suit your needs. Empire Life is dedicated to providing personalized service and tailored solutions.
- Equitable Life: Equitable Life is a mutual life insurance company in Canada, meaning policyholders are also considered company owners. They offer term life insurance products with guaranteed and non-guaranteed coverage options, allowing individuals to choose the level of certainty that suits their preferences.
Learn more about insurance companies in Canada
Final Thoughts on Term Life Insurance
Term life insurance is undeniably a vital tool for securing your family’s financial future and providing peace of mind. Its flexibility, affordability, and tailored coverage options make it an ideal choice for many.
So, if you’re seeking a straightforward way to protect your loved ones and ensure they have access to financial support when it matters most, don’t hesitate to explore term life insurance options today. Take the first step by requesting a personalized term life insurance quote and discover the coverage that suits your unique needs.
FAQs on Term Life Insurance
Does Term Life Insurance Cover Accidental Death?
Term life insurance pays out your death benefit if you die due to natural causes like old age, terminal illness, stroke, cancer, etc. If you also die due to accidents, which is no fault of yours, term life insurance will payout your death benefit to your beneficiaries.
However, some term life insurance includes exclusions that can withhold your life insurance payouts. These exclusions include suicide, death by illegal activities, death from hazardous jobs not listed in your policy, or if you have misrepresented yourself on your insurance application.
Learn more about what deaths are covered by life insurance
Does Term Life Insurance Cover Disability?
No. Term life insurance does not cover disabilities. However, there are disability riders that you can add to your term life insurance policy to protect you if an injury or illness stops you from earning an income.
If you want more robust disability coverage, you should opt for disability insurance. This type of insurance covers you if you become disabled and unable to work and earn income. It pays out a benefit to you, pending when you can go back to work.
Learn more about term life insurance and disability riders
What is the right age to buy term life insurance?
Many factors affect the life insurance rates in Canada. Your age and health status are the most important factors determining your premiums.
While there is no specific age to buy term life insurance, the earlier you apply for coverage, the less premiums you will have to pay. Applying for term life insurance at a younger age will help you lock in low premiums.
This is advantageous because you are less likely to have health conditions, which could increase your insurance rates.
Learn more about what age to buy life insurance
Can smokers purchase term life insurance?
Yes. Canadians who smoke can also buy term life insurance. However, they would have to purchase term life insurance at a higher rate than Canadians who are non-smokers. Insurance companies in Canada offer nearly two to five times more life insurance premiums to smokers.
Learn more about life insurance for smokers
Can I cash out my term life insurance?
No. You cannot cash out your term life insurance. Term life insurance does not hold cash or surrender value like permanent life insurance. This is why term life insurance is less expensive than other types of life insurance.
