Life insurance provides your family with an important financial safety net if you suddenly pass away. When shopping for life insurance, make sure your coverage not only provides adequate financial assistance, but is within your budget.
One life insurance product that may apply to most Canadians’ financial situation is term life insurance.
Unlike whole life insurance, which provides lifetime coverage and accumulates cash value, term life is simple to understand.
In this article you will find out what to look for in a term life insurance policy and which life insurance policy is right for you.
What is Term Life Insurance?
Term life insurance provides coverage for a specific number of years and pays out a death benefit if you pass away during the term of the policy. Unlike permanent life insurance, it doesn’t come with many bells and whistles, like doubling as an investment tool. As such it is more affordable, with premiums often comparable to the cost of an extra-large pizza!
This is the reason why most Canadians (76% in fact) opt for it.
Term life insurance is usually available in increments of 10, 15, 20, 25, 30, or 35 years or is set to last until a specific age, like 65 or 80. It offers protection during the years you are likely to need it most. That is, during your 30s, 40s, and 50s when you may have a mortgage to pay off, young children to provide for, and few financial assets.
Your beneficiary receives a guaranteed payout if you pass away within the policy term. If you outlive your term policy, you don’t get any money.
Features of a Term Life Policy
|$25-$75 per month for most people
|Joint policy option?
Note: monthly price is calculated based on healthy individuals between 20-45 years of age in Canada for a $400,000 policy coverage amount. Monthly policy rates can vary based on age, gender, health-status, coverage amount, and policy length.
How does term life insurance work?
Term life insurance is the simplest, purest form of life insurance. You pay a premium for a set number of years, and in exchange, the insurer promises to pay a fixed amount of money to your family if you die before the policy term is up.
The insurer determines your premiums based on the coverage amount and policy term. The more coverage you want, the higher your policy premiums. Likewise, the longer your policy term, the more you will have to pay.
The insurer also takes into account your age, gender, medical history, and family’s medical history. They may inquire about your smoking status, current medication hobbies, occupation, hobbies, and driving record. You may also have to take a medical exam to prove eligibility or qualify for the best rates.
Most term policies are sold as level term policies. That means your premiums will remain the same throughout the contract. So, if you’re paying $24 a month for a 20-year term policy, that $24 will not increase for the entire life of your policy.
Your loved ones receive the death benefit, which is usually tax-free, if you die within the policy term. Note: the death benefit is not tax-free if made to an estate.
Your beneficiaries can choose to receive the death benefit as a single payment or in installments. They are free to use this money as they see fit. If you outlive the term, you have the option of converting or updating your life insurance policy or letting it expire. If you die after your policy has expired, your family will not get any death benefit.
Most term life insurance policies are renewable and convertible up to certain limits. However, expect to pay more at policy renewal because life insurance costs go up as you grow older. Similarly, if you convert your term life policy into a permanent one, you will have to pay higher premiums. You can renew or convert your life term policy without any additional underwriting or providing any medical evidence.
What are the main advantages of term life insurance?
Term life insurance offers five important benefits.
1. More affordable
Term life insurance rates are cheaper than whole life insurance because it offers coverage for a specific number of years and doesn’t include a savings component.
2. Suitable for young families
Because it is more affordable than permanent life insurance, it often offers a better value for young families in Canada. Many young families are stressed by money, shouldering the costs of a mortgage, raising children, and other expenses. Term life insurance allows them to protect their family financially without breaking the bank.
3. More Flexible
Term life insurance is highly flexible. You can pick the term and coverage as per your needs. For instance, if you want to cover a long-term debt, like a mortgage, you can lock in low rates for the next 20 or 25 years. On the other hand, if you want to cover your tuition expenses, a 10-year term policy might be a good match.
Term life insurance policies are much easier to understand than permanent life insurance. You have to make only three decisions: preferred insurer, coverage amount, and term length. The insurer provides you coverage for the entire term, provided you pay premiums on time.
5. Can be converted to permanent life insurance
Most term life insurance policies come with a “term conversion rider”. It allows you to exchange a term life policy for a permanent one without submitting proof of insurability.
Why is that beneficial? You may ask.
Well, let’s say you purchase a 15-year term policy. Twelve years on, you get diagnosed with breast cancer. Normally, a cancer diagnosis makes it almost impossible to get a new permanent life policy. However, with a conversion rider in place, the insurer cannot refuse your request to convert your term life policy into a permanent one. Nor can it take this diagnosis into consideration when setting your new premium rates.
How much life insurance do I need?
All of us would like to leave our loved ones as much money as possible. However, the amount of coverage you choose impacts your premiums.
The more the coverage amount, the higher the premiums. For this reason, it’s important to make sure it's cost-efficient while still providing a safety net that’s adequate for your family’s needs.
To calculate how much insurance coverage you require, ask yourself: for how long into the future your income needs to be replaced?
Will the payout be needed until your spouse finds employment? Until your kids become financially independent? Or until any long-term debt, like a mortgage, is paid?
Next, take into account your annual salary and multiply it by the number of years for which your family will need the funds.
Now, consider any debt you may have (mortgage, vehicle loans, credit loans, etc.). Subtract the value of all your current savings from the total amount you owe and add this figure to the previous one. The resulting figure is a rough estimate of how much coverage you need.
Our intuitive life insurance calculator can crunch the numbers for you. Simply plug the numbers in our life insurance calculator and get a recommendation tailored to your needs.
How much will term life insurance cost me?
Term life insurance has an end date, so it is less expensive than permanent life. How much you pay depends on many factors, such as:
- Age: Insurers give younger applicants better rates than older shoppers. Generally speaking, the cost of life insurance goes up by 5% to 9% per year.
- Health: Insurance companies reward healthy applicants with lower premiums.
- Coverage amount: Premium rates go up as the coverage amount increases.
- Term length: The greater the term length, the more will pay for coverage.
- Occupation/Hobbies: If you have a job or a hobby that puts you at risk, expect to pay more.
- Tobacco usage: Insurers charge smokers two or three times more than non-smokers.
- Family history: Insurers look into your family medical history because many diseases have a hereditary component. A family history of heart disease or cancer can push your premium rates up.
- Your gender: Women live longer than men, and as such, get better life insurance rates.
The best recommendation is to buy early
Here is a sample of monthly insurance rates for a non-smoker based on a Standard health rating. This coverage is for monthly premium rates for policies offered by Dundas Life in 2020.
Types of term life insurance
Your family is unique — your term life insurance should be, too. Even before you start looking for the right insurer, zero in on the kind that fits your unique needs.
Broadly speaking, term life insurance comes in four varieties.
Level-premium term life insurance
Premiums and the death benefit remain the same throughout the policy term.
Annual renewable term life insurance (ART)
The term lasts one year. You can renew the policy at the end of the term. Each year you’ll pay more than the previous one. ART policies are best for covering short-term debt obligations. For example, if you have a car loan, but plan to sell it in the near future, an ART policy offers an affordable way to protect yourself within this period.
Decreasing term life insurance
The death benefit decreases over time, while the premiums usually stay the same. People buy decreasing term life insurance to take care of a specific debt, like a mortgage, though we prefer life insurance.
No medical exam term life insurance
You don’t need to take a medical exam to get coverage, though you may have to answer a few health-related questions.
Group Term Life Insurance
Group term life insurance is a policy that is available for free or at low cost through your work. It is definitely a good option to consider if your workplace provides it.
Five common term life insurance riders
“Riders” here have got nothing to do with motorcycles or horses. Instead, they refer to additional features added to a life insurance policy to address specific concerns or needs. Many of these riders are provided by large insurers, such as Manulife and RBC Insurance. Some riders — like term conversion — are built into your term life policy. For others, you have to pay extra.
- Term conversion rider — A free add-on, it lets you convert your term life policy into a permanent one without a medical exam up to a certain age.
- Return of premium rider — Pays some or all of the premiums you’ve paid if you survive the policy term.
- Accelerated death benefit rider — You receive part of the death benefit if you become terminally ill and have only one to two years to live.
- Disability waiver of premium — Protects your policy from lapsing if you get seriously injured and can’t make premium payments.
- Accident death benefit — Your family receives two or three times the payout if you die due to an accident.
Finding the best companies for term life insurance
Once you’ve got a handle on your term life insurance needs, it’s time to hunt for the right insurer.
Remember, not all insurance companies are created equal. Some boast solid financial standing, while some others offer great customer service. Pick the term life insurer that excels in areas most important for you.
Here are some ways to compare insurance companies to find out which one is best for you.
Check out the insurer’s financial rating
You want to select a company with the financial wherewithal to honour long-term contracts. Checking an insurer’s financial strength is one way to ascertain if you can trust it.
Look at the AM Best rating of each carrier you are considering. A rating of A- or higher indicates that the insurer has a strong ability to make good on its promise.
Check their customer service
You want a life insurance carrier that serves its customers well, right from the moment they request a quote to until a claim is made. To get an idea of an insurer’s customer service, you can look up its rating and reviews on Better Business Bureau website.
For most people, term life insurance boils down to cost. Since each applicant has unique needs, no insurer is the low-price leader for everyone. One carrier that’s cheapest for one person may well turn out to be the most expensive option for another. Comparing rates of multiple players is the only way to ensure you get the best bang for your buck.
How to buy a life insurance policy?
Term life insurance isn’t complicated, but choosing the right policy may require some serious research. Instead of going solo, it may be best to partner with an experienced independent broker, like Dundas Life. A broker will help you locate a Canadian insurer that provides the best possible term life insurance coverage at the best possible price.
The process of buying life insurance involves three steps:
- Fill out the application form
The application form will have questions related to your health history, family medical history, and occupation. Answer these questions truthfully. Also, specify the desired coverage amount and the policy term.
- Take a medical exam
If you're opting for a fully underwritten life insurance, you’ll have to take a medical exam. A paramedical examiner will collect your blood and urine samples and measure your height, weight and blood pressure.
If you don’t want a medical exam, consider a no-medical term life insurance policy.
- Pay the first premium
If you are eligible for coverage, the insurer will send you the policy papers. However, the policy will become active after you pay the first premium.
Term life insurance vs. Whole life insurance
Term life insurance is easy to understand. It is also more affordable because it has an end date and no cash value. For most people, it’s the right choice. However, whole life insurance can be a better fit for certain people, like someone with a lifelong dependent or a high net worth.
Here’s a quick comparison chart to simplify the differences between term life and whole life insurance.
|Term Life Insurance
|Whole Life Insurance
|Most affordable life insurance product
|5 to 20 times more expensive than term life
|Guaranteed Death Benefit
|Guaranteed Cash Value
|Depends on the term life insurance product you select
|Some whole life insurance policies pay dividends
Is term life insurance worth it?
Yes, it is. Take into account the potential advantages and disadvantages of term life insurance vis-à-vis whole life insurance.
|Pros of Term Life
|Cons of Term Life
|Cheaper than any other life insurance product
|Expires after your initial term
|Comes with an end date. So you pay only for the coverage that you need.
|Doesn’t build cash value
|The payout can help your family replace your income, pay off your debts, and take care of future costs (like college tuition costs)
If there’s someone you care about who depends on you financially, purchasing life insurance should be at the top of your to-do list. And since term life insurance provides coverage at an affordable price during the years your family needs it most, you should strongly consider it.
For less than the cost of a cup of coffee a day you can put financial protection in place for your family.
Most Frequently Asked Questions
Do term life rates get higher?
It depends on what kind of term life insurance policy you have. In the case of a level-term life policy, the premium stays the same throughout the contract. If you bought annual renewable term life, your premium would increase every year. That’s because life insurance costs increase as we grow older.
What happens if I live longer than my term life insurance?
You have four options in front of you.
- Let the policy expire. If you no longer need life insurance, you can let your term life policy expire and go without coverage.
- Convert your policy. When your policy is near the end of its term, you can convert it into permanent life insurance coverage. You will not have to submit proof of insurability. This option is available till a certain age, which may vary from insurer to insurer.
- Renew your term life policy. You don’t need to take another medical exam. You can exercise this option till a certain age, which may vary from one carrier to the next.
- Apply for a new policy. Healthy people may benefit from buying a new policy at lower rates instead of renewing the existing one.
Is it possible to cancel a term life insurance policy at any time?
Yes, absolutely. You can cancel your term life policy by stopping premium payments. You won’t be charged any cancellation fee.
Would I get my cash back if I cancel my term life insurance policy?
No, you won’t. That’s because it doesn’t build cash value. So when you end it, there’s no refund.
How long should my life insurance coverage last?
Life insurance needs aren’t one-size-fits-all. So there’s no one right answer to this question. It all depends on your reason for purchasing term life in the first place.
Are you buying coverage until retirement? In that case, the term should be for as many years as there are to your retirement. Do you want a term life policy to protect a mortgage? Then the policy should be in force for the number of years you would need to pay off the loan.
Term life insurance may be a good option if you want protection for a specific amount of time. It is typically cheaper than whole life insurance, so it may be a better choice if you are looking for affordability.
Gregory Rozdeba is the CEO of Dundas Life, Canada's leading digital insurance brokerage. He has over 8 years of experience in the life insurance industry. Gregory previously served as Director of Sales at a Toronto-based insurtech firm. He took the company from having no product to raising over $7.6M+ in venture capital to transform the prospect to policy process in Canada. Gregory holds a Bachelor's Degree in Finance & Accounting from Ontario Tech University and a Master of Information Management from FH Joanneum.