As you may know, the purpose of implementing term life insurance policies is to financially protect your loved ones, business partners, or creditors against your non-permanent financial obligations.
This obligations can be any or all of the following:
- Active Income
- Consumer debts
- Personal Loans (from institutions or individuals)
- Children’s Post-Secondary Education
On average, you should carry a term life insurance policy for at least 20-years especially if you’re raising a young family where your income needs replacing at least until your children are capable of financially supporting themselves should something were to happen to you.
Common financial obligations such as the ones listed above have end dates to them, and most insurance companies have flexible term life insurance lengths. The shortest-term life insurance that you can carry is a 10-year term policy. So, say, for example, you have a business loan from angel investors such as your parents that you can pay-off in 10-years, you can protect your lender’s, in this case, your parent’s financial interest on your loan by carrying a 10-year term life insurance so in the event that you pass-away prematurely, your debt is paid off by putting them as your beneficiaries.
Whenever we structure a life insurance policy, we always start by running life insurance needs analysis. This determines the many different obligations that may need funding in the event that the life insured is to pass away prematurely.
For most Canadians, the bulk of our financial obligations are temporary in nature, which means, they end at a certain point. For many of us, our ability to earn a living for our loved ones is our primary asset and responsibility. Premature death strips away whatever income we bring in into our household, without proper insurance planning, many Canadian households find themselves dealing with the loss of or reduced income in the event of a breadwinner’s premature death.
The length of an income replacement policy depends on the person’s age at implementation and the length of his or her financial obligations. Most life insurance policies we design for our clients consider all temporary (and permanent) financial obligations.
Young adults who are starting a family are usually concerned about protecting their young ones’ future, as such income protection insurance is of high importance. There’s no better way of securing your loved one’s lifestyle and future by implementing insurance policies that replaces a breadwinner’s income so your household’s financial well-being need not be jeopardized in the event that a serious life event ever affects a breadwinner’s ability to earn a living.
About half of those who are just starting out their family life will also need to purchase homes down the road. As such, mortgage loan protection should also be considered, on average a couple’s mortgage obligation usually lasts around 25-years in Canada, that if they only buy one house and settle in it until they retire, in such a case, a 25 to 30-year term life insurance is advised, depending on their home purchase time-frame.
Another option is to implement a term life insurance policy that protects most of your long term, yet temporary financial obligations until age 65, which in most instances is when people retires. This makes sure that you need not deal with term renewals where monthly contributions are expected to increase up to 4 times the initial amount.
4 Common Term Life Insurance Options
There are 4 common term life insurance lengths in Canada, and they are as follows:
- 10-year term
- 20-year term
- 25-year term
- 30-year Term or Term to Age 65
10-Year Term Life Insurance
A 10-year term life insurance is the cheapest term life insurance you can get, well at least when you’re young, this is ideal if you know for a certain that the obligation you’re looking to protect ends in the 10-year time frame. If you’re looking to protect a longer-term financial obligation, I would suggest that you get a longer-term life insurance policy to avoid drastic premium increases at renewals.
One thing you should avoid when getting term life insurance policies is renewals. Yes, your monthly contribution amount increases at each term renewal. If you’re implementing a term life insurance for longer time frame obligations, try to get longer-term life insurance that fits the length of that obligation so you avoid overspending at renewals.
Remember, you’ll be 10-years older at every term renewal with a 10-year term life policy. And, though you need not prove insurability (medical exams, and stuff), the premium amount at renewal will be based on your attained age – that makes renewals expensive that’s why I always advise my clients to avoid renewals whenever possible.
20-Year Term Life Insurance
A 20-year term life insurance is the most-commonly issued term life insurance policies by many brokers in the anticipation that most temporary financial obligations ends in 20-years.
20-years is a mid-range term life insurance length, it can cover an income replacement life insurance that you can carry for the length of the 20-year period and dispose of after the end of the term. Similarly, this is expected to more expensive when you renew it in its 21st year because by then you’ll be 20-years older (I know, ouch!). Needless to say, avoid putting yourself in a situation where you renew term life insurance policies. The first renewal usually isn’t an issue for 10-year and 20-year term policies but the 2nd and 3rd renewals would usually hurt your pocket, and most people will just give up their term policies at 3rd renewal, leaving them without life insurance coverages at old. This is the reason why we always suggest that our clients implement structured policies with both permanent and term life insurances from the get-go or convert part of their term life insurances as soon as possible to lock in their age for a permanent insurance policy.
25-Year Term Life Insurance
A 25-year term life insurance policy is most commonly used for mortgage loan protection, which is otherwise known simply as “mortgage insurance”. Before I go further with this section, a mortgage loan protection insurance shouldn’t be confused with the mortgage insurance that you have to pay organizations like CMHC (Canada Mortgage and Housing Corporation) when you’re only putting a 5% downpayment on your home purchase, which is required by Canadian mortgage lenders to minimize their risks in the event that the borrower(s) default on their mortgage payments. This type of mortgage insurance protects the lender against the mortgagee.
Now that we have that out of the way, let’s go back to 25-year term life insurance.
Looking at the 25-year length, this perfectly fits a person’s mortgage loan obligation. The purpose of getting a mortgage loan insurance is to protect your loved ones against losing their home in the event of a breadwinner’s premature death. In most instances, two incomes qualify whenever a family applies for a mortgage, in the event that one of the spouses pass-away during the length of the mortgage, the remaining spouse’s income has to qualify at a mortgage renewal and make it a point that they can actually afford to pay off the mortgage on their own, otherwise the family could lose their home either way.
Implementing a 25-year term life insurance to protect your loved one’s against your mortgage obligation means that they can actually pay off outright, in case any of the mortgagees pass-away during the term of the mortgage.
For mortgage loan purposes, a 25-year term life insurance can be designed as a decreasing, join-first-to-die policy where there’s technically only a life insurance policy with two named life insureds. The benefits get paid to the beneficiary when of the named life insured passes away and the contract ends at the first payout since there will no longer be any coverage after the benefit has been paid out being it’s a “join-first” policy. The benefit pays out on the first death. Notice I mentioned decreasing, yes the death benefit decreases over time, as the mortgage obligation also decreases, this and the joint nature of the policy, usually makes it a bit more affordable than implementing two separate life insurance coverage when you’re only looking to cover a mortgage obligation. This of course goes without saying that you should have other life insurance coverage for your other financial obligations since this type of policy is mainly designed to protect your loved ones against the possibility of losing their home in case of premature death.
Term 30/65 Life Insurance
There is a certain term life insurance called Term 30/65. Not all insurance companies offer this but it’s available on the product shelf of a couple of Canadian carriers.
This type of term life insurance aims to cover a person’s financial obligations up to the person’s retirement age, which is usually age 65. Ideally, a person should be retired at age 65 but then as you know, this isn’t always the case in Canada. Very few Canadians actually successfully retire at age 65, which is an also interesting personal finance topic but I’ll reserve this for another article.
The Term 30/65 life insurance policy is for people who want to get a longer-term policy that covers their loved ones from common financial obligations until they retire or until the obligation ends. It’s a flexible type of longer-term life insurance that covers the insureds for at least 30-years, depending on their age at implementation, with the minimum age being 18.
For example, a 25-year old male looking to get $500,000.00 of life insurance coverage will only pay $49.04 (as of this writing) from age of implementation up to age 65, with no renewal increases in sight for a 40-year term life coverage. See the illustration below:
Term 30/65 offers coverage up to a maximum issue age of 55, can get coverage with this type of policy for 30-years, with no increases through the length of the policy’s term.
Clients aged 18 can get a maximum coverage length of 47-years without ever having to renew. Those who are aged 35 and above will have a maximum coverage term of 30-years.
Other Term Life Insurances
Nowadays, a person can implement flexible term life insurances depending on the length of the obligation the insurance is being implemented for. You can have a 12-year or 16-year year term life insurance policy for those odd length obligations with a maximum of 40-year length but in most instances, if you’re looking to protect longer-term obligations such as a breadwinner’s income and a mortgage obligation, you should implement at least a 20-year or up to age 65 coverage depending on how long you need the coverage. Just know for a fact that after a term policy’s coverage ends, you either have the option to renew it (at a higher rate) if it’s a shorter length coverage or your policy ends. In saying that, we always suggest our clients have both their temporary and permanent obligations covered so they don’t find themselves in a situation where they run out of coverage at old age.
Outliving Your Term Life Insurance
Term life insurance by nature, does not provide the insureds with a lifetime insurance coverage. On average, the bulk of our financial obligations are temporary in nature, however there are some obligations that doesn’t go away as long as the person lives.
For most Canadians, our basic permanent life insurance need is our own final expense and probably some taxes due at death, depending on what asset(s) you have to dispose of before death (think capital gains at disposition).
If there are not any concerns on capital gains on asset disposition, I suggest that a person should have at least $50,000.00 of permanent life insurance for immediate cash needs upon death.
Permanent because we don’t know as to when our loved ones will need the final expenses funds, such as the nature of life. You know, some people leave young, some people are lucky enough to stay way into their 90s. Whenever it occurs, it’s a good idea to have the funds so as not to burden our loved ones with the immediate cash needs at death.
Depending on your long term goals and estate planning needs, you may need a higher permanent insurance than simply leaving money for final expenses. If you have money, a business to pass on or other types of assets, your recipients should have money to settle any capital gains that may arise as a result of your death at old age, you can leave them with tax-free funds in the form of permanent life insurance death benefit.
You can also use a permanent life insurance to tax-free leave a legacy to your next generation to further preserve your family’s wealth. Insurance policies can be structured depending on your needs, and goals, which of course is beyond the topic of this article but just know that it can be done and that there are several options available to you.