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Term Life Insurance: How It Works in Canada

Term life insurance is a type of life insurance policy that provides coverage for a specific period of time or term. It pays a death benefit if the insured dies during the policy term.

Term life insurance is the most affordable type of life insurance, at least, during the initial term and it’s a good choice for people who want coverage for a specific period of time, like 10, 20, 30, or 40 years. The policyholder pays monthly or yearly contributions to the policy, and the policy pays a death benefit if the insured dies during the policy term.

The death benefit is paid to the policy’s named beneficiaries, tax-free, who can use it to pay for funeral expenses, living expenses, or other debts and obligations of the deceased.

An important thing to note is that term life insurance does not build cash value, so it’s not a good choice for people who want to use their life insurance policy to build wealth throughout their working careers.

Term life insurance is a popular choice for people who want life insurance but don’t want to pay the high monthly contributions on a whole life or universal life insurance. It’s also a good choice for people who are just starting out or are new to Canada and need life insurance coverage for a specific period of time, such as those who are looking to protect their loved ones against loss of or reduce income until their children are out of college. Term life insurance policies are typically renewable, so the policyholder can continue their coverage (at a higher rate) if they need it after the initial policy term. Most term life insurance policies sold in Canada have conversion options, which allow the policyholder to convert their policy to whole life or universal life insurance at a later date. This is a good option for people who want to eventually transition to a permanent life insurance policy but are not yet ready to do so as of the moment.

Term Life Insurance vs Whole Life Insurance

arm wrestle between two men
Arm wrestle between two men, depicting comparison between term life insurance and whole life insurance.

Whole life insurance is a pure type of permanent life insurance that provides coverage for the insured’s entire life. Similarly, the policyholder pays their monthly or annual contributions, and the policy pays a death benefit if the life insured dies. Whole life insurance policies typically have higher premiums than term life insurance policies, but they also build up cash values and earn dividends if the policy is participating whole life insurance.

An easy way of comparing term life insurance with whole life insurance is to look at them in the concept of renting and owning.

With term life insurance, you’re basically renting your life insurance coverage. This means that no matter how long you keep on paying into the policy, you’re not building equity into your policy.

Similarly, no matter how long you rent a house or an apartment, no ownership is built, hence, you’re out of your residence if you stop paying.

Whole life insurance can be paid off in 20-years. When you buy a house, you will most likely own it, once it’s paid off and when you decide to sell your house, you get all your money back plus equity gains by simply owning the house. When you decide to dispose of your whole life insurance policy, provided that the policy is considered to have matured, you will also get back your equity and if you implemented your policy at a younger age, you may also have equity growth from your policy.

Term Life Insurance vs Universal Life Insurance

Universal life insurance is a type of permanent life insurance policy that offers a combination of death benefits and investment components. The investment component, allows your policy cash values to grow over time on a tax-deferred basis. This allows policyholders to access the cash value later on when needed.

Instead of earning surplus premiums and dividends, universal life insurance policies earn investment returns based on your policy’s equity and fixed income portfolio.

One of the main benefits of universal life insurance is that it offers more flexibility than term life insurance. For example, policyholders can adjust their monthly contributions and death benefit amounts as their needs change over time. They can also take out loans against the cash value if needed.

Universal life insurance policies required higher monthly or annual contributions compared to term life insurance policies because you’re not only contributing to the death benefit but also contributing to a longer coverage period and wealth accumulation.

female martial artist attacking male opponent
Female martial artist attacking a male opponent. Depicting term life insurance vs universal life insurance.

How Term Life Insurance Works in Canada

In Canada, term life insurance is available from a variety of different insurers. Each insurer has its own forte or sweet spot. Common term life insurance policies range between 10 and 20-years, with some insurance companies offering up to age 65 or a term coverage period of 40 years.

You may have heard of the term to age 100 life insurance policy. While named “term to 100”, this is technically permanent life insurance, which will cover you up to age 100, provided that premium payments are consistently made. It’s like whole life insurance, less the cash values. The only difference is that you can’t pay it off in 10 or 20-years, and you can’t apply for a premium holiday in case of cash flow issues or layoffs.

Contributions for all types of life insurance in Canada can vary based on factors such as the insured’s age, health, lifestyle, and smoking status.

Regardless of which type of life insurance policy, it’s important to choose a policy with a monthly or annual contribution amount that you can afford to contribute over the long term.

When shopping for term life insurance, it’s important to understand how the policy works and what the benefits are. It’s also important to know how to make a claim if you need to. If you have any questions about term life insurance, speak to an experienced financial security advisor who can help you plan life ahead. They can help you understand the different policies available and find the best one for your needs.

Top 3 Benefits of Term Life Insurance

male and female professional looking at a tablet
Male and female professionals looking at a tablet.

There are several benefits of term life insurance, including:

It’s affordable:

Term life insurance is the most affordable type of life insurance, making it a good choice for people on a budget.

It’s flexible:

Term life insurance policies can be customized to fit your needs and budget.

It’s simple:

Term life insurance is a straightforward product that is easy to understand.

How to choose the right term life insurance policy

When choosing a term life insurance policy, it’s important to consider your needs and budget.

You’ll also want to consider how long you’re going to need the coverage. Keep in mind that term life insurance policies come with an expiry date. When your term life insurance expires, you either lose your coverage or you can renew it at a much higher rate (based on your age at renewal).

Most older Canadians risk losing their life insurance coverage because term life insurance tends to be more expensive every time you renew your policy. If you think having a long-term life insurance policy is important, you either convert a portion of your term life insurance policy into a permanent policy or implement a small permanent life insurance policy in conjunction with your term insurance so you have both your short-term and long term needs covered.

How to buy a term life insurance policy in Canada

male consultant talking with young female entrepreneurs
Male consultant talking with young female entrepreneurs

While you can easily buy a term life insurance online nowadays, speaking to a financial security advisor who can help you plan your insurance coverage is a much better option.

As licensed insurance advisors, we understand the ins and outs of the financial services industry. We can take you by the hand in exploring all your different options, helping you plan and implement an effective financial risk management strategy that covers any potential risks that may affect your ability to earn a living so you and your loved ones never have to be poor even when you’re unable to work for income.

To buy term life insurance with us, book your appointment with us here at a date and time that’s most convenient for you. In our meeting, we will provide you with the necessary information to help you make a well-informed decision so you know that your policies are going to work for you when you or your loved ones need them the most.

The different types of term life insurance policies available in Canada

There are two main types of term life insurance policies available in Canada: level term and decreasing term.

Level Term Life Insurance

Level term life insurance provides coverage for a set period of time, such as 10, 20, or 30 years. The death benefit remains the same throughout the policy term.

Decreasing Term Life Insurance

Decreasing term life insurance provides coverage for a set period of time, but the death benefit decreases over time. This type of policy is typically used to cover a mortgage or other loan.

How to make a claim on a term life insurance policy

If you need to make a claim on your term life insurance policy, you’ll need to contact the insurance company and provide them with the required documentation.

In most cases, you will need to submit a death certificate or a police report in cases where a death certificate can’t be obtained.

Your policy should indicate the life insurance company’s toll-free number. You can call the claim’s hotline, and they will email you the claim forms that you need to fill out and the required documents to support the claim.

claim written with a fountain pen
Claim written with a fountain pen.

The different companies that offer term life insurance in Canada

There are many different companies that offer term life insurance in Canada, including:

FAQs about term life insurance in Canada

Q: What is the difference between term life insurance and whole life insurance?

A: Term life insurance provides coverage for a specific period of time, while whole life insurance provides coverage for your entire life.

Q: How much does term life insurance cost?

A: The cost of term life insurance depends on factors such as your age, health, and the death benefit.

Q: How long does a term life insurance policy last?

A: A term life insurance policy can last for 10, 20, 30, or 40 years.

Q: What is the difference between level term and decreasing term life insurance?

A: Level-term life insurance provides coverage for a set period of time while decreasing term life insurance provides coverage for a set period of time but with a decreasing death benefit.

Q: Can I convert my term life insurance policy to whole life insurance?

A: Yes, most term life insurance policies can be converted to whole life insurance.

Q: Do I need term life insurance if I have a mortgage?

A: A term life insurance is a much better option than bank mortgage protection insurance because once you’re approved, you’re pretty sure your loved ones will have the money to pay off the mortgage in case one of the mortgagees pass away and the mortgage isn’t yet paid off.

Q: Is term life insurance better than permanent life insurance?

A: Term life insurance and permanent life insurances have different purposes. While you can use whole life and universal life insurance policies for income protection purposes the premium contributions are usually on a much higher scale than a term life insurance. For many Canadians, term life insurance is a budget-friendly policy for income replacement purposes.

Q: How much term life insurance do I need?

A: The amount of term life insurance you need depends on your individual circumstances. You’ll want to consider factors such as your debt, income, and dependents when deciding how much coverage you need.

As a rule of thumb, when you’re implementing life insurance to secure your loved ones against income loss, you will need an amount of death benefit of at least 10-times your annual income.

Q: What happens if I outlive my term life insurance policy?

A: If you outlive your term life insurance policy, the death benefit will not be paid.

Q: Can I cancel my term life insurance policy?

A: Yes, you can cancel your term life insurance policy at any time.

Q: What is the difference between term life insurance and permanent life insurance?

A: Term life insurance provides coverage for a specific period of time, while permanent life insurance provides coverage for your entire life.

Conclusion

Term life insurance is a type of life insurance that provides coverage for a specific period of time. It’s the most affordable type of life insurance, and it’s a good choice for people who want coverage for a specific period of time. The policyholder pays premiums, and the policy pays a death benefit if the insured dies during the policy term. The death benefit is paid to the beneficiaries, who can use it to pay for funeral expenses, living expenses, or other debts and obligations. There are many different companies that offer term life insurance in Canada, and the cost of the policy depends on factors such as your age, health, and death benefit.

A licensed insurance agent or a financial security advisor can help you implement a term life insurance for income replacement purposes, for mortgage protection, or any other financial obligations that are considered temporary in nature. A good quality financial advisor will not let your term life insurance expire without converting it or a portion of it into permanent life insurance and will commit to providing you with long-term financial guidance that’s beyond simply implementing a term life insurance policy.

As financial advisors, we help our clients manage their financial risks and build wealth over time so they never have to be poor.

If you’re looking to implement a term life insurance policy to protect your loved ones against your financial obligations, please don’t hesitate to book an appointment with us by choosing a schedule that works for you (and your partner). We currently serve the provinces of Manitoba and Ontario.

Our commitment to our clients is to provide them with the necessary information to help them make better, and well-informed decisions in managing their financial risks and building wealth over time. Our business is built by focusing on client benefits, instead of ours by providing an honest and transparent service to all Canadian families and business owners we’ve helped over time.

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