What is term life insurance in Canada? – How it works & how much you need

When it comes to protecting your family, term life insurance in Canada is one of the most straightforward and affordable solutions. It’s designed to cover your biggest financial responsibilities, like mortgage payments, childcare costs, or lost income, during the years you need it most.

Most term life insurance plans in Canada require the applicant to be a Canadian citizen or resident. Many providers now allow you to apply online, making the process quick and convenient.

In this guide, you’ll discover how term life insurance works, how to decide between 20- and 30-year terms, and what financial experts like Dave Ramsey recommend.

What is life insurance?

Life insurance is a contract between the policyholder and the insurance company. In exchange for your premium payments, the insurer agrees to pay a set amount of money, also known as the death benefit, to the designated beneficiary after the insured policy owner dies. Your beneficiaries can use the money for anything they choose.

This often includes:

• Paying off outstanding debts or mortgages

• Covering daily living expenses

• Funding your children’s education

• Covering funeral costs and related funeral and estate fees

This often includes:

• Paying living expenses

• Paying a mortgage or settling other financial obligations such as outstanding loans and debts

• Paying for a child’s higher education or covering childcare costs

• Putting money aside for retirement

• Making a payment for funeral and estate fees.

There are two main types of life insurance. Term life insurance covers a set period, while permanent life insurance lasts a lifetime and has a savings component that grows over time. Whole life insurance includes a cash value component that grows tax-deferred over time.

Term life insurance

Term life insurance is a policy that provides coverage for a specific period or term, usually 1, 5, 10, 15, 20, or 30 years. Term life insurance is considered temporary coverage, designed to protect you for a limited time rather than your entire life.

If the insured policy owner dies during the term, the named beneficiary receives a death benefit if the insured pays premiums during their lifetime. If the policy owner lives past the term, the policy expires, and they are no longer covered.

There are six different types of term life insurance:

• Level term insurance: This type of term life insurance policy is the most common and offers a death benefit that remains the same throughout the policy. As the death benefit does not change, the premiums remain stable. Level term policies have fixed monthly payments for the duration of the policy.

• Increasing term insurance: This term policy offers a death benefit that grows throughout the policy. The premiums stay the same or may increase.

• Decreasing term insurance: This type of term policy offers a death benefit that decreases throughout the policy, usually in one-year increments. The premiums stay the same throughout the length of the policy. Because the payout decreases over time, decreasing-term policies are generally less expensive than level-term insurance.

• Return of premiums (ROP) rider: This term policy offers a death benefit if the policy owner dies during the policy term but refunds or returns your premiums paid if you outlive the policy term. Because of this added benefit, Return of premiums (ROP) policies may cost more than double that of regular term life insurance. Note that ROP riders are not available in Canada.

• Convertible term plan: This type of term policy offers the policy owner an option to convert a term policy into a permanent plan or permanent insurance policy, often without any additional underwriting or medical exam. The premiums increase after the policy is converted.

• Yearly renewable term (YRT) plans: This type of term policy offers one-year coverage. The premiums are lower initially but increase when you renew coverage. Yearly renewable term (YRT) policies can be renewed each year without providing evidence of insurability.

How does term life insurance work?

Term life insurance is the purest form of life insurance, where the policy owner agrees to pay premiums. In return, the insurer guarantees to pay a death benefit if the insured policy owner dies during the policy term. However, there is no payout if the policy owner outlives the policy term.

The policy expires at the end of the initial term, as does the life insurance coverage. After the initial term expires, you may have options such as renewing the policy, converting it to permanent insurance, or letting it lapse. Before the policy ends, you can convert it into permanent coverage, renew it to another term, let the policy expire, or purchase a different one.

If you continue the term policy, the premiums are recalculated for your age at renewal. Some policies renew on a yearly basis after the initial term, providing ongoing coverage with flexibility. You choose the term length when you buy a term life insurance policy. Most traditional term insurance products automatically renew for the same length of time as the original term.

Types of Term Lengths

Here are some of the most common term lengths to choose from:

• Annual renewable term (ART) insurance: This type of term policy offers a guaranteed renewal of coverage each year for a set number of years without having to reapply or take another medical exam.

• 5-year term life insurance: 5-year term life insurance is one of the shortest term insurance policies available, offering five-year coverage.

• 10-year term life insurance: This type of term policy offers coverage for 10 years. At the end of the policy term, the policy owner may be able to renew coverage, convert it to permanent life insurance, typically at higher monthly premiums, or let it expire.

• 20-year term life insurance: This type of term policy offers coverage for 20 years. At the end of the policy term, the policy owner may be able to convert it to permanent life insurance, typically at higher monthly premiums, or let it expire. However, some 20-year term policies may offer an option to renew annually until 95 years of age.

• 30-year term life insurance: This type of term policy offers coverage for 30 years. At the end of the 30-year term, the policy expires. The policy owner can either remain without coverage or apply for a different policy for the needs at that age.

Is it better to get 20 or 30-year term life insurance?

Whether a 20- or 30-year term life insurance policy is better depends on your age, budget, and financial timeline. A 20-year term suits Canadians with shorter obligations, like mortgages with less than 20 years left or children who will become independent within that timeframe.

Term life insurance can be maintained until children reach adulthood and become self-sufficient, providing financial protection during their childhood and adolescence. A 30-year term offers peace of mind for those who want longer protection, such as covering a full mortgage or ensuring coverage through their prime earning years.

While a 30-year term costs more, it locks in your rate longer and reduces the risk of facing higher renewal premiums later in life. A good rule is to choose a term that lasts until your largest financial obligations are gone, whether that’s your mortgage, your children’s education, or your planned retirement age.

Choosing the length of a term life insurance policy

The length of a term life insurance policy depends on the desired coverage amount. Here are some factors to consider:

1. Financial obligations: Evaluate your obligations, such as mortgage payments, outstanding debts, or the duration of financial support needed for dependents. Choose a term that aligns with the timeframe during which these obligations will be in effect. Homeowners can select a term life policy that matches the length of their mortgage to pay off remaining debt if they die.
2. Family and dependents: Consider the age of your dependents and the time you anticipate providing financial support for them. For example, if you have young children, choose a term that covers their dependent years or until they become financially independent.
3. Income replacement: Determine how many years of income replacement would be necessary to support your family in case of your premature death. This can help you select a term that adequately covers the income gap until your dependents can become self-sufficient.
4. Future needs: Consider any future financial obligations you may have, such as funding education expenses for your children or retirement savings. Ensure that the chosen term allows these goals to be met within the coverage period.
5. Affordability: Evaluate your budget and select a term length that aligns with your financial capacity. Longer-term policies generally have higher premiums, so strike a balance between the desired coverage period and affordability.
6. Flexibility: If your needs change, consider a term life insurance policy offering renewal or conversion options. This can allow you to extend coverage or convert to a permanent policy without requiring a new medical examination.

Let’s consider an example:

Sophie is a 35-year-old married woman with two young children who wants to ensure that her family is financially protected in case of her untimely death. Here’s how she goes about choosing the length of her term life insurance policy:

Sohpie evaluates her financial obligations, including a mortgage that will be paid off in 25 years and her children’s estimated years of dependency until they become financially independent, which she estimates to be around 20 years.

Sophie calculates the number of years her family would need income replacement if she were to pass away. She decided that a term life insurance policy covering 20 years would provide sufficient time for her children to complete their education and become self-sufficient.

Sophie considers her goals, such as retirement savings. She determines that a 20-year term would allow her to allocate funds towards retirement savings while providing adequate coverage for her family’s needs.

Sophie reviews her budget and determines that she can comfortably afford the premiums for a 20-year term life insurance policy within her financial means.

Based on these considerations, Sophie purchased a 20-year term life insurance policy. This length aligns with her financial obligations, provides income replacement for her family during the dependency years, and allows her to focus on her future goals.

Find your ideal term length in just a few clicks.

How much term life insurance do you need?

The rule of thumb is ten times your income. For example, if you make $50,000 annually, you should have a policy with a face value of at least $500,000. However, there may need to be more than this method for accurately determining how much coverage you need for your financial needs and specific circumstances. It’s important to consider future financial goals and expenses, such as a mortgage, college tuition, retirement savings, or healthcare costs, which may require additional coverage beyond a simple multiple of your income.

We can consider an example with specific financial obligations and income replacement requirements to determine your needed coverage. Let’s break it down in the form of a table:

In this example, John has a mortgage of $300,000 and outstanding debts of $50,000. He wants to set aside $100,000 for his children’s education. His total financial obligations amount to $450,000.

To provide income replacement, John’s annual income is $60,000, and he wants ten-year coverage. The total income replacement needed is $600,000. This policy is designed to replace lost income for his family, ensuring their financial needs are met during this period.

To calculate the total amount of term life insurance coverage John needs, we add the financial obligations and income replacement amounts:

Total coverage needed = Financial obligations + Income replacement

Total coverage needed = $450,000 + $600,000 Total coverage needed = $1,050,000

Therefore, John would require a term life insurance policy of at least $1,050,000 to adequately cover his financial obligations and provide income replacement for his family. It’s important to review your life insurance needs regularly, as your financial situation and specific circumstances may change over time.

How much does term life insurance cost?

The cost of term life insurance in Canada can vary depending on age, term length, coverage amount, and gender. Here’s an example table showing estimated monthly prices for different scenarios:

Several factors, including the insurance provider’s underwriting criteria, can affect the cost of term life insurance in Canada.

• Age: Generally, younger individuals pay lower premiums than older individuals. This is because younger individuals are statistically considered to have a lower mortality risk. Renewing or purchasing a new policy later in life often results in a higher cost due to increased age and risk.
• Gender: Generally, females tend to have longer life expectancies than males. As a result, women often pay slightly lower premiums.
• Health condition: Health plays a significant role in determining the cost of life insurance. Insurance companies assess factors such as your medical history, current health, and any pre-existing conditions. Individuals in good health usually qualify for lower premiums. Smokers often pay higher premiums for term life insurance than non-smokers.
• Smoking status: Tobacco use, including smoking cigarettes or using other tobacco products, is associated with higher health risks. Smokers usually pay more for insurance than non-smokers because there’s a higher chance of health problems.
• Coverage amount: The amount of coverage you choose directly affects the cost of your premium. Generally, higher coverage amounts result in higher premiums.
• Term length: The length of the term also affects the premium. Longer-term policies usually have higher premiums than shorter-term policies due to the extended coverage period.
• Lifestyle and occupation: Risky hobbies, participation in dangerous activities, and certain occupations with higher occupational hazards can influence the cost of insurance coverage.

Term vs. Permanent life insurance

Unlike term life insurance, permanent life insurance offers coverage for the insured’s whole life, as long as the premiums are paid. Permanent life insurance policies provide lifetime coverage, meaning your protection never expires, and may offer additional benefits such as tax-advantaged cash value growth and the potential to earn dividends.

Types of permanent policies, such as whole or universal life insurance, offer cash values that grow over time and can be accessed during the policyholder’s lifetime.

Benefits of term life insurance

Though permanent insurance may have its advantages, term life insurance is often considered better for several reasons:

Affordability: Term life insurance generally offers lower premiums than permanent insurance policies. This affordability allows individuals to obtain higher coverage amounts for a specific period, providing adequate protection during their highest financial obligations.

Better Flexibility: Term life insurance offers flexibility in choosing the coverage period. Term length can be tailored to match specific needs and obligations, such as mortgage payments or education expenses, ensuring coverage aligns with individual circumstances.

Simplicity: Term life insurance is a straightforward policy. The focus is primarily on providing a death benefit during the term without complex investment or cash value components.

Easy to get approved: Many companies provide a “No Medical” term life insurance policy with accelerated underwriting. This process uses a phone screening to confirm your answers on the life insurance application and uses data analytics to evaluate the risk of applicants. Some term life insurance policies do not require health questions or a medical exam, making approval even faster. This enables you to skip the medical exam and receive a decision faster, typically in minutes, as opposed to traditional underwriting, which takes weeks to months. You could get approved within a few hours if you’re relatively young and healthy.

While term life insurance is usually the way to go, there are some drawbacks to buying a policy that only covers you for a set period. For example, a term policy does not increase cash value over time.

Additionally, if you must renew your policy before it expires, your premium will be adjusted based on your current age and health – which could mean much higher rates. You might not be eligible for “No Medical” term life insurance if you have significant health problems. Despite these drawbacks, term life insurance is still an excellent option for many people.

Does term life insurance expire?

Term policies offer coverage for specific periods, typically one to 30 years. Once the term ends, the policy terminates, and the insured is no longer covered. However, there are a few options available to policyholders:

• Renew the policy: Term life insurance policies generally provide the choice to renew the coverage at the end of the term. However, the premium for the renewed policy is typically higher and is based on the policyholder’s current age and health condition. Renewal terms may vary among insurance companies, so it’s essential to check the policy terms to determine if renewal is an option.
• Convert to permanent life insurance: Most term life insurance policies include a conversion feature, allowing policyholders to switch to permanent life insurance, thus enabling you to maintain coverage for your lifetime, with the added benefits of cash value. The conversion option may have specific time limits or restrictions, so reviewing your policy to understand the terms and requirements is essential.
• Purchase a new policy: If you still require life insurance coverage after the term expires, you can purchase a new life insurance policy. This may involve exploring different policies, such as another term life insurance policy or a permanent one, based on your current needs and financial situation. Remember that obtaining a new policy may involve reassessing your health and potentially paying higher premiums based on age at the time of application.

Can I renew or convert my term policy?

Most term life insurance in Canada policies are renewable and convertible, two valuable features that give you flexibility as your life changes.

• Renewal: You can usually renew the policy at the end of the term without another medical exam, but your new premium will reflect your current age and risk profile. Some insurers allow annual renewals until age 75 or later.

• Conversion: Many policies include a conversion option, letting you switch to a permanent policy, such as whole or universal life, without re-qualifying medically. This can be especially useful if your health has changed since the policy began.

To avoid losing these options, always check your policy’s conversion deadline, typically between age 65 and 71.

Term life insurance for business purposes

Term life insurance isn’t just for families, it’s also a smart financial protection tool for business owners. A term life insurance plan can help safeguard your company’s future by providing a lump sum payout if a key person, such as the owner or a partner, passes away during the policy term.

This insurance plan can be used to pay off business debts, cover operating expenses, or fund a buy-sell agreement, ensuring the business can continue to operate smoothly without financial disruption.

Term life insurance and estate planning

Term life insurance can play a vital role in estate planning by providing a tax-free death benefit to your beneficiaries. This lump sum from term life insurance policies can help your loved ones cover funeral expenses, pay off outstanding debts, and manage other final costs, all without dipping into the estate’s assets. The tax free death benefit ensures that your family receives the full value of the insurance payout, helping them maintain their standard of living and financial security.

Incorporating term life insurance into your estate plan can also help cover estate taxes or other obligations, preserving more of your assets for your heirs. By using life insurance policies as part of your estate strategy, you can ensure that your wishes are carried out and that your loved ones are protected from unexpected financial burdens after you’re gone.

Term life insurance and taxes

When it comes to taxes, term life insurance offers a significant advantage: while term life insurance premiums are generally not tax-deductible, the death benefit paid out to your beneficiaries is typically tax-free. This means your loved ones can receive the full amount of the death benefit from your term life insurance policy without having to pay income tax on it.

Additionally, the payout from term life insurance policies can be used to pay off any taxes owed by your estate, helping to minimize the financial impact on your beneficiaries. It’s important to note that tax rules can be complex and may change, so consulting with a tax professional or experienced insurance advisor is always a good idea.

They can help you understand how your term life insurance policy fits into your overall tax and estate planning strategy, ensuring your family receives the maximum benefit from your coverage.

Term life insurance for non-resident Canadians

If you’re a non-resident Canadian, you may still be eligible for a term life insurance policy, but the process can be a bit different. Insurance companies may require additional documentation, such as proof of income or residency status, to assess your eligibility and determine the right coverage for your individual circumstances.

The availability and terms of life insurance policies for non-residents can vary, so it’s important to work with an experienced insurance advisor who understands the unique needs of Canadians living abroad or with ties to multiple countries.

Before purchasing a term life insurance policy, carefully review the policy’s terms and conditions to ensure the coverage meets your needs and complies with any relevant regulations. With the right insurance policy in place, non-resident Canadians can secure valuable life insurance coverage and peace of mind, no matter where life takes them.

Term life insurance for Canadians living abroad

Canadians living abroad often face unique challenges when it comes to securing term life insurance coverage. Some insurance companies may have restrictions on issuing term life insurance policies to Canadian citizens residing outside of Canada, while others may require additional underwriting, medical exams, or documentation to assess risk.

If you’re a Canadian living overseas, it’s important to research and compare different life insurance policies to find one that offers the right level of financial protection for your situation. Consider factors such as currency exchange rates, foreign tax implications, and local regulations that may affect your policy. Consulting with an experienced insurance advisor can help you navigate these complexities and select a term life insurance policy that provides reliable coverage and peace of mind, ensuring your loved ones are protected no matter where you call home.

What is Dave Ramsey’s recommendation for term life insurance?

Well-known personal finance educator Dave Ramsey consistently recommends term life insurance over permanent coverage. His rule of thumb is simple: buy 10–12× your annual income in coverage for the number of years your family will rely on your income. He advocates for term insurance because it’s affordable, easy to understand, and designed for income protection, not investment.

While his advice originates from the U.S., the same logic applies in Canada. A well-structured term policy can secure your family’s financial future while keeping premiums manageable, freeing up extra cash to invest elsewhere.

Term life insurance in Canada – Conclusion

When a term life insurance policy expires, you won’t receive any reimbursement or returns on your investment. The policy only pays out if you pass away during the term. This is why term life insurance is generally affordable, as most people survive the policy term and don’t receive a payout. A term life policy may be suitable if you’re a young and healthy individual with family dependents.

In contrast, whole life insurance may appeal to some individuals due to its savings component, where a portion of premiums contributes to a growing cash value over time, potentially earning dividends.

However, term life insurance often provides more affordable and flexible protection, allowing individuals to save on premiums and allocate that money toward other financial priorities, such as investing in assets, paying off debts, building an emergency fund, or funding their children’s education. This makes term insurance more attractive for those seeking straightforward and cost-effective coverage. Premiums for whole life insurance are significantly more expensive than for term life insurance but remain fixed for the duration of the policy.

Frequently asked questions about term life insurance

Sources:

1. LIMRA, “Insurance Barometer Study“
2. CLHIA, “Canadian Life and Health Insurance Facts“

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