What are the types of term life insurance in Canada?

Understanding what are the types of term life insurance helps you choose a policy that matches your goals and budget. Major Canadian insurers, such as Canada Life, offer a variety of term life insurance options. Canadians can select from level, decreasing, renewable, convertible, or annual renewable term options, each offering unique benefits. These policies are known for their affordable rates, making them accessible for many Canadians. Whether protecting a mortgage, replacing income, or covering family needs, the right policy length makes all the difference. Understanding term life insurance is essential to make an informed decision about your coverage.

In this guide, we’ll break down how each type works and when to use it for maximum value.

Term life insurance

Term life insurance is a pure form of insurance that covers a period known as a ‘term’. If the insured person passes away during the term, the insurer pays a lump sum to the beneficiary. It’s an affordable way to have temporary coverage instead of permanent life insurance, which covers a lifetime. Term life insurance premiums are generally lower compared to other types of life insurance, making it accessible for many.

There are various term life insurance products available, each designed to meet different financial needs and coverage durations.

Famous for its affordability, term life insurance is temporary, typically lasting 10 to 30 years. When the term ends, so does the policy and its coverage.

What are the types of term life insurance in Canada?

The types of term life insurance in Canada include level, decreasing, convertible, renewable, and yearly renewable term (YRT). Each type caters to a specific life stage or obligation, from early-career families to homeowners nearing retirement, and are differentiated by factors such as policy length and premium stability. Each term life insurance plan is designed for a specific set period, such as 10, 20, or 30 years, and these term life insurance options allow Canadians to tailor coverage to their needs.

Renewable Term Life Insurance allows the insured person to continue coverage without medical exams required for renewal, although a medical exam may be required for the initial term. Premiums will increase based on their age at renewal, but the convenience of not needing medical exams at each renewal makes this option attractive for many.

Level-term

Level-term life insurance is a type of term life insurance that offers a ‘level’ or fixed death benefit and premium for a specified term. With level-term life insurance, coverage is provided for a set period, such as 10, 20, or 30 years, and the premium payment remains constant throughout the term.

People often choose level-term insurance to replace income, protect a mortgage, and ensure financial safety for dependents in the event of the policyholder’s death during the specified period.

Increasing-term

In an increasing-term policy, the death benefit increases each year. To compensate for a more considerable death benefit over time, premiums for increasing-term policies are higher than for level-term policies.

The death benefit of your increasing-term life insurance increases in two ways: flat rate or percentage.

• Flat rate: For example, if your initial coverage amount is $100,000, you can increase coverage by $10,000 every five years. At the end of a 20-year policy, your death benefit would be $140,000. If you choose the percentage route, you can increase the death benefit by a fixed percentage yearly.
   
• Percentage: If your initial coverage is $100,000, you can increase it by five percent yearly. At the end of 20 years, your death benefit would be $265,330.

Decreasing-term

Decreasing-term life insurance is where the death benefit reduces over time, but premiums may remain the same. This type of policy is often used to cover mortgage debt, ensuring that the outstanding balance is paid off if the policyholder passes away.

Return of premiums (ROP)

Return of premium (ROP) plans provide the same coverage as regular term life policies, paying out the full death benefit if you pass away during the term. However, if you outlive the policy, the insurance company refunds all your premiums. You can buy ROP as a standalone policy or add it as a rider to other term life policies, but it typically comes with higher premiums. It’s a way to address the feeling that regular term life insurance payments are a waste if you outlive the policy, offering a win-win by returning your premiums while providing coverage.

Note that this type of insurance is only offered in the United States and is not available for purchase in Canada.

Convertible term

Convertible term life insurance is a type of term life policy that allows the policyholder to convert the coverage into a permanent life insurance plan, such as whole life or universal life, without needing a medical exam or proving insurability. Term life insurance can also be customized with add-ons to meet specific needs, such as children’s coverage or accidental death benefits.

This conversion feature provides flexibility for policyholders who want to switch to a more permanent form of coverage, like a permanent life insurance plan that offers lifelong protection and may include features such as cash value growth. Permanent policies generally have higher premiums than term policies, but they provide long-term security and investment components. This enables policyholders to adapt their life insurance to changing financial needs and circumstances.

Yearly renewable term (YRT)

Yearly Renewable Term (YRT) is a type of term life insurance policy with a one-year term. Unlike traditional term life insurance, where the premium and death benefit remain at the same level for a specified term (e.g., 10, 20, or 30 years), YRT policies are renewed annually. Since the policy officially ends at the end of the term, renewals are rated at the new age of the applicant. As a result, the premiums will increase at each renewal.

In a YRT policy:

• Premiums: The premiums start lower than you might pay for a level-term policy with the same death benefit. However, the premiums increase yearly as the policyholder ages, and these annual increases can become substantial over time.
• Death benefit: The death benefit remains constant throughout the policy year. The beneficiary receives the predetermined death benefit if the policyholder dies during that year.

YRT policies are suitable for individuals who need temporary coverage for a very short period or expect their financial responsibilities to change annually. However, the increasing premiums can become costly over time, and individuals who want long-term, predictable coverage often opt for traditional level-term policies.

How term life insurance works

Term life insurance provides temporary financial protection for your loved ones in the event of your death during the term. The money from the death benefit can be used by beneficiaries for any purpose, providing financial security during difficult times. Beneficiaries receive a tax-free payment, which can be used to cover a variety of expenses.

You start by selecting a term length (e.g., 10, 20, 30 years) and a coverage amount (death benefit) that suits your needs. You then pay the insurance company regular premiums, typically monthly or annually. Policies can include a 30-day or 10-day review period for refunds if the policyholder decides to cancel shortly after purchasing.

The policy remains in force for the chosen term. If you pass away during this period, your beneficiaries receive the death benefit, a tax-free lump sum payout. This money can replace your income, pay off debts, cover living expenses, fund children’s education, cover children’s education costs, pay off student or car loans, or fulfill other financial obligations to help secure your family’s financial future.

• Premium payments: You are required to make premium payments throughout the term to keep the policy active. In level-term policies, the premiums generally remain level for the term.
• Expiry: Once the term ends, the coverage also ends. If you’re still alive at the end of the term, there is no payout, and the policy expires. You can renew the policy, convert it to permanent life insurance (if your policy allows), or let it lapse.
• Renewable and convertible: Many term life policies offer the option to renew at the end of the term or convert to a permanent policy without a medical exam, providing flexibility as your needs change.
• No cash value: Unlike permanent life insurance policies (e.g., whole life or universal life), term life insurance does not accumulate cash value or savings over time. It’s pure insurance protection without an investment component.

Here is an example of how term life insurance works in different situations:

Situation: A 30-year-old couple, John and Emily, recently started a family. They are Canadian residents, which is a requirement for eligibility. They have a mortgage and car loans and plan to send their children to college. After considering their family’s financial future, they decided to purchase life insurance to ensure their family’s financial security if something happens to either of them.

John and Emily each purchase a 20-year life insurance policy with a $500,000 death benefit.

The term coincides with their primary financial obligations, like paying off the mortgage, covering student or car loans, and putting their kids through college, including children’s education costs.

If either of them were to pass away during the 20-year term, the surviving spouse would receive the $500,000 death benefit.

This payout can pay off debts, cover living expenses, fund their children’s education, cover children’s education costs, pay off student or car loans, and provide financial security.

If John and Emily outlive their term life insurance policies, here’s what happens:

John and Emily do not receive any payout from their term life insurance policies because they are still alive.

The insurance coverage they purchased served its purpose by providing financial protection during the critical years when their family had significant financial obligations.

To continue having life insurance coverage, John and Emily can explore options such as renewing their policies, purchasing new term policies, or considering permanent life insurance if their needs have changed.

Benefits of term life insurance

• Term life insurance is cost-effective, offering affordable rates for a wide range of term life insurance needs.
• It is straightforward and lacks complex policy structures, tax implications, or limitations.
• It provides financial protection during the crucial life stages with significant financial responsibilities, such as mortgage payments and children’s education expenses.
• Choosing the right term life insurance plan can help you secure the best value for your situation.

Drawbacks of term life insurance

• Term life policies have a predetermined expiration date, requiring policyholders to obtain a new policy, renew at a higher cost, or convert to permanent insurance if continued coverage is desired.
• Term life insurance lacks a cash value savings element, providing solely a guaranteed lump-sum death benefit.

How much does term life insurance cost

Average monthly term life insurance rates for healthy, non-smokers for a 10-year policy for $500,000 in coverage

While short-term policies offer the lowest premiums and affordable rates, long term coverage may provide better value for those with ongoing financial responsibilities or long-term financial goals.

How much life insurance do you need?

Determining your insurance needs allows you to tailor coverage to your specific circumstances, ensuring you’re not overpaying for unnecessary coverage or underinsured in critical areas. When calculating how much coverage you need, be sure to consider your family’s lifestyle and any potential estate taxes, as these can significantly impact the amount of protection required. Calculating how much coverage you need can be done using various methods, including the DIME method and others:

DIME Method

• D: Debt – Calculate your outstanding debts, such as mortgage, loans, and credit card balances.
• I: Income Replacement – Estimate how many years of your family’s income would be needed if you pass away prematurely. Consider factors like your spouse’s income, existing savings, and any other sources of financial support.
• M: Mortgage – Include the amount needed to pay off your mortgage.
• E: Education – Consider the cost of your children’s education.

Multiple of income

• The resulting figure is considered a baseline for the death benefit by multiplying your annual income by 10. This method ensures that your life insurance coverage is substantial enough to cover immediate expenses, replace your income for a certain period, and potentially assist with long-term financial needs. 

Needs analysis

• Considers debts, immediate expenses, children’s education, income replacement, long-term financial goals, and inflation.
• Account for funeral and burial costs, medical bills, and estate settlement expenses.
• If you have dependents with special needs, factor in their long-term financial requirements.
• For permanent life insurance, remember that these policies can accumulate cash values over time, which can be used for estate planning or as a financial resource. If you surrender a permanent policy early, you may receive the cash surrender value, which is the amount paid out to you after deductions.

Online calculators

Use our online calculator to get a precise estimate. 

What is the difference between level and decreasing term?

Level-term life insurance maintains both a consistent premium and death benefit for the full policy duration, ideal for families seeking predictable coverage. Decreasing-term insurance, however, reduces the death benefit each year, typically matching a declining mortgage or loan balance.

Premiums for decreasing-term policies are usually lower, but coverage shrinks over time. If your goal is to replace income or leave funds for dependents, level-term may be better. If you simply want protection for a loan balance, decreasing-term can be a cost-efficient fit.

Can I convert term life to permanent life insurance in Canada?

Yes, most insurers in Canada offer conversion options. You can convert term life to permanent coverage without a new medical exam, allowing you to maintain protection even if your health changes. Conversion must usually occur before the term ends or before a set age (commonly 65). Once converted, your premiums are recalculated at your current age. This flexibility lets you start with affordable term coverage and later upgrade to lifelong protection when finances allow.

Is annual renewable term worth it?

Annual renewable term (ART or YRT) can be worth it if you need short-term protection, such as covering temporary debts or income during a transition period. Premiums start low but increase yearly, eventually becoming more expensive than level-term policies.

YRT works well for people expecting financial obligations to decline soon or those wanting flexible, short-term coverage without long commitments. However, for most long-term goals like family protection or mortgages, level-term remains the more stable and cost-effective choice.

What term length is best for a mortgage?

The ideal term length for a mortgage aligns with your loan duration. If your mortgage is 25 years, a 25- or 30-year term life policy ensures your family can fully pay off the loan if something happens to you. Many Canadians choose a 20- or 25-year level-term policy to mirror their amortization schedule. This approach provides consistent coverage and predictable premiums until the mortgage is gone, helping your beneficiaries remain debt-free.

Types of term life insurance in Canada – Conclusion

There are a variety of term life insurance products and term life insurance options to choose from, allowing you to tailor coverage to your needs and financial stage, shorter terms for flexibility or longer terms for family stability. The best policy aligns with your commitments, income, and debt timeline. To find the most cost-effective fit for your mortgage, family, or business, get a personalized life insurance quote with Oneday. Quotes are for eligible applicants and subject to underwriting and provincial regulation.

Frequently asked questions about term life options Canada

Sources:

1. FCAC, “Life insurance”
2. CLHIA, “A Guide to Life Insurance”