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What is term life insurance and how does it work?

by Mark Cluett
6 min read

A generation of Canadians are reaching the age where their protection needs are outweighing their knowledge and asking: what is term life insurance? It’s understandable! You’re leading a busy life advancing your career, buying a home, or raising children. While you may be pondering what is term life insurance after hearing it in passing lately or seeing a barrage of advertising on your commute – don’t let pondering turn into procrastination. 

Most Canadians decide not to get life insurance because they assume it’s complicated and expensive. That’s a shame. Term insurance offers straightforward benefits and is the least expensive way to buy life insurance. The following will help you understand term life insurance and determine if it is the best product for your immediate needs.

What is term life insurance?

Term life insurance is a type of life insurance that lasts for a specific period of time known as a term, which can be a fixed number of years or until you reach a certain age. You pay premiums to the insurance company until the expiry of the term. In return, your beneficiaries are entitled to receive a death benefit if you die within the term of the policy. Once the term ends, your coverage also expires and you can stop paying premiums. Term life policies are usually offered for periods ranging from 10, 20, or 30 years to specific ages such as age 65. Some companies will also allow you to pick-a-term, in which case you can choose your own life insurance coverage period to meet your needs.

How does term life insurance work?

Term life insurance is a contract between the individual being insured and the insurance company, whereby the insurance company agrees to make a payment should the individual die during the term of the policy. The insurance company uses detailed statistical or actuarial models that assess the risk involved in offering the death benefit coverage to the beneficiaries of the insurance applicant. These models take into account life expectancy of various ages and health profiles in the population as also assumptions about interest rates and future expenses. In return for bearing the risk of making the benefit payment, the insurance company requires a periodic payment of an insurance premium.

What are insurance premiums for term life insurance?

An insurance premium is the cost for the insurance offered by the insurance company. It is payable periodically, generally on a monthly or annual basis. As long as the premium payments are made, the insurance contract stays valid through to the end of the policy term. Various factors go into determining these premiums. You can read all about them here.

Term life insurance has many options so it can be customized to fit most budgets. These terms will determine the premium, which is the money you pay at regular intervals to keep the policy active. A longer term will increase the premium, as will the amount your beneficiaries receive if you die during the term. This amount is known as the term coverage.

What are the benefits of term life insurance?

Simplicity is one of the primary benefits of buying a term life insurance policy since you only need to decide on the insurance company, the term length and the coverage amount. As long as you pay your premiums on time and in full, you’re covered for the entire term.

It is also highly affordable because the term is for a fixed period of time. Your insurance provider will determine your exact premium based on factors such as age, occupation and overall health.

Flexibility is another important advantage. The ability to specify the term and coverage amount means you can use this insurance to meet a particular financial need in the event of your death.

Benefits of term life insurance
Benefits of term life insurance

Who needs term life insurance?

The general purpose of term life insurance is to provide financial protection for your family and other dependents. It’s best suited for people who want affordable life insurance for a predefined number of years and won’t get that value in other insurance products. It is especially beneficial for people who have major life events occurring during their prime earning years such as getting married, having children, and buying a home. It’s also useful for those with temporary needs such as supporting beneficiaries, paying for their children’s education and paying off debts. In addition, some people use it as a less expensive way of obtaining mortgage insurance.

Do term life rates go up?

Most term life policies are structured on a level term basis, meaning the premiums won’t change over the term of the policy. However, at the end of the term, the insurance company may charge a higher premium if you wish to renew your policy.

What happens if I outlive my insurance?

Once the policy’s term expires, you stop paying premiums and your coverage ends. You can also cancel the policy before the end of its term just by stopping the payments, without paying any additional fees. Term life insurance is highly customizable, so you should just buy the coverage you can afford to reduce the chances that you’ll need to cancel.

How long should I have term life insurance for?

You can get a term life policy with any term you like, although 10 to 30 years is the most common. You can also get a policy that lasts until you reach a particular age, such as 65 years. It is generally used to cover temporary needs such as the pre-defined term of a mortgage or to cover the term up to the completion of your children’s education. Therefore, the primary consideration is to ensure the term of the policy meets such temporary needs.


PolicyAdvisor is building a new type of insurance advisor that makes buying insurance more transparent and less stressful. We do this with an intuitive design that combines human expertise with modern technology. Read our honest guide to life insurance and get life insurance quotes in minutes with our online tool. You can also contact us to learn more about how we can help you get the best life insurance Canada has to offer.

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