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Different types of life insurance in Canada: choosing the right plan

SUMMARY

In Canada, there are two main kinds of life insurance: one that lasts for a certain period (term life insurance) and one that lasts your whole life (permanent life insurance). But there are many sub-types and other options available, such as policies with cash value growth and investment opportunities. The best type of insurance for you depends on your unique circumstances, needs, and goals.

IN THIS ARTICLE

Many people think there are only two kinds of life insurance in Canada: term life insurance and whole life insurance. It is true that most policies are either one or the other of these two types of life policies. But there are many more options and different types of life insurance Canada has to offer!

Read on to find out about your options for life insurance and types you should choose.

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What are the different types of life insurance in Canada?

There are two main types of life insurance policy in Canada:

  1. Term life insurance, which covers you for a set period of time called a “term”
  2. Permanent life insurance, which covers you for your entire lifetime

All policies can fit into one of these two major categories of life insurance, which we take a closer look at in this article. But, there are many different types of coverage, based on the type of policy or type of underwriting you choose. See more below.

Term life insurance

Term life insurance is a type of life insurance that lasts for a specific period of time or ‘term’. The term can be a fixed number of years usually ranging between 10-40 years, or a certain age, the most common being up to age 65 (retirement).

There are two variants of term life insurance:

  • Traditional term life insurance — the standard term policy that lasts a certain number of years. The most popular and affordable type of life coverage
  • Annual renewable term life insurance (ART) — a type of policy that lasts for one year and gets renewed every year. Premium payments start low but can increase a lot over time

How does term life insurance work?

With term life insurance, you pay a premium to an insurance company for a set number of years. In turn, the company agrees to give money to anyone you choose (beneficiaries) if you die within your term.

Usually, the shortest term you can get for term life insurance in Canada is 1 year and the longest is up to 40 years. But this also depends on the provider. Some companies won’t offer less than 5 years and some may not offer more than 30 or 35 years, especially for seniors.

You could get a 1-year term that renews every year. But this is also an expensive option.

Who should get term life insurance?

Term life insurance is ideal for those who:

  • Want affordable life insurance for a set number of years
  • Are going through a major life event as a young adult, like getting married, having children, buying a home, etc.
  • Have temporary needs like supporting a financial dependent, paying school fees, paying debts, etc.
  • Have outstanding mortgage payments
  • Are on a tight budget

Permanent life insurance

Permanent life insurance, as the name suggests, will never end as long as you continue to pay your premiums. In other words, a permanent life insurance policy will cover you for your entire life. Upon your demise, your beneficiaries will receive a tax-free death benefit.

There are several types of permanent life insurance policies that Canadians can choose from. These are:

  • Non-participating whole life insurance — has an investment component that builds cash value over time but does not pay dividends
  • Participating whole life insurance — has a cash value component and also pays annual dividends
  • Universal life insurance — has an investment component that the insured person manages. Also called indexed universal life insurance policy
  • Term-to-100 life insurance — a policy that lasts for the rest of your life but does not build cash value like other types of permanent coverage
  • Funeral or final expense insurance — a permanent life insurance option that is designed to cover a person’s end-of-life expenses like funeral costs and also help with estate planning

How does permanent life insurance work?

In addition to the lifetime insurance coverage, most permanent insurance policies also include a savings or investment component. Part of the premium is used to pay for investments, which accumulate within the policy on a tax-deferred basis and generate a cash value that can be accessed as needed by the policyholder.

The policyholder may use the cash value as savings available for retirement through partial or full withdrawals or by taking loans against the cash value by offering it as collateral to a lender. Due to the lifelong coverage and the embedded investment component, the premiums for permanent life insurance are much higher than other products.

Who should get permanent life insurance?

Permanent life insurance is best suited to protect ‘permanent’ or ‘lifelong’ needs such as:

  • Estate tax liabilities
  • Care for a disabled child or dependent
  • Liquidity for closely-held businesses
  • Funeral expenses

Types of permanent life insurance

What is whole life insurance?

Whole life insurance is the most popular type of permanent life policy. It has most of the features of permanent policies, including:

  • Lifelong coverage
  • Cash value growth
  • Annual dividends (participating or par policies only)
  • Guaranteed payout
  • Higher premiums than term insurance

What is universal life insurance?

Universal life policies are similar to whole life insurance, except you control the investment options yourself. Normally, the insurance company does it for you.

Experienced investors may use universal policies because it has the potential for a higher rate of return when they manage it themselves. But, it also means there’s a higher risk of loss.

Universal life offers:

  • Lifelong coverage
  • Self-directed investment component with cash value growth
  • Growth potential depends on market conditions
  • Guaranteed payout
  • Higher premiums
  • Flexible premium amounts can change

Compare the different types of life insurance policies

While all life insurance pays out a death benefit, not every policy is built the same. So how do they compare? The chart below shows how some of the most popular types of life policies compare.

Compare types of life insurance

Types of life insurance by underwriting

Fully underwritten policies

Fully underwritten policy is a type of policy where the life insurance company asks a lot of personal questions about your health, job, and more to figure out how risky it is to insure you. They might also ask you to do a medical exam.

Accelerated policies

These are a type of policy that do underwriting more quickly by using technology and sometimes skipping the medical exam.

No-medical life insurance

Simplified issue life insurance — a life policy that only asks a few health questions and does not need a medical exam. Gives you a higher chance of being approved but at a higher cost and with less flexibility

Guaranteed life insurance — a life policy that does not ask any health questions or need a medical exam. You are guaranteed to be approved but there are many drawbacks

Different underwriting options exist for both term and permanent types of insurance. Although, no-medical policies usually only offer lifelong protection.

Types of no-medical life insurance

Accelerated issue insurance is ideal for those in good health, offering extensive medical questioning and potential medical tasks with a maximum coverage of up to $1,000,000. Approval can take anywhere from instant to four weeks, and it is the most affordable option.

Simplified issue insurance, best for those seeking faster approvals or avoiding needles, involves 15-20 medical questions with no medical tasks, providing up to $750,000 in coverage with approvals in an instant to one week. It is moderately priced.

Guaranteed issue insurance suits those declined for traditional coverage or with severe health issues, involving only 1-5 medical questions and no medical tasks, offering up to $50,000 in coverage with approvals within 48 hours and is the most expensive option.

There are different types of no-medical life insurance.
Read more about simplified vs guaranteed life insurance

Other life insurance types

While these are the major types of policies you can get from an insurance company, there are alternative options available through a bank or lender. These include:

  • Mortgage life insurance — a type of life insurance that will pay off outstanding mortgage debt if you unexpectedly pass away. Benefits the lender, not your family
  • Credit life insurance — a type of life insurance that will pay off eligible debt you owe if you unexpectedly pass away. Benefits lenders, not your family

We normally do not recommend this type of insurance from lenders because a life insurance policy from an actual insurance company gives you better options.

More choice. Lower price.
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What is the best type of life insurance for me?

Finding the perfect plan type can be a challenge and the answer isn’t always straightforward. In general:

Term policies are best for short-term needs:

  • Covering outstanding debt: paying off the mortgage, student loans, credit card balances, etc.
  • Providing for young children: funding future college education and other childcare needs
  • Supporting a spouse: ensuring they can afford everyday living expenses and maintain the same standard of living

Permanent policies are best for long-term needs:

  • Estate planning: making sure your family has enough to offset the cost of estate taxes
  • Covering end-of-life expenses: paying funeral costs and clearing any outstanding debt
  • Leaving a legacy: ensuring your loved ones have an inheritance or making a final gift to a charity

If you’re not sure about your needs, connect with our licensed agents. Our clients come from all walks of life and we have years of experience working with the Canadian insurance industry. We can help you figure out what plan would be best for you!

How do I get life insurance?

You can get an individual life insurance policy by applying online using our website! Use our free quoting tool below or our life insurance needs calculator to get a customized quote in seconds.

Or, simply book some time with our life insurance experts. We’re happy to help you determine how much life insurance you need to protect your family and achieve your financial goals. Reach out and get a quote!

Frequently asked questions about types of life insurance

Term life insurance policies are the cheapest type of insurance policy. It has the most affordable premiums because it does not have investments like whole life insurance. And, the death benefit payout is not guaranteed — you can outlive your policy.

A lot of Canadians overestimate how much life insurance costs, and how low monthly premiums can be. Get personalized quotes in seconds on our website and see just how little a term life policy would cost you.

Term life insurance is the most popular type of life insurance because it’s an affordable option that can be used for a lot of different needs. Most Canadians get term life insurance for things like covering outstanding debt or providing for dependents.

You can only borrow from permanent life insurance policies that build cash value, or what some people call “cash value life insurance.” These are:

Whole life insurance
Universal life insurance (or indexed universal life insurance)

Permanent life insurance policies are the only ones that come with an investment component built in. You can either get:

Whole life insurance, where the insurance company handles all the investments for you and you get modest returns
Universal life insurance, where you handle investments yourself and get bigger potential returns — but also bigger potential losses

The main differences between term and whole life insurance is that term covers you for a certain number of years and does not have cash value, while whole life covers you permanently and has an investment component. They each have pros and cons that make them best suited for different purposes.

Whole and universal are both types of permanent insurance policy. The key difference between these kinds of insurance is that whole life insurance’s cash value investments are managed by your insurance provider but universal life lets you manage it yourself. With universal, your growth potential is higher, but so is your risk.

Learn more about the differences and which is right for you in our article on whole life insurance vs. universal life insurance.

Group insurance is a life insurance policy that you get through your employer, job, or other group you’re part of. On the other hand, individual life insurance is a policy you buy on your own. Some of the key differences are:

Group policies are convenient but limited. They may not provide adequate coverage for your needs, and coverage usually is not portable — it ends when you retire or reach age 65, or if you decide to leave the company.
Individual policies grant far more flexibility. You can customize coverage type, amount, length, and more to meet your exact needs.

KEY TAKEAWAYS

  • Term and permanent are the two main types of life insurance in Canada
  • But there can be many more types of coverage based on type of policy, level of underwriting, and more
  • The best type of life insurance for you depends on you and your family's needs

By Jiten Puri
CEO & Founder, Insurance Advisor, LLQP
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