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

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.

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.

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.

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.