What is term life insurance?

A generation of Canadians are reaching the age where their protection needs are outweighing their knowledge and wondering exactly what term life insurance is, whether getting term insurance is a good idea, how term life insurance works, can they get their money back if they cancel term life insurance and other related questions.

It’s understandable! You’re leading a busy life advancing your career, buying a home, or raising children. While you may be pondering its meaning 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 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 tax-free 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.

If you are instead looking for coverage that lasts your entire life and has a cash value attached, you would be searching for permanent life insurance (also known as whole life insurance). Term life insurance has no cash value.

How does term life insurance work?

Term life insurance is a contract between the individual being insured and the life insurance provider, whereby the insurance company agrees to make a payment should the individual die during the term of the policy. The life insurance provider uses detailed statistical or actuarial models that assess the risk involved in offering the death benefit coverage to the beneficiaries of the life 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 life insurance company requires a periodic payment of an insurance premium. As mentioned earlier, there is no cash value component associated with this type of insurance.

What are insurance premiums for term life insurance?

An insurance premium is the cost for the life insurance offered by the life 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 life insurance premiums. You can read all about what affects insurance prices here or find instant life insurance quotes.

Term policies have 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? Is term life insurance a good idea?

Term life insurance has several benefits over other forms of life insurance including permanent life insurance or whole life insurance. Therefore, it is well worth getting for most Canadians.

Simplicity is one of the primary benefits of buying a term 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 life 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 life insurance to meet a particular financial need in the event of your death.

Do I need 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, term insurance can be used to replace 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?

When your term life insurance ends, and no claim has been made, you have a few options:

• You can let your term policy expire, stop paying premiums and your life insurance cover will end, upon end of the original term
• If you still need term coverage at the end of you initial term policy, there are some options too. You may be able to renew your term life policy for an additional term or covert your policy to permanent life insurance coverage, without requiring a new medical.
• If you are in good health, as your honest insurance broker, we will advise you to apply for a new term insurance policy at lower rates than renewing your policy.

Can I cancel my term life insurance policy at any time?

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.

Do you get your money back if you cancel your term life insurance policy?

No, term life insurance does not have any cash surrender value and therefore no premiums are returned if the policy is cancelled.  Unlike permanent or whole life insurance, the premiums of term insurance reflect the pure cost of life insurance coverage that an insurance company has provided to you. Thus, when you cancel your term insurance, there is no refund of premiums.

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.

Summary

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 calculate your life insurance needs. You can also contact us to learn more about how we can help you get the best life insurance Canada has to offer and help you decide if term life or an alternative like permanent life insurance is right for you.