Deciding to invest in your loved ones’ future by getting life insurance is a thoughtful and responsible decision. But do you know what type of life insurance policy is right for you? Are you aware of the difference between term life insurance and permanent life insurance, and what life insurance can do for you beyond helping to pay for a funeral and related expenses? We dissect the two main types of life insurance policies and touch on some of the variations that fall under them to help you decide which type of policy best suits your individual needs.
Types of Life Insurance in Canada Explained
The best life insurance policy for you depends on your individual needs, and learning about the available options is crucial. There are two main types of life insurance with dozens of variations. For your stage of life and financial preparedness, here are some of the life insurance policies to consider.
What is the Difference Between Term vs. Permanent Life Insurance?
The two main types of life insurance in Canada are term life insurance and permanent life insurance. We will outline the basics of these two types of insurance policies and provide a brief description of the variations for each below.
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1. Term Life Insurance
As the name implies, term life insurance covers you for a specific number of years, ranging anywhere from 5 to 40 years. It is usually more affordable because it is only for a fixed duration. If you die before the term is up, your family receives a set amount of money. The death benefit gets paid to your loved ones as a monthly payment, an annuity, or a lump sum. When you sign up for term life insurance, you must specify the coverage amount and coverage time. The insurer takes these details into account while calculating your premium rates.
What Happens When a Term Life Policy Expires?
If your beneficiaries no longer need the life insurance coverage, you can let the policy expire. However, for most people, this is not an option. If you still need coverage, there are three options available:
- Extend your current term policy: It is renewable without requiring re-qualification or a new medical exam.
- Convert your term policy to a permanent life policy: If your policy has a conversion rider, you can switch policy types without having to have it underwritten again.
- Consider purchasing a different life insurance policy: You can expect to pay higher premiums as the cost of insurance increases with age.
Types of Term Life Insurance Policies
Along with the three main types of coverage, there are also other term life insurance policy options for you to choose from:
- Joint life insurance: A joint policy insures two people (generally you and your spouse or common-law partner) as a single ‘life insured.’ Your joint premiums are higher than those for single coverage, which reflects the increased risk that the benefit will be paid out.
- Level, increasing or decreasing benefits: Both term and permanent policies give you the option of either levelling, increasing (cover liabilities that grow over time), or decreasing (liabilities that decrease in value over time) death benefit.
2. Permanent Life Insurance
Permanent life insurance, also known as “whole life insurance,” lasts for an entire lifetime. As long as you pay your premiums, you will not need to worry about the term coming to a close. Nor will you need to worry about ‘aging out,’ as you do with term policies. Due to this security, they are significantly more expensive than term policies with similar coverage. To help offset the expense, permanent life policies offer additional benefits, including tax-advantaged investment options. These options are known as participating policies, meaning you may share in the insurance company’s profits through investment. The investments are in a tax shelter, so all investment income earned in a whole life insurance policy is partially tax-free when left to your beneficiary.
Additionally, permanent policies feature a cash value, also known as a “cash surrender value” (CSV), which increases over time as the policy is held longer. This amount applies if you want to borrow against your policy or cancel it to redeem the cash value, a process known as “surrendering.” Most policies will not offer this option from the start. Many insurers will also charge you high surrender fees that gradually decrease over time.
Types of Permanent Life Insurance Policies
Permanent premiums are generally more expensive than term premiums while you’re young, but are cheaper later in life, offset by the more expensive premiums paid earlier. Here are the main types of permanent life insurance you’ll come across:
- Term-to-100 life insurance: A hybrid of term and permanent coverage. It works like a simple term policy but covers you for life. As it is guaranteed to pay out, you will pay higher premiums than term policies.
- Whole life insurance: Allows you to build up a cash value over time, which the insurance company then invests. The returns are used either to reduce your premiums or to add back to your cash value as interest. Your cash value is an asset. It can be used to reduce your premiums, borrow against, or withdraw from. If you cancel a whole life insurance policy, you’ll receive your cash value back, less any termination fees.
- Participating vs non-participating life insurance: A whole life insurance policy is either participating or non-participating. The difference lies in what is done with the returns from investing your cash value, also known as the cash surrender value (CSV). A non-participating policy will help reduce premiums, while a participating policy will allow the interest you earn to be reinvested in your CSV.
- Universal life insurance: It is insurance and an investment account in one. While whole life insurance doesn’t let you choose an investment strategy, universal policies allow you to invest your CSV in any way you wish. You can invest in cash, bonds, exchange-traded funds, and other securities. Because of this, your premiums in universal policies are often referred to as investments.
Types of Life Insurance Policies in Canada: Quick List
There are existing life insurance policies worth mentioning that are more customer-specific, such as:
- Guaranteed life insurance: A form of permanent life insurance. You are guaranteed acceptance with no medical or personal information required. If you are unable to qualify for insurance due to pre-existing conditions, this option is ideal for you.
- No-medical life insurance: No-medical or simplified life insurance is similar to guaranteed life insurance. If you are otherwise insurable, you would qualify. No medical is required, but you may be asked some medical questions to determine your risk.
- Mortgage life insurance: A special type of term insurance sold by mortgage providers. Its purpose is to make sure that your mortgage is paid if you were to die while you still owe money.
Common Questions about Life Insurance Policy Types in Ontario
Is term life insurance enough for most people?
Typically, yes. For many Canadians, term life insurance is more than sufficient, especially for covering temporary financial responsibilities such as childcare, replacement income, or a mortgage.
When does permanent life insurance make sense?
Permanent life insurance makes sense if you are looking for lifelong coverage. Choices like estate planning benefits, funds to help cover final expenses, and tax-advantaged investment growth.
Can I convert term life insurance to permanent life insurance?
Most life insurance policies in Canada include a conversion option if you want to switch your term life insurance to permanent life insurance. Usually, these conversion options it allows you to switch without a new medical exam as long as you convert within a specified timeframe.
How much life insurance coverage do I need?
It is on a case-by-case basis. Your life insurance policy should be sufficient to cover your income replacement and future expenses, and to ensure that any dependents (children, pets, family members, etc.) are provided for.
Is life insurance taxable in Canada?
While life insurance in Canada can be subject to taxation, it is generally not taxable. While contributions and premiums to life insurance policies are not tax-deductible, death benefits are generally tax-free.
Conclusion: How to Choose the Best Life Insurance Policy for Your Needs
Life insurance is one of the most complex investments you will ever make. With all the variations available, it’s easy to get lost. Our isure representatives can take you through the policies to help you choose the right one for you and your loved ones.
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