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Types of Life Insurance in Canada

So, you’re ready to settle down and start a family with your partner, but have you considered taking out a life insurance policy to support your loved ones when you pass away?

If you’re stuck deciding between life insurance policies or are even wondering if it’s necessary, keep reading to learn everything you need to know about life insurance in Canada.

What is life insurance and why do I need it?

The first thing to understand about life insurance is that it isn’t for you; it’s for your family.  Typically, life insurance will pay out a lump sum of money to the designated beneficiary when the policyholder dies.

If you’re deciding whether you need life insurance or not, here are a few things to think about. When you pass away, will your immediate family be able to pay the mortgage, rent, or other bills? Will you be leaving behind large amounts of debt or loans that would then fall on your loved ones? Do you have children that will need help paying for college tuition in the future? Do you own a business? If your answer is yes to any of these questions, then life insurance is definitely a good idea for you! And even if you’re single or young right now, that’s doesn’t mean your situation won’t change in the future, so it’s always great to jump into life insurance while you can.

And contrary to popular belief, life insurance isn’t as complicated as it may seem! Most policies are pretty affordable and accessible to those who are interested. Just make sure that you’re getting enough coverage to pay for any debts or loans you may have, future expenses for your family, and end of life costs such as your funeral. It may seem dim to think about these things, but your family and loved ones will be able to feel some relief in their time of grief.

Term life insurance

Life insurance in Canada is available in a few forms, but the two main types are term life insurance and permanent life insurance. Term life insurance only covers you for a certain number of years (typically anywhere between 10-30 years), and the lump sum of money will only be given to your beneficiary if you die within that length of time.

Your premiums for term life insurance will be the same each year, and at the end of your term length, you can either choose to extend your coverage (which will cost you more) or let it expire. The main benefit of term life insurance is that it is much more affordable than permanent life insurance because you’re only covered for a designated amount of time rather than your whole life.

Types of term life insurance

With that in mind, there are a few different types of term life insurance that you can look into getting.

  • Convertible term life insurance: This type of life insurance gives the policyholder the option to convert to a permanent life insurance policy at designated milestones within the term (think year 15 out of 30.) Because you will have the option to convert to lifelong coverage instead of just a period of time, premiums are usually higher for convertible term life insurance policies.
  • Renewable term life insurance: As mentioned before, some term life insurance policies will allow you to renew your coverage once the set term is over without having to re-qualify for it. With this being said, once you do renew it, your premium will most likely rise in price.
  • Joint life insurance: If you’re married or with a lifelong partner, joint life insurance may be the best option for you. It ensures two different people and will either pay a lump sum to the living partner after either die or to a beneficiary after they both die. A joint life insurance policy’s benefit is that it offers higher coverage (AKA a bigger payout) than just single coverage.

Permanent life insurance

As you can probably guess, permanent life insurance offers coverage for your entire life instead of just a set amount of time.

Since permanent life insurance is a guaranteed payment at the time of your death, the premiums are significantly higher than term life insurance.

Types of permanent life insurance

Like with term life insurance, there are a few different policy options for permanent life insurance.  

  • Whole life insurance: Whole life insurance covers you for your entire life while also creating a cash surrender value (or CSV) over time. This means that your life insurance company will invest these additional funds, and the return on these investments can either be used to reduce your premiums, or you can even use them to withdraw or borrow against. Your CSV is essentially a cash asset for you to have.
  • Term-to-100 life insurance: Term-to-100 is the simplest form of permanent life insurance because it provides a guaranteed payout when you die. Still, at the age of 100, you have the option to either get the money early or stop paying the premiums while still being covered.
  • Universal life insurance: This type of policy is similar to whole life insurance in that you have a CSV, but you’re able to invest this CSV any way you’d like.

Other types of life insurance

Term and permanent life insurance are the most popular and widely used in Canada, but some additional life insurance policy options are available.

  • Mortgage life insurance is sold by mortgage providers so that if you were to die with an outstanding balance on your mortgage, it would be paid off in full. Sometimes mortgage life insurance is required if you aren’t able to put down enough money on the property at the purchase time.
  • If you’re older or have pre-existing conditions, guaranteed life insurance is the option for you. This type of policy doesn’t screen you for your age or medical health, so it essentially guarantees a life insurance policy. The catch is that it’s usually capped at $25,000, and the payment isn’t provided for two years after death.
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