What is term life insurance?
Term life insurance policy provides coverage for a specific period. It pays a tax-free lump sum amount to your loved ones if you pass away during that time.
The policy is called "term" life insurance because it covers you for a specific term. The most common terms are 10, 20, and 30 years. In contrast to whole life or universal life insurance that covers you for your entire lifetime, term life insurance coverage ends after a specific period and it does not build any cash value.
Unlike permanent insurance, term insurance lasts only for the chosen term (10, 20, or 30 years) and does not build any savings or investment value. Also, the coverage ends after the contract period. This is the reason why term insurance plans are more affordable than other insurance types, especially for short- to mid-term financial protection.
How does term life insurance work in Canada?
Before buying a term insurance policy in Canada you have to understand some of the basic terminologies.
What is the policy term?
Policy term is simply the number of years you are contracted for that specific insurance policy. During this period your premiums and coverage amount will remain the same. Even Though you can buy term insurance for Term 5, 10, 15,20…. Term 40 years. As per the recent data Canadians prefer to choose a 20-year term over other terms.
What is the coverage amount?
Coverage amount is the total death benefit your beneficiaries will receive if you pass away during the policy term. This amount is chosen when you apply for the policy. The right coverage depends on your family's financial needs, including income replacement, mortgage protection, and future expenses like children's education. The higher the coverage, the more you'll pay in premiums
What are the types of Term Life Insurance in Canada?
Fully Underwritten: This is the most common and affordable option available. It often requires medical tests, which are usually conducted at your home free of charge by the insurance company. However, whether medical tests are required is entirely at the insurer's discretion. If you're in good health, this is one of the best options, as it typically offers the lowest premiums.
Simplified: This option provides the flexibility to skip the medical exam but still requires you to answer a series of health questions. Approval is typically faster, but premiums may be slightly higher than those for fully underwritten policies.
Guaranteed Issue: No medical questions, no exams — you're guaranteed approval. This option is typically reserved for individuals with serious health conditions. However, keep in mind that it comes with higher premiums and lower coverage amounts.
How do you get approval?
Based on the type of insurance issuance you select, the insurance company will evaluate your application and this process is known as underwriting. It helps them determine the risk level. They will evaluate your health, family medical history, and lifestyle.
For example, a healthy 30-year-old might pay around $25 a month for $500,000 of coverage, while a 50-year-old smoker might pay closer to $180 for the same amount.
What happens when the term ends?
The term will expire, if you:
• Let the coverage end
• Convert to a permanent policy like whole life insurance without a medical exam (about 15% choose this)
• Renew for another term (only about 7% go this route, as rates increase significantly)
Make sure to opt for the conversion option, if you wish to get coverage after your term ends. Otherwise, you'll need to apply for a new policy and new premiums will be much higher in this case depending upon your age and health conditions.
Why do Canadians choose term life insurance?
Source: A 2023 LIMRA study found that 57% of Canadian adults have life insurance coverage, highlighting the importance of life insurance in Canadians' financial planning. It is affordable and exactly matches their time-limited financial needs such as:
• Covering your mortgage: A term policy ensures your family stays within their home if something happens to you. For dedicated mortgage protection, consider mortgage life insurance.
• Replacing your income: If your family members are dependent on your paycheck, term insurance can replace that income for a number of years depending upon the coverage you picked up.
• Funding education: Term insurance ensures your kids can still attend college or university if you're not around.
• Business protection: If you own a business, term insurance can fund buy-sell agreements or protect the company if a key person passes away.
Here's a family in Toronto with a $750,000 mortgage and $150,000 annual income. They might get a $2 million policy. It would cover their mortgage and provide about 6.6 years of income replacement which is enough for the family to adjust and make new financial plans.
What are the tax benefits of term life insurance in Canada?
If you are looking for a policy to help you save on taxes, term life insurance is an excellent choice.
It comes with the following specific advantages:
• Tax-Free Benefits: When your beneficiaries receive the death benefit, they don't pay income tax on it. This is guaranteed under subsection 148(8) of Canada's Income Tax Act.
• Bypasses Probate: You beneficiaries will get the instant money transfer because life insurance payouts typically don't go through the probate process.
What's the difference between term vs whole life insurance?
| Feature | Term Life Insurance | Whole Life Insurance |
|---|---|---|
| Purpose | Pure protection | Protection plus investment |
| Period | 10-30 Years | Lasts for a lifetime |
| Cost (For a 35-year old non-smoker) | About $35/month | About $285/month |
| Cash Value | None | Builds over time its based on the several factors |
| Flexibility | Can change as your needs change | Less flexible |
| Tax Savings | Tax-free death benefit | Tax-free death benefit plus tax-deferred savings |
Most Canadians choose term life insurance to get the protection when they need it most, without the higher cost of permanent insurance.
What are term length and conversion options?
Term life insurance is available in multiple term lengths, usually offered in 5-year increments up to 40 years. However, the ideal term should be chosen based on your individual financial goals and how long you need coverage.
• 5-Year Term: This is the cheapest option to start with, but if you renew, the price goes up. Only recommended for short term needs or for conversion within the next 5 years.
• 10-Year Term: A good middle-ground option that gives you a decade of protection at reasonable rates. Many people in their 60s and 70s choose this for covering final expenses or the last stretch of their mortgage.
• 20-Year Term: It is the most popular choice in Canada. It is quite usefull to cover most major financial responsibilities like raising kids or paying off a mortgage.
• 25-Year Term: New parents often select this option because it lines up with the time it takes to raise kids to independence. It also matches the 25-year mortgage term in Canada.
• 30-Year Term: It is the longest option. A 30-year term is great for young families or those with three decades of mortgages.
Choosing a term is a daunting task, but if you will focus on what you are protecting, the answer becomes clear. Consider the following things:
• When will your young kids become financially independent?
• What is your mortgage length? (Consider mortgage life insurance for specific mortgage protection)
• When do you plan to retire?
• When do you wish to sell your business?
If you are still confused or have doubts, schedule a call with one of PolicyScanner representatives and we could understand your personal situation and provide tailored advice.
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What are the different types of term life insurance in Canada?
Understanding the various types of term life insurance helps you choose the right option for your specific needs.
1. What is renewable term insurance?
The benefit is that even if your health takes a turn for the worse during your term, you're guaranteed the right to renew your coverage without any medical coverage. That peace of mind can be worth a lot as you get older.
However, the important factor to consider is the premium increase rate which may go up to 300% of what you were paying initially. For example, Manulife's 10-year renewable term policy lets you renew with premium increases of about 8% each year after your initial term is up.
2. What is convertible term life insurance?
With this option, you can upgrade your policy to a whole life policy in Canada. It allows you to convert your term policy to a permanent one without the headache of medical examination. However the terms and conditions may vary by the insurance provider.
• Sun Life lets you convert to a universal life policy up to age 74 without medical exams
• Manulife even offers conversion credits that lower the premiums on your new permanent policy
It is a life-saver policy if your health deteriorates. Your health ratings will stay the same as when you first bought the policy. It may save thousands in premiums.
3. What is decreasing term insurance?
In this type of term life insurance, your premium remains the same, but the death benefits get smaller over time. It is mainly beneficial in case of declining debts like mortgages.
Benefits from these policies may decrease by a certain percentage each year. For example, a $500,00 policy might be worth only about $300,000 by the end of a 25-year term.
Decreasing term insurance is beneficial when you need:
• Mortgage protection: As your mortgage balance drops, so does your coverage (though dedicated mortgage life insurance might be more suitable)
• Business loan coverage: Your coverage reduces as you pay down business debt
As insurance company's risk decreases over time, this option could be cheaper than regular life insurance policies.
What no-medical-exam term life insurance options are available in Canada?
Traditional policies are hard to get when you have an existing health condition. But there are a few types of term life insurance policies that don't require medical exams. They are commonly known as Non-medical term Insurance policies.
• Simplified Issue Policies: With this insurance, you just need to answer a few health questions. It doesn't require any in-depth medical exam. Such policies usually offer $500,000 in coverage, but the premium will be a but higher than fully underwritten policies(with medical test).
• No Medical Exam Policies: These policies offer quick approval. They do not require any health information. However, you will get $250,000 to 1 million maximum coverage with this policy.
Drawbacks of having a no medical exam term life insurance:
• Higher premiums, based upon company to company.
• More exclusions and waiting periods
Who should consider buying a non-medical insurance:
• People with pre-existing health conditions (who might also benefit from critical illness insurance)
• Those who need coverage ASAP
• Anyone with anxiety about medical exams
• Senior citizens (typically 60-75)
What are the benefits of term life insurance in Canada?
Term life insurance offers several compelling advantages that make it the preferred choice for most Canadian families.
1. Affordability
The best point of term life insurance is that it's affordable. You get a substantial coverage compared to any other insurance policies.
• Term life insurance usually costs about 82% less than whole life policies
• A 40-year-old might pay only $85 per month for $1 million of term coverage
• That same person would shell out around $450 monthly for comparable whole life coverage
Such a huge price difference is the main reason why people choose term life insurance. It is a perfect fit when you need most coverage but might also be juggling mortgage payments, childcare costs, and savings for retirement.
2. Flexibility
Insurance needs may change with time. Term life insurance offers various options to adapt to your changing needs. About 73% of Canadians increase their coverage after they:
• Get married
• Buy a home (often adding mortgage life insurance)
• Have a baby
• Start a business
You may love the following options as your life changes over time:
• Stack multiple policies: You can buy several policies with different end dates to match different needs
• Add more coverage: You can get additional policies as your family or income grows
• Convert to permanent: You can switch to whole life insurance if your needs become lifelong
• Let coverage expire: As your needs decrease, you can let policies end
3. Tax benefits and policy riders
For Canadian people, term life insurance providers offer the following tax benefits:
• Tax-free payouts: Your beneficiaries get the entire death benefit without paying income tax
• Estate planning support: Insurance proceeds can be used to pay taxes on registered accounts and capital gains when you die
4. Policy add-ons and extras
Optional add-ons called Riders lets you customize your term life policy. Here is a quick list of riders available:
• Critical Illness Rider: Pays you a lump sum if you're diagnosed with a listed serious condition like cancer, heart attack, or stroke. For comprehensive coverage, consider dedicated critical illness insurance.
• Disability Waiver of Premium: If you become disabled and can't work, this waiver means you don't have to pay your premiums. Your coverage stays in force even without paying premiums during that period.
• Accidental Death Benefit: Increases your death benefit (often doubles it) if you die from an accident.
• Child Rider: Adds a small amount of coverage for your kids under your policy, usually for a minimal amount per month.
How do you choose the right term life insurance?
Start by asking yourself the following questions.
How much term life insurance do I need in Canada?
Most of us feel that calculating a coverage amount is a daunting task. But believe me it doesn't have to be if you will focus on your needs and purpose of buying the policy.
Expert use the following formula to determine coverage amount:
Coverage = (Your Annual Income × 10) + Debts + Education Costs + Final Expenses
Here is an example,
If you earn $100,000 a year, have a $300,000 mortgage, and expect to spend $200,000 on your kids' education, you'd need about $1.5 million in coverage.
For mortgage-specific protection, you might also consider mortgage life insurance as part of your overall strategy.
Another way of calculating coverage amount is known as the DIME method.
• "D" stands for debts and final expenses
• "I" stands for income replacement needs
• "M" stands for mortgage balance
• "E" stands for education costs
What things should I consider while choosing a term life insurance?
One of the alarming facts is that most Canadian households don't have enough insurance. On an average,
Source: Insurance Business Canada – Typical coverage gap is around $150,000 to $200,000
. You need to think about the following if you wish to protect your loved ones during hard times:
• How many years your family would need to replace your income
• Any debts that would need to be paid off
• Future expenses like college tuition fee
• Final expenses like funeral costs
• How inflation might affect these costs in the future
Consider whether you need additional protection like critical illness insurance for living benefits or mortgage life insurance for home protection.
What are the tips to get better rates?
• Apply when you're younger
• Maintain a healthy weight
• Quit smoking (try to quit smoking at least 12 months prior to your insurance application)
• Keep chronic conditions well-managed
• Shop around with different insurers
** to choose between 10, 20, and 30-year term insurance?
It depends upon your specific protection needs.
• For mortgage protection: Choose a term that matches your mortgage (typically 25-30 years), or consider dedicated mortgage life insurance
• For family protection: Pick a term that lasts until your youngest child finishes school
• For income replacement: Select a term that covers your working years until retirement
• For debt coverage: Match your term to when major debts will be paid off
Even though longer terms cost more, they lock in your rate for the same period. In other words, it is useful when you don't wish to face much higher premiums if you need to renew or get a new policy later.
Consider the following things if you are confused between a 10, 20, or 30-year term.
• A 10-year term works well for short-term needs or if you're closer to retirement
• A 20-year term balances affordability with longer protection, ideal for young families
• A 30-year term offers the longest protection and is great for young homebuyers with new mortgages
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Why is term life insurance important for new parents in Canada?
Life insurance becomes even more important when you become a parent. It helps you with the following things such as childcare costs, education funding, upbringing costs and so on.
If you are a new parent and planning to buy a term insurance policy, our recommendation would be as follows:
• Coverage of at least 7-10 times your annual income
• A term length that lasts until your kids are adults (25-30 year terms)
• Coverage for both parents, even stay-at-home parents (the cost to replace childcare and household management is substantial)
New parents should also consider:
- Mortgage life insurance to protect their home
- Critical illness insurance for medical emergencies that provincial health care doesn't cover
How can business owners in Canada benefit from term life insurance?
When you own a business, your insurance needs go beyond just personal protection. You have the following term life insurance options in Canada.
• Key Person Insurance: This protects your business if you or another crucial team member dies. The coverage (typically 3 to 5 times annual profits) helps keep the business afloat during the difficult transition.
• Buy-Sell Agreement Funding: This provides money for remaining owners to buy out a deceased partner's share of the business. It ensures business continuity and fair treatment of the deceased owner's family.
• Business Loan Coverage: This makes sure business debts get paid without forcing asset liquidation or burdening survivors. Your coverage should match your outstanding business loans.
• Succession Planning: This helps with smooth business transitions during unexpected changes. The coverage should account for transition costs and temporary revenue drops.
For a business making $100,000 in annual profits, key person coverage of about $500,000 helps maintain operations if an essential team member dies.
These options also provide various tax benefits for your business. For more sophisticated estate planning and tax benefits, consider whole life insurance within your corporate structure.
Is term life insurance a good option for seniors over 60 in Canada?
Premiums are very high in case of a term life policy for senior citizens. But the investment is still worth it if you are looking for:
• Final Expense Coverage: A few policies are specifically designed to cover funeral costs.
• Legacy Creation: This policy helps you leave something behind for your loved ones. For permanent coverage, whole life insurance might be more suitable.
• Debt Protection: It ensures your family stays happy and debt-free in your absence.
• Mortgage Protection: It covers remaining housing debt for those who still have mortgages in retirement.
Companies like BMO offer a simplified-issue policy for senior citizens having health concerns. It doesn't require any medical examination.
What is affordable term insurance for young adults in Canada?
Young adults should buy term life insurance early when premiums are at their lowest. They can protect their loved ones with the following:
• Debt Coverage: Protection for student loans (which average $28,000 for Canadian graduates) and early mortgage debt.
• Income Protection: Coverage that offers a lump sum payout equal to your 3 to 5 years of salary.
• Future Insurability: Options that guarantee your ability to increase coverage later as your needs grow.
• Affordable Entry Points: You can leverage short-term policies with 10-years term costing as little as $20 per month for $250,000 of coverage. It allows you to start small and increase protection as your career develops.
Experts at PolicyScanner suggests young adults to,
• Get enough coverage to at least clear your debts and provide 3-5 years of income replacement to your loved ones
• Select a convertible policy that let you switch to whole life insurance later without a medical exam
• Take advantage of the super low rates available to young, healthy applicants
Young adults should also consider:
- Critical illness insurance for health protection
- Mortgage life insurance when they buy their first home
Is term life insurance tax-free in Canada?
Yes, one of the best things about life insurance in Canada is that death benefits are completely tax-free for beneficiaries. This is guaranteed under subsection 148(8) of Canada's Income Tax Act. The insurance proceeds also bypass the probate process. Generally it takes months or even years for such a lengthy process to complete.
In contrast to a few investments that trigger taxes when you are no more, term life insurance offers a tax-free lump sum amount to your loved ones. For example, when you have a $500,000 policy, your beneficiaries get the full $500,000 without income tax deductions.
What are corporate-owned life insurance tax implications?
For business owners, corporate-owned life insurance offers many advantages but comes with the following tax considerations:
• Capital Dividend Account (CDA): When your corporation is the beneficiary of a life insurance policy, the death benefit (minus the policy's adjusted cost basis) can be credited to the CDA and distributed tax-free to shareholders.
• Premium Deductibility: Corporate-owned life insurance premiums usually aren't tax-deductible, unlike many other business expenses.
• Tax-Free Corporate Investments: Cash values within permanent policies (after conversion from term to whole life) grow tax-free within the corporation.
Make sure to talk to a tax professional who has the complete knowledge about provincial regulations to make the most of corporate-owned insurance.
Term life insurance death benefits are completely tax-free to your beneficiaries, making it one of the most efficient ways to transfer wealth to the next generation without tax implications.
How do you take action: next steps?
Now, since you gat a fair understanding about term life insurance in Canada, here's what to do next:
• Calculate Your Coverage Needs: Use the coverage calculator to calculate your required coverage based on your income, debts, and future expenses.
• Compare Quotes: Check out PolicyScanner Quote comparison to explore different policies from several Canadian insurers to find the best combination of coverage, premium, and features for your situation.
• Talk to a Pro: Schedule a call with a Policyscanner licensed insurance advisor who can answer your specific questions and help you navigate all the options.
• Review Regularly: Once you have coverage, check your policy every 2-3 years or after major life events (like having a baby or buying a house) to make sure it still meets your needs.
Consider your complete protection needs:
- Life insurance for income replacement
- Mortgage life insurance for home protection
- Critical illness insurance for living benefits
- Whole life insurance for permanent coverage and cash value
As per the experts, getting life insurance is one of the most important financial decisions you'll make. It gives you the peace of mind that your loved ones are protected and safe in your absence. If you are young, taking action today means grabbing lower rates that will save thousands of dollars. They are also impossible to get when you are older.
Frequently Asked Questions
• Younger, healthier applicants pay the lowest premiums
• Costs increase with age and health risks
• Smokers pay substantially more than non-smokers
• Larger coverage amounts result in higher premiums
Term life insurance is significantly more affordable than whole life insurance, often costing a fraction of permanent insurance premiums for the same coverage amount.
• Income replacement: Several years of your annual salary
• Outstanding debts: Mortgage, loans, and other obligations
• Future expenses: Children's education, final expenses
• Family's ongoing needs: Daily living costs and financial goals
A common approach is to multiply your annual income by a factor (typically between 5-10 times), then add major debts and future expenses. Many Canadian households have insufficient coverage, so it's important to assess your family's complete financial picture when determining adequate protection.
• Lowest initial cost but rates increase significantly upon renewal
• Best for short-term needs or those closer to retirement
20-Year Term:
• Most popular choice in Canada
• Balances affordability with longer protection
• Ideal for young families with mortgages and dependent children
30-Year Term:
• Longest available term with highest initial cost
• Best for young families or those with 30-year mortgages
• Locks in rates for maximum period
Simplified Issue: Answer health questions only, no medical exam, with moderate coverage limits
Guaranteed Issue: No health questions or exams, guaranteed approval, but higher premiums and lower coverage limits
Fully Underwritten: Requires medical exam but offers the lowest premiums for healthy applicants
No-medical-exam policies cost more but provide faster approval for those with health concerns or time constraints.
1. Let coverage end (most people choose this option)
2. Convert to permanent insurance like whole life without medical exam (some choose this for continued protection)
3. Renew for another term (less common due to significantly higher rates)
Always ensure your policy includes conversion options if you want coverage flexibility after the term expires, as renewal rates increase substantially with age.
• Need maximum coverage at lowest cost
• Have temporary financial obligations (mortgage, young children)
• Want flexibility to adjust coverage as needs change
• Are budget-conscious
Choose Whole Life Insurance if you:
• Want permanent coverage regardless of health changes
• Need tax-deferred investment growth
• Have estate planning needs
• Can afford higher premiums
Most Canadians choose term life insurance for its affordability and flexibility.
• Preferred Plus/Elite: Excellent health with great family history
• Preferred: Very healthy with minor issues
• Standard: Average health with controlled conditions
• Rated: Higher risk due to health concerns
Smoking status significantly impacts rates - non-smokers receive substantial premium discounts compared to smokers. Quitting smoking well before applying (ideally at least a year) can result in much better rates.
• Getting married
• Having children
• Buying a home
• Starting a business
You can also purchase additional separate policies or "stack" multiple policies with different term lengths to match varying protection needs.
• Lowest possible premiums (rates increase significantly with age)
• Debt protection for student loans and early career obligations
• Future insurability guarantees before health issues develop
• Affordable entry points with very low monthly costs for substantial coverage
Buying early locks in low rates and provides conversion options to permanent insurance later without medical underwriting.
• Debt others might inherit (co-signed loans, family financial obligations)
• Funeral and final expenses (can be substantial in Canada)
• Future insurability concerns (family history of health issues)
• Desire to leave a legacy to family, friends, or charities
Even modest policies can cover final expenses and prevent financial burden on loved ones.
• Key person coverage (multiple times annual profits) to protect business operations
• Buy-sell agreement funding for partner buyouts
• Business loan protection to prevent asset liquidation
• Succession planning to cover transition costs
Business-owned policies also offer tax advantages through the Capital Dividend Account (CDA) for tax-free distributions to shareholders.
Step 2: Compare quotes from multiple Canadian insurers
Step 3: Complete the application and health questionnaire
Step 4: Schedule medical exam if required (often done at home for free)
Step 5: Review and accept the policy terms
Step 6: Begin premium payments
The process timeline varies depending on the type of policy and health assessment required, with simpler policies approving faster than fully underwritten ones.
• Critical Illness Rider: Pays lump sum for serious diagnoses like cancer or heart attack
• Disability Waiver of Premium: Waives premiums if you become disabled
• Accidental Death Benefit: Doubles death benefit for accidental deaths
• Child Rider: Adds small coverage amounts for dependent children
Riders customize your policy but increase premiums, so only add what you actually need.
*Disclaimer: This guide gives you general information about term life insurance in Canada but isn't financial advice. Everyone's situation is different, Speak to a PolicyScanner advisor before taking any insurance related decision.*