Term Life Insurance

Here is the short version, before the detail. For the same starting death benefit, term life insurance generally has a lower starting premium than permanent coverage, because nearly all of the premium buys protection and none of it builds a value you can use. Compare written quotes on the same basis, and remember that renewals, and how long you actually need the coverage, change the lifetime comparison. If you came with one question, go straight to it: what changes the price, how much coverage you need, or what to check in the contract before you sign.

Is it the right choice for you? Very often, yes. If someone depends on your income, or shares a debt with you, for a period that will end, term life insurance is usually the most sensible way to protect them, because it buys the largest death benefit for the premium you can afford. It is the wrong tool on its own when the need will last your whole life, and it may be unnecessary if nobody would be financially harmed by your death.

Two features decide how well a term policy ages with you: renewal and conversion. Both carry dates written in the contract, and both deserve a look before you sign.

What is term life insurance, and when is it the right choice?

Term life insurance is a contract with an insurer. You pay premiums; if the insured person dies during the term, the insurer pays the death benefit to the beneficiary you named. If the insured survives the coverage period, no death benefit is payable for a later death; a death that occurs while coverage is in force can still be claimed after the term has ended, subject to the policy's claim requirements. The Financial Consumer Agency of Canada puts the consequence plainly: term policies do not include cash value, so you cannot borrow against them (FCAC, Life insurance).

Most people buy level term, where the death benefit and the premium stay the same for the whole initial term, set at issue from your age and health. Other designs exist, and the next sections show them. The owner of the policy, the insured person and the beneficiary can be three different people: a spouse can own a policy on your life, for example, and name the children.

The death benefit is generally received free of income tax. The Autorité des marchés financiers states that the amount of life insurance paid out by the insurer is tax free, and adds that tax may still be payable at death because most of a deceased person's assets are considered sold (AMF, Term life insurance). The two are separate questions. The Canada Revenue Agency adds an important exception: property left to a surviving spouse or common-law partner who lives in Canada at the time of death can generally pass without a capital gain on the final return, under conditions it sets out (CRA, Taxable capital gains on property, investments, and belongings).

When is term life insurance the right choice? When the need has an end date. A mortgage that will be paid off, children who will become independent, a business loan that will be repaid, a partner whose income could not carry the household alone for the next fifteen years. Each has a finish line, and so does a term policy. If the need ends while you are alive, permanent coverage bought only for that need may have cost you years of premium for protection you no longer needed.

A surplus is not a need. Someone with money left over at the end of each year does not need life insurance because of the surplus; they need it if someone depends on them. This page answers the insurance question only; whether the rest should go to debt, savings or investments is a question for a professional licensed to advise on those products. For the insurance question, write down five answers before you compare any quote.

A single person with no dependants, no shared debt and enough savings to cover final expenses may not need life insurance today. The reason to apply anyway is narrower: someone who expects to need coverage later, and wants to secure it while healthy, may choose a small convertible term policy now.

How does term life insurance compare with permanent coverage?

This practice mainly places permanent policies, so read this comparison knowing that. The author is paid by commission from the insurer when a policy is issued, term or permanent. Commission is generally tied to the premium, and a permanent premium is higher for the same death benefit, so a permanent policy usually pays the advisor more: keep that incentive in mind. Advice and any policy come only from Canadian Wealth Creation Centre Inc., the firm that publishes this educational website, through its licensed representatives in Quebec, Ontario, Alberta, British Columbia, Manitoba and New Brunswick. The table compares product types, not every insurer in Canada; ask any advisor which contracts were considered and why.

That is why the comparison turns on how long the need lasts, and why a lower starting premium is not, by itself, a lower lifetime cost. If the need ends while you are alive, you may have paid for permanent coverage you did not need; if a lifelong need remains, a term that ends can leave a gap, at an age when new coverage may cost more or be harder to obtain. Many families need both shapes: a large term policy across the years of heaviest obligation, with a smaller permanent policy underneath.

Anyone who tells you term life insurance is always the answer, or that permanent coverage always is, is describing a preference and not your situation. How the permanent forms differ is on whole life insurance, and the arguments against permanent coverage, including the correct ones, are in objections and risks. A comparison of buying term and investing the difference is on buy term and invest the difference, compared.

Which term structures and features will you see?

Term life insurance is one idea with several shapes. Some are structures, which decide how the death benefit behaves. Others are features, and one contract often carries more than one of them.

Level term suits most purposes, and it is the usual choice for replacing a family's income. Decreasing term follows a debt that shrinks, and it fits poorly anything that does not shrink: income replacement, education costs and final expenses do not fall on a mortgage's schedule. Before deciding, get level and decreasing quotes from the same insurer, for the same term and the same starting amount, and compare the full benefit schedule as well as the premiums: a lower premium can come with a falling death benefit.

Joint first-to-die coverage is described by the Financial Consumer Agency of Canada as term insurance that pays a death benefit when the first partner dies, with both insured under the same policy. It pays once. Two individual policies can lead to two claims if each insured dies while their own policy is in force, so ask for both quotes, and compare what the survivor would still hold after the first death.

Term 100 carries the word term, but it behaves like lifetime coverage. The AMF notes that it generally covers you for your whole life, even beyond 100, and that some insurers stop charging premiums at 100. Compare it with permanent coverage, not with a twenty-year term.

How does renewal work, and when does it make sense?

Renewal continues the same contract when the term ends. The AMF says that you generally do not need to prove you are still in good health to renew, and that a renewed contract costs more than the period that just ended. Its general page on life insurance adds that, depending on your age and the insurer, the premium can be significantly higher, even up to twice as much at renewal (AMF, Life insurance).

The reason is simple arithmetic about risk. At renewal the insurer is covering a person ten or twenty years older, and the premium follows. Ask whether renewal is automatic unless you cancel, or happens only if you ask: contracts differ on this, and the answer decides who has to act. Ask whether your contract sets out the renewal premiums when you buy it, and read that column before you sign, not twenty years later.

Renewal makes sense in two situations. The first is when your health has changed and a new application might be rated or declined, so the right to continue without new evidence is worth the higher price. The second is when you need only a few more years, for example until a mortgage is paid off, and a new long-term policy would be more than you need. If you are still in good health and need many more years, a new application at your current age is often cheaper than renewing.

How does conversion work?

Conversion lets you exchange all or part of your term coverage for a permanent policy without new medical evidence. It protects one thing that nobody controls: your insurability. If your health changes, a convertible policy keeps the door to permanent coverage open on the terms written in the contract.

It has limits, and they are the whole point of reading the contract. Conversion is usually available only until a stated age or date, which can come years before the term itself ends. It is available only into the products the contract names. The new premium is usually set by your age at the time you convert, so it is much higher than the term premium you were paying. And conversion creates no cash value on its own: the permanent policy you convert into has its own premiums and its own values.

Before you buy, ask four questions. Is conversion included, or does it need a rider? Into which permanent products? Until what date or age? On what premium basis? Whether and when to use it is a decision of its own, set against applying for a new contract, and it is laid out on converting term life insurance or a new contract.

What happens when the term ends?

Four things can happen, and the decision belongs several years before the end date, not in the final months.

The coverage stops. Nothing is paid and nothing is returned. If the obligation ended too, this is the product working exactly as bought.

The coverage renews, where the contract allows it, at a higher premium set by your age, as described above.

The coverage converts, where the contract allows it, into permanent coverage without medical evidence, provided you act before the conversion deadline.

You apply for a new policy, which is open to anyone still insurable, priced at your new age and your health at that time.

Put the conversion deadline and the renewal date in your calendar the day the policy arrives. Do not rely on a reminder: ask your insurer what notices it sends, and confirm both dates in writing.

What changes the price of term life insurance?

Term life insurance is priced on the probability of a claim within a defined period, so the premium follows the facts that move that probability. There is no single price for Canada. A sample figure without your age, your health and an insurer attached would mislead, and even a quote is an estimate: the written offer the insurer makes after underwriting is the price that counts.

Age is the largest single factor. Smoking status is the largest factor you control, and it is worth asking how the insurer classifies cannabis and vaping, since that can decide your rate class. Health and family history are established at underwriting. Term length matters because a thirty-year term prices thirty years of risk. The amount of coverage matters, though not proportionally: the cost per thousand dollars of coverage can fall at larger amounts, so ask each insurer where its amount bands fall. Occupation and pursuits count where either carries more risk. Riders, such as waiver of premium, add their own cost. Payment frequency can matter as well: ask whether twelve monthly payments cost more over a year than one annual payment.

To compare quotes, ask each insurer or advisor for a written quote on the same basis, and fill in this table yourself from those written quotes. Two quotes that differ on any line below are not comparable yet.

How does underwriting set your price?

Underwriting is the step that sets the price, and the one applicants understand least. The insurer is estimating the probability of a claim within the term, and everything it asks serves that estimate.

It looks at your age and smoking status; your height and weight; your personal medical history; your family history, particularly of heart disease and certain cancers before a stated age; your driving record; your occupation; and pursuits such as diving, climbing or flying. Depending on the insurer, the amount and your answers, underwriting may also use medical records, measurements or tests, such as a paramedical visit; ask what will be required before you apply. More on each step is in life insurance underwriting.

The result is a rate class. Insurers name and define their classes in their own way, and a rating above standard may be added where the risk is higher. Ask which rate class the written offer actually assigns, and whether it matches the class the quote assumed. The gap between classes for the same coverage can be large, and it is decided on facts largely fixed by the time you apply.

Answer every question fully, including what seems minor or embarrassing. A material misrepresentation or omission can let the insurer contest the contract or a claim. During the contestability period, which is set by provincial insurance law, generally the first two years the contract is in force, and which your contract restates, this can apply even to an honest error; after it, the insurer generally has to show fraud. In Quebec, article 2424 of the Civil Code says that, in the absence of fraud, a misrepresentation or concealment about the risk does not justify annulling or reducing insurance that has been in force for two years (Civil Code of Québec, art. 2424). The consequences are set out on misrepresentation on an application.

A rating is not always permanent. Where a rating was applied for a condition that has since resolved or is now controlled, ask the insurer whether it will review the rating, what evidence it needs and whether there is a fee. A better class is not guaranteed, but if the insurer agrees, the premium can come down for the rest of the term.

How much coverage do you need, and for how long?

The amount is arithmetic with your own numbers in it: what your family would owe, what income it would lose, and what it already has. The term is the number of years those needs last.

Estimate each year's household shortfall after the death: the income lost, less what a surviving partner would actually earn, plus replacement childcare or other work you now do without pay, for as many years as it would last (until the children are independent, or until a partner reaches retirement, are the two common answers). Then add one-time obligations not already in those annual costs: the debts that would remain, including the mortgage, education, a dependant who needs lifelong support, or a buy-sell agreement in a business. Subtract only resources actually available for those needs, such as savings not set aside for something else and other insurance. What remains is the gap, an estimate and not an insurer's recommended amount.

Illustrative example. Assume a remaining mortgage of $300,000, income replacement of $50,000 a year for 10 years ($500,000), education costs of $40,000 and final expenses of $20,000, for needs of $860,000. Assume savings of $60,000 and group life coverage of $100,000 through work, for $160,000 available. The gap is $700,000. If the group coverage ended with the job, the gap would be $800,000. The $50,000 a year is assumed to be the shortfall after the surviving partner's own income, and to cover the survivor's own living expenses and childcare. It also excludes mortgage payments; if it includes them, take them out before adding the mortgage balance, or the mortgage is counted twice. These hypothetical figures ignore inflation and any return on the money after it is paid, and they are not a recommended amount.

Test inflation, a longer period of income replacement, the loss of group coverage and affordability, and then compare coverage amounts you can keep paying. Term life insurance is inexpensive enough that the difference between adequate and inadequate coverage is often small each month and very large in consequence.

Match the term to the obligation rather than taking a default. Twenty years is a common choice, and it is not automatically right. If the mortgage has eighteen years left, that is the number that matters; if the youngest child finishes school in fourteen years, that is the number. Where two needs end at different dates, some families hold two policies of different lengths, for example a longer one sized to the mortgage and a shorter one for income replacement, which can cost less overall than one long policy sized to the larger figure.

When should you buy term life insurance?

When somebody would be financially harmed by your death. That moment usually arrives with a mortgage, a partner or a child, not with a birthday.

Applying younger usually lowers a comparable first quote. Your future price and eligibility depend on the insurer, your health and underwriting at that time, so compare a current quote rather than assuming what the future will cost. What does run out is insurability: someone who expects to need coverage later is usually better placed applying while healthy than waiting for a moment that feels decisive. Nobody should rush you, and a decision measured in decades is worth a week of thought.

Is group coverage through work enough?

Many employees have group life insurance, and it is often mistaken for a plan. It is a useful supplement with three weaknesses.

It usually ends when the job does. A layoff, a resignation or an illness that stops your work can also stop your coverage, and those are the moments when a family is most exposed. The amount is often a multiple of salary; your benefits booklet gives the figure, and it may not cover a mortgage plus years of lost income. And basic group coverage is often issued without individual medical evidence, though optional or larger amounts may need it; your benefits booklet says which. That ease is useful, but the coverage belongs to the plan, so it cannot be relied on as a permanent arrangement.

Some group plans let you convert to an individual policy when you leave, usually within a short window and without medical evidence. Find out now whether yours does and how long the window is. Then size your own coverage against the gap that would remain if the group coverage ended tomorrow. How employer-paid group coverage is taxed, and what a conversion window looks like, is set out on group life insurance at work.

Should you use your lender's mortgage insurance instead?

Life insurance offered by a lender when you take a mortgage and a personal term policy do different jobs, and they compare poorly on three points.

The Financial Consumer Agency of Canada sets out the lender's product plainly (FCAC, Optional mortgage insurance products). It is optional: you do not need to buy it to be approved for a mortgage, the lender cannot insist that you buy it, and it needs your express consent. The mortgage lender is the beneficiary and receives the death benefit, not your family. The death benefit equals the outstanding balance and falls as you pay the mortgage down, while the premiums generally stay the same. And you can buy mortgage life insurance through your lender or through another insurance company.

A personal term policy works differently. It pays the beneficiary you name, who decides what to do with the money: pay the mortgage, keep it and replace income, or both. The lender's coverage can end if you move the mortgage to another lender or refinance, while a policy you own stays with you. Ask the lender, too, when your eligibility is checked: at application, or only when a claim is made.

Owning the policy yourself keeps the coverage, and the choice, with your family.

How do you name a beneficiary well?

The beneficiary line decides who is paid and whether the money passes through your estate, which makes it one of the most consequential lines on the application. It costs nothing to get right.

When a beneficiary other than your estate is validly named, the insurer normally pays that person directly, and the money does not form part of your estate, which usually keeps it out of probate where the province charges it. Whether creditors can reach it depends on the designation, any assignment or competing claim, and provincial law. Dependants can claim against it in some provinces, and a court can set a designation aside in some cases. How quickly a claim is paid depends on the insurer and the documents it needs. The rules are set out on the designation and what a creditor can reach and how a death claim is paid.

Name a contingent beneficiary as well. If the primary beneficiary dies first and nobody else is named, the benefit falls to the estate, which is the outcome the designation existed to avoid. If a beneficiary is a minor, the Financial Consumer Agency of Canada suggests setting up a trust and designating a trustee or administrator; the options are on a minor beneficiary.

In Quebec, when the policyholder names a married or civil union spouse as beneficiary in a writing other than a will, the designation is irrevocable unless it says otherwise (Civil Code of Québec, art. 2449). An irrevocable beneficiary's written permission is needed before changes, so if you intend the designation to be revocable, ask the insurer how to record that when you apply. How separation and divorce interact with a designation is set out on family patrimony and the beneficiary designation.

Review the designation after any change in your family: a marriage, a separation, a birth, a death. The insurer pays whoever is named, not whoever was intended.

What should you check in the contract before you sign?

Every line below is written in the contract or the policy schedule. Read them once, at the start, so the end of the term holds no surprises.

Each question has a right person to answer it. Your insurance advisor answers the need, the amount, the term length, which contracts are available and how the advisor is paid. The insurer answers the renewal schedule, the conversion deadline, the exclusions and the grace and cancellation periods, in writing. Your lender answers what its mortgage insurance covers and when eligibility is checked. An accountant answers questions about a corporation owning a policy. A lawyer or notary answers questions about a trustee for a minor, Quebec designations and blended families.

What are the common mistakes?

Taking the term by default. Match it to the obligation, not to the most common number.

Buying too little because the premium was the only figure compared. Compare the gap first, then the premium.

Skipping conversion without asking what it costs. Conversion is the one feature that protects your insurability. Ask whether it is included, into which products and until when, before deciding it is not worth having.

Missing a payment. After the grace period, coverage ends unless the policy is reinstated on the contract's terms. Pay automatically, and call the insurer at once if a payment fails.

Assuming coverage can be replaced later. Insurability is the one input nobody controls, and it can change without warning.

Confusing term life insurance with income for life. A life annuity answers a different need: an income you cannot outlive. It is not a substitute for a death benefit.

Where does term life insurance fit inside a longer plan?

Term life insurance is the right answer for a temporary need. It expires and leaves nothing behind, which is not a flaw; it is why its premium is lower. What it can do, if the contract is convertible, is keep a door open.

Conversion is that door. It creates no cash value or borrowing capacity by itself: the permanent policy you convert into has its own premiums and its own values, and its cash value builds slowly.

That door leads, for some families, to what this practice calls Infinite Financial Sovereignty®, a registered trademark of Jose Salloum: permanent coverage organized so that its cash value can be used during life, on a plan the family keeps. In plain terms, the policyholder owns the policy and, where the contract permits it, can take a policy loan: an advance from the insurer, secured by the cash value. If your permanent policy permits a policy loan, its contract sets the borrowing limit and interest terms. Check whether the rate is fixed or variable, when interest is due, and how unpaid amounts affect coverage. Interest goes to the insurer, not back to you. Unpaid loan and interest may reduce proceeds and can put coverage at risk; ask the insurer for its written loan limit, interest, notice and lapse provisions. A term policy can do none of this, because it has no cash value to borrow against. An insurer policy loan can create a taxable policy gain if its proceeds exceed the policyholder's adjusted cost basis immediately before the loan (Income Tax Act, s. 148(1) and 148(9), disposition para (b)). A qualifying repayment may permit a deduction, limited by paragraph 60(s). A separate lender's loan secured by assigning the policy is not itself a disposition (para (f)); its interest, approval, repayment terms and other tax effects need separate review. Neither arrangement creates money without a borrowing cost. More is on when a policy loan becomes taxable.

The method it draws on is the one Nelson Nash, a life insurance agent for 35 years, named The Infinite Banking Concept®, a registered trademark of Infinite Banking Concepts, LLC. Neither this practice nor its author is affiliated with, sponsored by or endorsed by that company or the Nelson Nash Institute, and no policy is a bank. It is set out here, including who it does not suit.

If you have not bought anything yet, the six reasons a person in their twenties usually should not take a permanent contract, and the three narrow cases where one might, are on the first contract at twenty five. Nothing here argues against term life insurance. It argues for buying it in the form that does not close a door, and for knowing which door that is.

Who may not need term life insurance?

Term life insurance is right for a great many people, including many who are sold something else. It is not for everyone, and saying so is part of the answer.

You may not need it if nobody depends on your income, you share no debt, and your savings would cover final expenses. You should not rely on it alone if the need will last your whole life, such as estate liquidity or a dependant who will need lifelong support, because it will expire before the need does. And you should not buy more than you can keep paying: a policy that lapses in year six protects nobody in year seven.

What stands behind the coverage, and who can help you decide?

The obligation to pay is the insurer's own, and it depends on the insurer's financial strength. It is not backed by any government, and CDIC deposit insurance does not cover insurance policies. If a member insurer fails, Assuris states that you keep up to $1,000,000 or 90% of the death benefit, whichever is higher; a $1,500,000 benefit keeps $1,350,000. Check that the insurer is a member before you apply. Assuris is meaningful protection, and it is not deposit insurance.

The choice is yours to make, and it deserves real numbers. The person who can help you decide is an insurance advisor looking at your own need, your own written quotes and the renewal and conversion lines of the contract in front of you. For a first conversation, bring a list of who depends on you, the coverage you already hold, including group coverage through work, and the term, renewal and conversion dates of any policy you have. No application or illustration is prepared during that call.

Everything here is written by someone paid by commission from the insurer when a contract is issued, which is stated on the author page and at the foot of every page.