Term Insurance

Term insurance is life coverage for a fixed period.

If the insured dies within the term, the death benefit is paid. If they do not, the policy expires and pays nothing.

That is the entire product, and its simplicity is why it costs a fraction of permanent coverage for the same death benefit.

What is term insurance?

Temporary coverage bought for a defined number of years, most commonly ten, fifteen, twenty or thirty.

The premium is level within the term. Set at issue based on age and health, and it does not change while the term runs.

The death benefit is fixed and is generally received free of income tax by a named beneficiary.

There is no cash value. Nothing accumulates, nothing can be borrowed against, and there is nothing to surrender. Almost the whole premium buys coverage.

According to the Canadian Life and Health Insurance Association, term accounts for around 60% of individual policies sold in Canada, with coverage commonly between $100,000 and $5 million and a typical term of twenty years.

The four common types

Level term is the default and suits most purposes.

Decreasing term matches a falling obligation. It is cheaper because the insurer's exposure shrinks, and it is a poor fit for anything that does not shrink.

Renewable term continues without new evidence of health, and the renewal premium is priced at the attained age, so it rises steeply. It exists for the person whose health has changed and who could not qualify for a new policy.

Convertible term is the one to ask about. It allows conversion to permanent coverage without medical evidence, within a stated window and usually before a stated age. It costs little and it is the most undervalued feature in the product.

How it works

Application and underwriting. Forms, medical history, often an examination. The insurer assesses risk and assigns a rate class.

Issue. The premium is quoted, the first payment is made, coverage begins.

The term runs. Premiums are paid, the coverage stands.

Then one of three things. A claim is made and the benefit paid. Or the term ends and the policy expires. Or, where the policy allows, it is renewed or converted.

The rate class matters more than people expect. Preferred, standard and substandard classes can differ substantially in price for the same coverage, and the difference is set at underwriting on facts about health that are largely outside anyone's control at that moment.

What it costs

Term is priced on the probability of death within a defined period, so the premium follows age, health and the length of the term.

A healthy non-smoker in their thirties pays a small fraction of what permanent coverage would cost for the same death benefit. This site does not publish premium quotes, because a figure without your age, your health and an insurer attached is not information. Ask for a quote against your own facts.

What moves the price:

Age, which is the largest single factor.

Smoking status, which is the largest factor a person controls.

Health and family history, established at underwriting.

Term length, since a thirty-year term prices thirty years of risk.

Coverage amount, though not proportionally: larger policies often cost less per thousand of coverage.

Occupation and pursuits, where either carries elevated risk.

The benefits

Cost. The most coverage per dollar of any life insurance product.

Simplicity. One premium, one benefit, one period. It can be understood and compared.

It matches temporary obligations. A mortgage, the years until children are independent, a business loan. Each has an end date, and so does term.

Convertibility, where the policy carries it, which preserves the option to buy permanent coverage later regardless of health.

The drawbacks

It expires. If the need turns out to be permanent, the coverage ends when the term does, at an age when replacing it is expensive or impossible.

Nothing accumulates. Premiums paid are gone. For many people that is the correct trade and it should be understood rather than discovered.

Renewal is expensive. Renewable term renews at the attained age, and the increase surprises people who have not read the schedule.

Health can change. Someone who intended to buy permanent coverage later may find they no longer qualify, which is exactly what convertibility protects against.

Who should buy it

Anyone with a temporary obligation and people who depend on them. A mortgage, young children, a business loan, a partner whose income would not cover the shortfall.

Anyone who needs the largest death benefit their budget allows. Term buys the most coverage per dollar, and an underinsured family with a permanent policy is worse off than a well-insured one with term.

Anyone unsure whether the need is permanent. Convertible term buys time and keeps the option open.

When to buy it

When somebody would be financially harmed by your death. That is the trigger, and it usually arrives with a mortgage or a child rather than with a birthday.

Earlier is cheaper, and that is arithmetic rather than urgency: the price follows age and health, and both move in one direction. A decision measured in decades does not improve for being made this week, and it does get more expensive the longer it waits. Both of those are true.

How much coverage

An arithmetic question with your own numbers in it.

What debt would remain, including the mortgage.

What income would need replacing, and for how many years. Until the children are independent, or until a partner reaches retirement, are the two common answers.

What specific obligations exist: education, a dependant who needs lifelong support, a buy-sell obligation in a business.

What already exists: group coverage through work, which usually ends when the job does, and any existing policies.

Subtract what would be available: savings, other insurance, a surviving partner's income.

The remainder is the gap. Round it up rather than down, since the cost of a little extra coverage at term prices is small and the cost of being short is borne by somebody else.

Term against permanent

The honest comparison, and this site sells the other one.

Where the need is temporary, term wins on cost and it is not close. A mortgage that will be paid off, children who will become independent, a loan that will be repaid. Buying permanent coverage for a temporary need means paying for something the household will not use.

Where the need is permanent, term eventually fails, because it expires. Estate liquidity, a dependant with lifelong needs, a business obligation that does not end.

Many households need both, and the usual shape is a large term policy over the years of highest obligation with a smaller permanent policy underneath it.

Anyone who tells you term is always the answer, or that permanent always is, is describing their own preference rather than your situation. The product landscape and 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.

Underwriting, and why two people pay different prices

The step that sets the price, and the one applicants understand least.

What the insurer is doing. Estimating the probability of a claim within the term, and pricing it. Everything asked serves that.

What it looks at. Age. Smoking status, including cannabis and vaping, which insurers treat differently from each other. Height and weight. Blood pressure and cholesterol, usually from a paramedical visit. Personal medical history. Family history, particularly of heart disease and certain cancers before a stated age. Driving record. Occupation. And pursuits such as diving, climbing or flying.

The rate classes. Preferred plus, preferred, standard, and substandard ratings expressed as a percentage of standard. The gap between preferred and standard on the same coverage is substantial, and it is decided on facts largely fixed by the time anyone applies.

Two things applicants get wrong.

Understating anything is worse than the rating it avoids. A material misstatement can void the contract within the contestability period, and the claim is refused at the moment it is needed. Disclose everything, including what seems unimportant.

A rating is not always permanent. Where a rating was applied for a condition that has since resolved or is now controlled, many insurers will reconsider on request. Very few people ask.

What happens when the term ends

The part that arrives twenty years after anybody thought about it, and the part worth understanding at the start.

Expiry. The coverage ends. Nothing is paid and nothing is returned. If the obligation ended too, this is the product working.

Renewal, where the policy is renewable. Coverage continues without new medical evidence, at a premium priced on the attained age. The increase is severe, frequently several times the original, because the insurer is now pricing a much older life. Renewable term exists for the person who cannot qualify elsewhere, and for anyone who can, shopping is almost always cheaper.

Conversion, where the policy is convertible. Permanent coverage without medical evidence, within a window stated in the contract and usually before a stated age. Check both limits now rather than later, because the window commonly closes years before the term does.

A new policy. Available to anyone still insurable, priced at the new age and the new health.

The decision belongs several years before expiry, not in the final months, because the conversion window and insurability are both time-limited and neither sends a reminder.

Group coverage through work, and why it is not enough

Most Canadians with life insurance have some through an employer, and it is routinely mistaken for a plan.

It usually ends when the job does. Redundancy, resignation or illness that stops the work also stops the coverage, and those are precisely the circumstances in which a family is most exposed.

The amount is usually modest, frequently one or two times salary, which rarely covers a mortgage and years of income replacement.

It is not underwritten to you. Which is why it is easy to obtain and why it cannot be relied on as a permanent arrangement.

Conversion privileges vary and are often short. Some group plans allow conversion to an individual policy on leaving, usually within a brief window and without medical evidence. It is worth knowing whether yours does before you need it.

Treat group coverage as a supplement, and size individual coverage against the gap that remains if the group coverage disappeared tomorrow.

Naming a beneficiary, which costs nothing and changes everything

The single most consequential line on the application, and the one most often left to default.

A named beneficiary receives the benefit directly. On proof of death, in weeks rather than months. It does not pass through the estate, it avoids probate where the province charges it, and it is beyond the reach of the deceased's creditors.

Where the estate is named, or where nobody is, all three advantages are lost. The money enters the estate, waits for administration, becomes available to creditors, and may attract probate fees.

Name a contingent beneficiary too. If the primary beneficiary dies first and nobody else is named, the benefit falls to the estate by default, which is the outcome the designation existed to avoid. Designations sit inside the year-by-year mechanics of a policy.

Review it after any change. A marriage, a separation, a birth, a death. A designation made a decade ago reflects a family that may no longer exist, and the insurer pays whoever is named rather than whoever was intended.

In Quebec the rules differ. A designation in favour of a married or civil union spouse is irrevocable unless stated otherwise, which has consequences on separation that surprise people.

It costs nothing to check, and it is the highest-value hour available in this whole subject.

Common mistakes

Buying the term length by default. Twenty years is the common choice and it is not automatically right. Match the term to the obligation: a mortgage with eighteen years remaining, or the years until the youngest child finishes education.

Buying too little because the premium is the only number compared. Term is cheap enough that the difference between adequate and inadequate coverage is often small in monthly terms and enormous in consequence.

Skipping convertibility to save a little. It is the cheapest option in the product and the one people most regret not having.

Letting it lapse by accident. A missed payment on a policy with no cash value lapses quickly. Set it to pay automatically.

Assuming it can be replaced later. Insurability is not permanent, and it is the one input nobody controls.

The opposite product is a life annuity, which insures against living too long rather than dying too soon.

Where term fits inside a longer plan

Term is the right answer for a temporary need and this page has said so plainly. It is worth adding what it does not do, because that is where the rest of a plan begins.

Term expires and leaves nothing behind. That is not a flaw; it is the product working as designed and it is why it costs so little.

Convertibility is the bridge. A convertible policy can become permanent coverage without new medical evidence, and permanent coverage is what accumulates a contractual value a household controls. The option costs almost nothing at issue and cannot be added later, which is why it is worth electing even by someone certain they will never use it.

What that option preserves is the ability to build what this practice calls Infinite Financial Sovereignty®, a registered trademark of Jose Salloum: a pool of capital held where the household decides the terms of its use, with permanent coverage underneath it. The method it draws on is the one Nelson Nash 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.

Nothing here argues against term. It argues for buying it in the form that does not close a door, and for knowing which door that is.

What stands behind the coverage

The obligation to pay is the insurer's and depends on its financial strength. It is not backed by any government. Assuris protects Canadian policyholders within published limits, which is meaningful and is not deposit insurance.

What this page will not do

It will not quote you a premium, because a price without your age, your health and an insurer attached is not information.

And it will not steer you toward permanent coverage. Term is the right answer for a great many people, including many who are sold something else, and a page about term written by a practice that mainly places permanent policies should say so plainly.

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.