What is term life insurance and how, exactly, does it work?

Many opt for term life insurance because it offers low-cost coverage for a certain amount of time, and it’s generally well-suited for covering debts with a known lifespan, like a mortgage. For $100,000 of coverage, premiums can range from $13 per month to more than $100 per month, depending on a wide range of factors, like your age, health and lifestyle. If you are a healthy 30-year-old, you are likely to be closer to the lower end of the spectrum than a 60-year-old smoker.

Term vs whole life insurance

Unlike term life insurance, whole life insurance provides coverage for the duration of your life, as long as you continue paying your premiums. “Each option offers its own benefits, and the coverage that would be recommended would depend on the reason the insured is seeking life insurance,” explains Adam Mitchell, president of Mitchell & Whale Insurance Brokers Ltd. in Whitby, Ont. 

If you’re looking to cover debt with a timeline—for example, ensuring the mortgage on your family home can be paid off if you pass away—term life will be a better low-cost option. But if you want premiums that stay the same, and the ability to build a cash value you can borrow against or withdraw from before you pass, whole life may be a better bet for you. 

Learn more about how to pick a life insurance policy in our guide to finding the best life insurance in Canada.

Should you buy 10- or 20-year term life insurance?

Mitchell says the answer to that question depends on your needs for insurance. If you need it to cover a short-term debt obligation that you will have repaid in 10 years or less, the 10-year term may be more beneficial, as it will offer the coverage you need at a lower premium. On the other hand, if you’re likely to have the debt for more than 10 years, choosing a 20-year term (or longer) may be more beneficial; in this scenario, your premiums remain the same for 20 years, meaning you won’t have to renew after the first 10 years, when you will be older and therefore likely to pay more. Choosing the longer term to start may keep the total cost of insurance lower overall. 

Comparing term life insurance quotes

Your health, age and gender play critical roles in determining what the cost of term life insurance will be for you. This table gives you an idea of the price averages, based solely on the length of the term. To save money on term insurance, you are likely to get the best deal if you buy when you’re young-ish and are in good health. 

Estimates based on a 30-year-old female in good health paying annual premiums. 

What your health has to do with it

Mitchell says if you have underlying disabilities or conditions, you should discuss it with your insurance broker, who can inform you about how that may impact their premium or eligibility to obtain a policy. 

Does term life insurance cover disability? It doesn’t, as term disability insurance is a separate policy. “Some policies may offer a small amount of disability coverage as a rider on the policy, but this is not included in the base premium,” says Mitchell. A rider is an additional benefit added to a policy.

When it comes to existing health conditions, some may ask, for instance, what is the best term life insurance for those with diabetes. “There is no such thing,” says Mitchell, as the answer depends on your individual goals, debts and more. “Your broker should be informed about any existing medical conditions, like diabetes, during the discovery process. There are products that guarantee eligibility regardless of pre-existing conditions, but these would likely carry a higher premium.” 

What happens after term life insurance expires?

The policy will either be renewed or it will expire at the end of the term, depending on the policy. With a term insurance policy, unlike with a whole life policy, Mitchell says, “there is nothing to be paid out at the end of the term.” 

Can you sell a term life insurance policy in Canada?

In Canada, selling a life insurance policy is referred to as a life settlement or a viatical settlement. It involves selling your policy at a discount to a third party. The policy is typically sold for more than has been paid in premiums or more than the cash surrender value (the amount of money the policy has accumulated to date), but less than the death benefit payout. The buyer continues to pay the premiums and eventually receives the death benefit when the policy holder dies. 

There are a variety of reasons someone may want to sell their policy, including:

• Their financial situation changed and they are no longer able to make the payments 
• They become critically ill and need to access money in the short term

Viatical settlements were once permitted in Saskatchewan, Nova Scotia and New Brunswick, but these provinces have since passed regulations to no longer allow them. Today, only residents of Quebec have access to viatical settlements.

While selling a policy can certainly be a lifeline for someone who can no longer make payments or who needs an infusion of cash, critics worry it can allow unscrupulous buyers to target vulnerable people, including seniors, who may not fully understand the ramifications of selling a policy. Note that some insurance companies, like Sun Life, do not permit selling an insurance policy no matter which province you live in.

How much term life insurance do you need?

“One of the biggest myths is that [term life insurance] is extremely expensive,” says Mitchell. “For a person under 40, in perfect health, the cost of term insurance can be negligible.” People often underestimate the amount of coverage they need as well. “It is not just for covering your funeral,” says Mitchell. 

In order to determine how much coverage you require, your broker should complete a life-needs analysis. This method measures your liabilities against your assets and income. It also takes into account other expenses you may wish to have covered if you pass away. For example, you may want your spouse to receive a certain income—such as five times what you earn currently—to make up for the loss of a second income and allow your family to continue having the same lifestyle. People also commonly seek additional coverage, too, to prevent one parent or partner from being saddled with expenses, like child care, their children’s future post-secondary education and their mortgage. 

“The coverage suggested for the insured should lie somewhere between the optimal amount of coverage and what the client can comfortably afford,” says Mitchell.

More on life insurance: 

• Term vs. whole life insurance: Which type of policy is best?
• Life insurance for kids: Do you really need it?
• What is whole life insurance?
• How much does life insurance cost in Canada?

About Sandra MacGregor

Sandra MacGregor has been writing about personal finance, mortgages, investing and credit cards for over a decade.

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