Buying term life insurance is the most flexible, versatile coverage available. You pay monthly premiums for the peace of mind that your loved ones will have financial security if you pass away during the term.
If you’ve been asking “what is term life insurance, and how does it work?”, we’ve got you covered. We’ll discuss how term life insurance works in Canada, whether you can cash out your policy, what happens at the end of the term and how a term policy pays out.
There are two types of life insurance: term life insurance and permanent coverage, also called whole or universal life insurance. The biggest difference between term and whole life insurance is that term life insurance policies are arranged for a limited time period, while whole policies are permanent life insurance policies. Term life insurance is usually offered for anywhere from ten to thirty years, or until a specific age.
The length of your term is chosen by you when you arrange your term policy with your insurer. Typically, most term life insurance policies in Canada are between ten to thirty years, but they can vary depending on your needs and the provider’s rules.
You pay a monthly premium on your policy for the entire length of the policy. If you stop paying, or miss multiple payments, your policy may be cancelled.
No, they don’t. After you choose your policy type, your premiums remain the same for the entire length of your policy. However, if you cancel your policy early, or neglect to renew your term life policy before it ends, your annual premiums will be readjusted based on brand new calculations. This ends up costing you more money.
You can avoid this by choosing to extend your term life policy before the term ends. Your rates may go up, but they won’t rise as much as they would with an entirely new policy.
Unless you have a Return of Premium (ROP) term policy, term life insurance policies have no cash value component. Unfortunately, the monthly premiums for ROP term policies are much higher.
Term life insurance policies are meant to protect your loved ones in case you were to pass away during a specific period of time. It’s not meant to be a form of investment, or a method to save money. You’re paying for the comfort of knowing that they’ll be protected, so foreseeable financial burdens will be covered, like your mortgage and your children’s college tuition, etc.
If an insured person outlives their policy, the policy simply ends. It’s quite easy to just let that happen, but that may not be the best choice if you still require life insurance coverage.
Depending on how your situation changes during the length of your original term (i.e., health issues, etc.), you may want to consider extending your term insurance policy, rather than letting it expire. It’s usually more affordable to extend your existing policy, rather than to go through the process of applying for an entirely new one. However, there are a few things to consider if you’re thinking about extending the time period of your policy:
You can reapply for a new term policy at the end of your existing policy. However, if your health conditions have changed, you may not want the exact same policy. When that happens, it’s a good idea to sit down with an financial advisor, and talk about what options might be best for you now.
Remember how we mentioned that renewing your policy before it expires may cause your monthly premiums to rise, but not as much as signing up for an entirely new policy?
Converting your existing coverage to a permanent policy has the same effect. Your premiums are likely going to increase, but it won’t be as much as it would be if you signed up for a brand new whole life insurance policy.
This built-in rider is called a term conversion rider and is a part of most term life insurance policies. The conversion period varies based on which of the life insurance companies you choose, so check your guidelines to make sure you make a decision within that time frame. Otherwise, you’ll have to start from scratch again.
Thankfully, anytime you renew or convert your existing policy before it expires, you don’t have to undergo an additional medical exam or lifestyle assessment, which could impact your rates. This saves you money, and if you have a new medical condition, it won't affect your premium payments or death benefit.
No, unless you have a return on premium term life policy, you won’t receive any money at the end of your term. These are far less commonly chosen, because they’re much more expensive than ordinary term life insurance policies.
A payout is made when the insured party dies and the listed primary beneficiaries files a death claim with the insurance company. The default death benefit payout option of most term policies is a lump sum check. The amounts received from a life insurance policy are not subject to income tax, but the interest accumulated from it may be taxable.
According to a Study at Penn State University, 99% of term life insurance policies aren’t paid out. However, this is most often because people let their policies lapse, or stop paying their monthly premiums, which causes their policy to be cancelled.
Also, in many cases, due to a lack of knowledge about it, many beneficiaries neglect to claim the entitled death benefit payouts. Most often, this is because they aren’t aware of the policy, or which insurer they should contact.
This is part of the reason we encourage our clients to make sure that their beneficiaries are well informed about their policies, and how to access them in the event of the policy holder’s passing.
Choosing the right term life insurance policy involves taking stock of everything you owe, or things you would need to pay for in the future. It also depends on how much financial freedom you want your dependents to have, since the death benefit may need to cover everything from funeral expenses to tuition for education.
Calculate your expenses, debts and liabilities, the current and future costs of dependents, and your end-of-life payments. That's how much money your dependents will need to sort out your affairs and maintain their standard of life in the event of your passing.
Whole life insurance might be a good choice in some scenarios. For example, you may have permanent dependents and haven’t accumulated enough wealth to protect them after your death, or you’ve maxed out your contributions in all other available forms of investment. However, at PolicyMe we believe that term life insurance is the right choice for 99% of Canadians.
Normally, you only need enough life insurance to replace your income for a given period of time. Usually, this is until your kids are out of the house, or your mortgage is paid off. However, it may be longer than that.
The standard general rule to follow is you should be covered for at least 10-15 times your annual income. If you’re the sole provider for your dependents, you’ll need a payout that is large enough to replace your income, plus some extra to adjust for inflation.
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