Your 20s, 30s, and 40s can be some of the best years of your life. But they’re also time for some serious adulting. During these decades, you might start a family, buy a house, work far too much, and find yourself paying more bills than you ever thought possible. It’s also when you might first think about buying life insurance.
If you’ve ever ventured into the psychological minefield that is online life insurance quotes, you’ve probably learned that there are a few different types of insurance you can buy. But if you’re young and looking to protect your family financially while they’re dependent on you, you can probably narrow your options down to term life insurance.
What exactly is term life insurance and how does it work?
Keep reading below to learn everything you need to know about buying term life insurance in Canada.
Term life insurance is a type of life insurance that gives you coverage for a fixed period of time, such as 10, 20, or 30 years. When you buy term life insurance, you select the term length and the amount of coverage you want based on your needs.
In exchange for paying your monthly premiums, your insurance company will pay your beneficiaries a death benefit equal to your coverage amount if you die while holding your policy. Your beneficiaries will receive your death benefit as a tax-free lump sum, which they can use in any way they want.
No matter how long the term of your policy is, your premiums and coverage amount will be locked in for the entire term. This means that they won’t change before the end of your term even if your health changes.
When you reach the end of your policy term, you can let it expire (if you don’t need the coverage anymore) or renew it. If you renew your policy, it’s pretty much a guarantee that you’ll pay higher premiums. Why? Because now that you’re older, your risk of dying is higher. And that makes it more likely that your insurer will have to cough up the money to pay out a death benefit during your renewed policy term.
Term life insurance is designed to give you insurance coverage during the years when you really need it. Usually, this is when you have young kids who depend on you financially or a mortgage that would be hard for your family to pay without your income. For this reason, many people decide to buy term life insurance when they start having kids or when they buy their first home.
At first, it may seem crazy to buy life insurance when you’ve just added mortgage payments or a diaper subscription to your monthly expenses. But because term life insurance gives you coverage for a fixed period of time only, it’s the cheapest type of insurance on the market. And it’s relatively affordable even when you’re young and still trying to establish yourself in your career.
Also, yes, insurance premiums will add another line to your monthly bank statements. But they’ll also ensure that your family will still be able to afford that home or those diapers if you passed away.
When you buy term life insurance, you’ll want to choose a term length and coverage amount based on the amount of protection your family needs and the length of time they need it for. For many people, this ends up being equal to the expenses they pay to support their family until their kids are out of the house and their mortgage is paid off.
However, your needs might differ depending on your family’s situation and your preferences. For example, if you want to be able to pay for your kids’ post-secondary education, you’ll need a longer policy term.
When you’re thinking about your coverage amount, it’s also important to consider expenses that may not seem like expenses to you right now. For example, if you stay home to watch your kids while your partner works during the day, you’re providing free childcare to your family. If you were to pass away while your kids were still very young, your partner might have to pay for childcare. If you factor this expense in when buying life insurance, your family will have the funds they need even if the unthinkable happens.
Wondering how to find the best term life insurance in Canada? Here’s what to consider:
Like a marriage, buying life insurance is a long-term deal. You want to be sure that your insurer will be around to pay out your death benefit even if you don’t die until you’re 90% through a 30-year term policy. That’s why you want to choose an insurer that’s financially stable enough to survive the test of time.
The good news is that life insurance is heavily regulated in Canada. So almost every Canadian life insurance company is in excellent financial health. Phew!
Different insurers will offer different features on their term life insurance policies. To make sure you get a solid policy, look for one with robust coverage, limited exceptions and exclusions, and the option to renew your policy down the road.
E-applications for life insurance aren’t just easier to fill out. They also get processed quicker. In fact, filling out a paper application can increase your application processing time by 6–8 weeks!
So unless you’re nostalgic for the days of snail mail and telegrams, look for an insurer that offers e-applications.
It’s common for different insurers to offer wildly different prices for what’s essentially the same term insurance policy. If you see a price that’s lower than the rest, you might assume that there’s something shady going on or that the policy is inferior in some way.
But in most cases, a lower price usually just means that that company is pricing the policy more aggressively to win you over as a customer. And that’s the kind of bait you shouldn’t hesitate to take.
The cost of a term life insurance policy depends on a few different factors.
First, it depends on the coverage amount you choose. If you want your insurer to pay out a larger death benefit if you were to pass away, you’ll have to pay higher premiums. Shocker, right?
Second, it depends on the policy length you choose. If you buy a policy at age 20 and want coverage for 30 years (until you’re 50), you’ll pay more than if you want coverage for just 10 years (until you’re 30). This is because you’re more likely to die between age 20 to age 50 than between age 20 to age 30.
Third, it depends on your personal characteristics and how they affect your likelihood of dying while holding your policy. Here are some of the key factors your insurer will look at to assess your risk of dying early:
So for example, if you’re a healthy non-smoker, a $250,000 20-year term policy would cost you $24.77/month if you buy it at age 35 but $55.20/month if you buy it at age 45.
Let’s say that you’re ready to protect your family financially by purchasing a term life insurance policy. Where do you actually go to buy it?
Well, you have 3 options: