The search for the right life insurance policy can seem long and confusing. With so many options available, how do you determine which best suits your needs? 

Deciding which product is right for you can depend on quite a few factors, like how long the policy should last, the type of coverage, and how much you’re willing to pay.

In this article, we’ll break down the different types of life insurance available and how to determine which is best for you and your family.

What are the three main types of life insurance?

The three main types of life insurance are term life insurance, whole life insurance and universal life insurance. 

1) Term life insurance: Term life insurance is the most cost-effective type of insurance. The length of your insurance policy can be for a term of 10, 20 or 30 years or can be set up to expire when you reach a certain predetermined age. 

2) Whole life insurance: Whole life insurance covers you for the duration of your life, as long as premiums are paid, while term life insurance has a fixed time period.

3) Universal life insurance: Universal life insurance is a category of permanent life insurance, like whole life insurance. While whole life insurance has set premiums that must be paid, universal life insurance allows for varied premiums and death benefits. 

What type of life insurance is best?

No one likes to think about passing away, but when you're newly married or have a young family, it's something you’ll need to consider.

The type of life insurance that’s best for you depends mainly on the following factors:

  • Your age
  • Your financial situation
  • How you want to protect your dependents 
If you have dependents, whether that’s a spouse or children, then life insurance is something you should consider.
Family cooking in kitchen for article about types of life insurance

Your age is also a significant factor when considering what type of life insurance is best suited for you. The best time to invest in a life insurance policy is when you’re young and healthy. Your premiums will be lower and you’re less likely to have medical issues. 

Suppose you and your family carry a mortgage on your property or hold any debt. In that case, you should definitely consider a life insurance policy that would cover those expenses when you pass away. 

Finally, if you're the breadwinner in your family, you should also consider a life insurance policy that will cover your income plus some additional income to cover higher-end expenses when you pass away. 

Here at PolicyMe, we believe that term life insurance is the best type of policy for the majority of Canadian families. We’ve taken all of the unnecessary steps out of getting term life insurance set up (no medical exam for most people), to make the process as quick and easy as possible for anyone looking for affordable term policies.  

Use our quote calculator to find your price in seconds.

What are the different types of life insurance?

There are two main types of life insurance: permanent life insurance and term life insurance. The diagram below shows you the major differences between the two types.

Chart breaking down the main types of life insurance

1) Term life insurance

Term life insurance is paid out to the beneficiary if the insured person passes away within a specified period of time. The length of time can be either fixed (10, 20 years etc.) or set at a certain predetermined age. 

2) Whole life insurance

If you have a whole life insurance policy, the cost of your individual payments never changes. The cost of your premiums never increases because you're locked into your rate, regardless of any medical changes. 

3) Universal life insurance

Universal life insurance is similar to whole life insurance. You still have coverage for your entire life but you don't pay premiums. Instead, you make investments into your policy for the amount of your choosing. 

4) Permanent life insurance

You have to pay the premiums and the insurance is valid from the time of purchase until death and never expires. A permanent life insurance policy has a cash value that you can borrow against and a death benefit.

5) Indexed universal life insurance

Indexed universal life insurance is a combination of a few types of life insurance. It provides a payout once the owner has passed away, like whole life insurance but also has a cash value, like permanent life insurance that increases as you pay premiums. 

6) Variable life insurance

Variable life insurance is a type of policy that is for the more investment-minded owner. There’s an investment component: a cash value that depends on the way your selected investments perform. 

7) Variable universal life insurance

This type of life insurance is also a bit of a mixture of variable and universal. You can pick and choose your investments, death benefit and premiums. 

8) Participating whole life insurance

Participating whole life insurance is lifelong and pays your chosen beneficiary a tax-free payment when you pass away. If you pay your premiums throughout your life, then the policy’s value will increase over time. 

9) Final expense insurance

Final expense insurance covers the cost of medical bills, burial and any funeral expenses that accumulate after someone passes away. Some companies also call this burial insurance

10) Group life insurance

Group life insurance is provided by an employer. This is usually part of a company's benefits package and allows you to cover your family when you pass away; however, you do lose this if you leave the company before your passing. 

What is term life insurance?

Term life insurance is the best option if you're looking for protection for the most important years of your life (like when you still have a mortgage and kids at home) and pays your selected beneficiaries if you die within a specified timeframe. 

The specified timeframe is usually 10, 20 or 30 years, depending on your coverage selection at the time of purchase. 

For the majority of young Canadian families, term life insurance is one of the best types of life insurance, since you're only paying for coverage during the years that you need it most (in your 30s, 40s and 50s), so you're never paying for something that you don't need. 

What happens when term life insurance expires?

After the term expires, you have a few options:

The most likely scenario is that you won't need life insurance anymore (you are near retirement, your mortgage is almost paid off & your kids are out of the house!). If this is you, you can let your policy expire and never look back.

If you still need insurance, you have two options. 

  1. If you're still pretty healthy, you can just apply for a brand new policy (at a higher rate).
  2. If you’ve been diagnosed with a severe illness, term life insurance comes with a feature called “guaranteed renewability”, so the good news is that you’re still covered. 

This means that if you still need the insurance after the term expires (10+ years down the road), you can renew the policy without having to go through additional medical underwriting. 

Since your renewal rates are guaranteed, this provides you with protection if you do get sick. 

Read more about Term Life Insurance: Everything You Need to Know.

What is whole life insurance?

Whole life insurance pays out a benefit to your beneficiaries, regardless of when you pass away. That's why it's categorized as permanent life insurance. Permanent life insurance is much more expensive because it guarantees that your beneficiaries will receive your death benefit, regardless of if you die young or old. 

Whole life insurance includes a death benefit (just like a term life insurance policy does) and a cash surrender value. Before we talk about cash surrender value, let's talk about premiums.

With a whole life insurance policy, the premiums you pay during the early years are usually higher than the amount needed to cover the risk of your death. These “excess premiums" form the policy's cash surrender value.

As you get older, your probability of passing away (and, therefore, the cost of your insurance) gets higher. When you reach a certain age, the premium you pay for your policy won't be enough to cover the cost of your insurance. 

At this point, your insurance company will start pulling money out of your cash surrender value account to cover the difference.

This structure allows you to pay the same premiums every year throughout the policy regardless of your age, even though the cost of your insurance technically increases over time. If you decide to cancel your policy at any point, you'll receive the policy’s cash surrender value (the amount of money that you previously overpaid by).

But be careful: cancelling a whole life insurance policy can come with penalties and additional charges (just like when you try to cancel your phone or cable plan).

What is universal life insurance?

Although it can seem more complex, universal life insurance gives you more flexibility than whole life insurance policies do. Universal life insurance combines life insurance with tax-advantaged investing. Like with whole life insurance, part of your universal life insurance premium is used to cover your death benefit, whereas the rest is invested.

The investments form the cash value of the policy. In this case, however, your insurance company gives you some flexibility to choose how and which funds you'd like to invest in.

Term vs. whole life insurance

For most young families, term life insurance is the way to go. Having life insurance protection for longer than you actually need it may not seem like such a bad thing, but why pay for something you don't need? 

Term life insurance lets you pay for coverage only during the years when it really matters (when your mortgage is at its highest and you have young kids).

Here is a super easy cheat sheet for comparing term and whole life insurance.

Term life insurance Whole life insurance
Low prices
Choice of policy length
Never expires
Rates locked in
Guaranteed death benefit
Accumulates cash value

If you’d like to learn more about why we almost always recommend term life insurance to our customers, read Term vs Whole Life Insurance: What’s the Difference?.

What is mortgage life insurance?

Buying a home? You might be asked whether or not you want to purchase mortgage protection. Mortgage life insurance or mortgage protection is typically sold by banks or your mortgage lender. 

The policy works like this: if you pass away, your insurer guarantees that the remainder of your mortgage will be paid off so that your family can stay in the home that you bought and their standard of living won’t have to change. 

To learn more, read Should I Buy Mortgage Life Insurance?.

What is group life insurance?

Group life insurance is a type of life insurance that you get through your job. Many people have at least some life insurance coverage as part of their employee benefits plan. In most cases, group life insurance gives you coverage that's 1x to 2x your annual salary.

The main drawback of this type of coverage is that you lose it if you ever leave your employer. 

Some of these plans offer options to convert the group insurance to an individual policy upon leaving your employer, but you want to make sure that no additional medical evidence will be required. 

You want to avoid having to undergo additional medical underwriting again, because if you're diagnosed with any health conditions as you age, you could see your premiums skyrocket.

For example, if you’re an Ontario teacher, you’ll likely have your benefits for the remainder of your career until you retire. If you’re not as certain about your job and aren’t sure if it’ll be around for the next 30 years, group life insurance might not be the best policy for you. 

When is the best time to get life insurance?

The best time to get life insurance is when someone depends on you. For most people, this is when they get married or when they start a family. But for others it could be at a time when you're taking care of dependents, like your aging parents. 

We know what you're thinking: “But I just got a mortgage, and having kids isn't cheap! How am I supposed to afford life insurance?"

Fortunately, the younger you are, the more affordable your life insurance will probably be. In most cases, it's smart to lock in a low monthly rate when you're young because it'll stay at that price for the entire term of your policy and you'll be more likely to pass a medical exam. 

Family hugging outdoors for article on types of life insurance

The younger you are, the more affordable a policy will be. 

If you have dependents right now, ask yourself, "If I passed away today, would my family be able to support themselves?" If you have a young family who depend on you, having a life insurance policy will give you the extra safety net you need. 

Get a quote online in seconds. Once you have your quote, there’s an option to speak with one of our licensed advisors for more information.

In summary: the type of life insurance you choose depends on your age and stage of life

Choosing the life insurance policy that’s best for you and your family is a big decision. It’s important to take the time to consider all of the options and consult with an expert. 

  • The type of life insurance that you choose to purchase is closely related to your age and stage of life.
  • If you have dependents, life insurance is a smart choice so that no one is left in a difficult financial situation if you pass away
  • A lot of factors will be looked at when considering your life insurance application and the amount of coverage needed, including a medical exam, your overall lifestyle and your age.
  • It's best to connect with a life insurance company and speak with a financial advisor to discuss the type of life insurance that's the best fit for you and your family. 

Laura McKay

COO & Co-Founder

Laura brings 7 years of experience working in insurance & strategic operations as a management consultant at Oliver Wyman, after experiences at Manulife and Munich Re. In 2017, she launched a successful initiative for the World Economic Forum focused on innovation in insurance, working closely with insurers, tech pioneers, and policy-makers.

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