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Navigating the ins and outs of life insurance can be overwhelming. And we get it! Insurance is one of those things that everyone needs, but most of us do not fully understand. And as a result, we end up putting it off. But when it comes to term life insurance, punting it down the line can cost you in more ways than one.
Keep reading as we break down everything you need to know about term life insurance, including what it is and whether it’s the right choice for you.
What is term life insurance?
Term life insurance is a form of life insurance that provides coverage for a set period of time—also known as the term.
During this time, if you pass away, your family and loved ones can receive a lump-sum payout to help ease any financial burdens. The goal of term life insurance is to help put your mind at ease, knowing that if you were to pass away your family and loved ones have a financial safety net that they can rely on for things like education costs, mortgage or rent, and funeral costs.
With term life insurance, you typically choose a term that lasts anywhere from 10 to 30 years. Term life insurance is designed to provide financial protection during a specific period of time, when you may have higher levels of financial responsibility.
That’s why you’ll find that term life insurance is a popular choice for families when they have children, mortgage payments, or other financial dependents.
How does term life insurance work?
Life insurance often sounds complicated. But we’ll let you in on a secret: it’s actually much simpler than you might think—especially when it comes to term life insurance.
But do not just take our word for it. Let us look at how term life insurance works in four easy steps:
1. Buy your life insurance policy
Before you have life insurance coverage, you’ll need to shop around for a policy that meets your needs and your budget. Life insurance can be purchased through a broker, insurance agent, or even online.
As you choose your policy, there are a few things to think about, including:
- Term length: This is how long your insurance policy will be active. It’s common to see policies ranging anywhere from 10 to 30 years. However, depending on your age or your insurance provider, you might find options for shorter or longer terms.
- Coverage amount: This determines the size of the benefit payout your beneficiaries can receive should you pass away. How much coverage you need depends on several factors, including your income, as well as your current and future financial obligations.
- Beneficiaries: This is who will receive the benefit payout upon your passing. It’s common to see partners, children, or other loved ones listed as beneficiaries on life insurance policies.
2. Pay your rates or premiums
Throughout the term of your life insurance policy, you’ll pay a fixed amount to your insurance provider. This is typically referred to as a premium, or your insurance rates. In order to keep your term life insurance policy active, you’ll need to continue to pay your premium.
Generally, your premium will be given to you as a monthly dollar amount. This amount is determined based on your age and your coverage needs when you purchase your policy.
For term life insurance, everyone’s premiums will be a little bit different. Every insurance provider also calculates their rates a bit differently. However, there are some factors that can help you understand the variation in cost.
- Age: As a rule of thumb, the younger you are, the lower your term life insurance premiums. This is because as you get older, you’re more likely to experience health complications, making coverage riskier for insurance providers.
- Amount of coverage: Insurance premiums typically go up if you need a larger coverage amount.
- Length of coverage: Typically, the longer the policy, the higher your rates will be. The longer the policy, the larger your risk of passing while the policy is still active.
- Health and lifestyle: Some providers may ask questions about your current medical situation and any lifestyle factors that can impact your rates. For example, people who smoke typically have higher life insurance premiums compared to those who do not smoke.
Remember: Honesty is key when it comes to your life insurance policy application. If your insurance provider discovers that you’ve misrepresented yourself, your policy can be canceled, or your claim could be denied.
3. File a claim
For many term life insurance policyholders, you’ll never file a claim.
If you’re still living by the end of your policy term, your coverage will simply come to an end. For example, if you have a 20-year term life insurance policy, but you’re still living after 20 years, your policy will lapse.
Based on your life situation and financial obligations at that time you can decide whether you want to extend the policy term, convert it to permanent insurance, or simply let it expire.
However, if you pass away while your policy is still active, your beneficiaries will need to file a life insurance claim. For example, if you have a 20-year term life insurance policy, but you pass away 10 years into the policy coming into effect, your beneficiaries would be eligible to submit a claim.
The process of filing a term life insurance claim varies between providers. Typically, your beneficiaries will be required to provide documentation regarding your death and other necessary details to help review and settle the claim.
Most insurance providers have agents and adjudicators who can walk your loved ones through the claims process, and ensure your loved ones have all the information they need.
4. Receive your payout
Once your claim is settled, your loved ones will usually receive your benefit payout in the form of a lump-sum payment. This amount is based on the coverage you selected when purchasing your policy. Term life insurance payouts are also tax-free, so your loved ones can make the most of the coverage.
Unlike mortgage insurance—which goes to the bank to pay off the balance of the mortgage, term life insurance payouts aren’t earmarked for a specific purpose. So, it is up to your beneficiaries to decide how they’d like to use it.
Common uses include:
- Mortgage or rent payments
- Income supplements
- Tuition or childcare costs
- Funeral or burial expenses
- Everyday living expenses
- Future savings
When is term life insurance the right choice?
Term life insurance might be the right choice for you if:
- You have a partner who relies on your income.
- You have children with current (and future) childcare or tuition costs.
- You have financial dependents, such as elderly parents or minor children.
- You have outstanding debt, such as a mortgage or a large loan.
- You want to have financial security for future needs.
What are the benefits of term life insurance in Canada?
There’s a reason term life insurance is one of the most popular types of life insurance. Here are some of the top term life insurance benefits Canadians can find.
1. Customizable term and coverage
Term life insurance isn’t one-size-fits-all, which is why most policies are personalized based on your budget and family’s needs.
You get to choose how long you have term life insurance and you get to decide how much. The flexible nature means you can get coverage when you need it the most.
But just because you’ve chosen a 20-year policy, doesn’t mean you’re stuck with that.
There’s usually the option to reduce your coverage over time if your financial obligations change. And if you find yourself needing more coverage than you initially expected, you can do what’s known as laddering, where you purchase another term life insurance policy to increase your financial safety net.
2. Affordable rates that don’t change
A common misconception about life insurance is that it’s expensive. But for most Canadians, term life insurance is more affordable than you might think.
Once you buy a life insurance policy, your rates remain throughout the term of your policy. You’ll pay the same amount every month for 10 to 30 years, making budgeting and planning much easier.
Snag lower rates while you can: Typically, the younger and healthier you are, the lower your insurance rates will be. You’ll be able to hold onto those rates throughout the entire term, as long as your policy remains active.
3. Simple and straightforward
Life insurance is one of those things that can feel more complicated than it actually is.
Sure—certain types of life insurance can have more nuance. But in general, term life insurance is extremely straightforward and easy to understand, allowing you to have complete confidence in knowing exactly what you’re getting.
4. Tax advantages
If you hold an active term life insurance policy, when you pass away, the benefit payout is typically not taxable. This means your beneficiaries will receive the full coverage amount.
On the other hand, permanent life insurance policies can have tax implications that impact the amount that your beneficiaries receive.
5. Financial confidence
One of the best term life insurance benefit is that it can help put your mind at ease.
Having term life insurance allows you to breathe easy, knowing if anything unexpected happens to you, your loved ones will be taken care of financially.
Discover how you can put your mind at ease with life insurance coverage that protects your loved ones through every stage of life. Learn more about Blue Cross Life Term Life Insurance.
Common types of life insurance in Canada:
Navigating the world of life insurance in Canada can be overwhelming. Understanding the types of life insurance available is a good starting point. Here’s a breakdown of the most common types:
Term Life Insurance
How it works: Term life insurance provides coverage for a specific period, usually 10, 15, 20, 25, or 30 years. If the policyholder passes away during the term, the beneficiaries receive a tax-free death benefit.
Why Term Life?
- Affordability: Typically the most affordable option as it only covers a set period.
- Simplicity: Easy to understand without complex investment components.
- Flexibility: Can choose the term length that aligns with financial obligations, like a mortgage or children’s education.
Key points:
- Premiums are level, meaning they stay the same throughout the term so if you get a policy at 30, you rates will stay the same even when you are 60!
- Policy can be renewed annually after the term expires until age 85.
- Some policies can be converted to a longer term within the first five years without a medical exam.
Whole Life Insurance
How it works: Whole life insurance provides coverage for the policyholder’s entire life. It includes an investment component that builds cash value over time.
Why Whole Life?
- Lifetime Coverage: Beneficiaries are guaranteed a payout whenever the policyholder passes away.
- Cash Value: Builds a cash value that can be borrowed against or withdrawn.
Key points:
- Whole life insurance typically has higher premiums compared to term life insurance.
- Part of the premium goes into a savings account that grows over time if your policy has a cash-value component.
- Policies can be complex with various fees and conditions.
What are the benefits of term life insurance in Canada?
If you're researching life insurance options, you've likely come across term life insurance. It's a popular choice in Canada, and for good reason. Understanding how term life insurance works and its benefits can help you make an informed decision to protect your loved ones. But what makes term life better for you compared to other policy types out there?
Let's explore how term life can be a great choice for you and your family:
- Affordability: Term life insurance is generally more affordable than permanent life insurance. Since it only covers you for a set period, the premiums are lower, making it an attractive option for budget-conscious families.
- Simplicity: The straightforward nature of term life insurance makes it easy to understand. You select the term length and coverage amount, and as long as you pay your premiums, your loved ones are protected for that period.
- Flexibility: Term life insurance policies often come with the option to convert to a permanent policy without a medical exam, providing flexibility if your needs change over time. This conversion feature can be crucial if your health deteriorates and you want to maintain coverage beyond the initial term.
Discover how Term Life Insurance can take out the hassle in coverage so you can focus on the more important things in life. Learn more about Blue Cross Life Term Life Insurance.
How much does term life insurance cost in Canada?
When it comes to life insurance, term life insurance stands out as a popular and affordable option for many Canadians. But what does it actually cost? Understanding the factors that influence the price can help you make an informed decision.
Factors Affecting Term Life Insurance Costs
The cost of term life insurance in Canada depends on several key factors:
- Age: Younger individuals generally pay lower premiums because they are less likely to claim within the term.
- Gender: Statistically, women live longer than men, which often results in lower premiums for women.
- Health: Your overall health, medical history, and lifestyle choices (like smoking) significantly impact your premiums.
- Coverage Amount: The higher the coverage, the higher the premium.
- Term Length: Longer terms usually cost more than shorter ones because the insurer’s risk increases with time.