The Best Types of Life Insurance in Canada

What are the 3 main types of life insurance?      

1. Term life insurance

2. Whole life insurance

3. Universal life insurance

What is term life insurance?

Term life insurance is a type of policy that provides you coverage for a fixed period of time, such as 10, 20 or 30 years. If you pass while the policy is active, your beneficiaries will recieve a tax-free lump sum payment known as a "death benefit."

Term insurance is the most cost-effective type of insurance for most Canadians. Premiums for term can be up to seven and a half times less expensive than those for whole life insurance.

It’s the best option if you’re looking for protection for the years you have significant financial obligations (like a mortgage and kids at home). 

If you still need insurance after the term expires, you have two options. 

1. If you're still pretty healthy, you can apply for a new policy (usually at a higher rate).
2. You can renew your current policy. If your policy comes with a guaranteed renewability feature, so you can keep your coverage even if your health dramatically changes. Premiums for your renewed term will be much more expensive, though.

PolicyMe makes life insurance simple and affordable for Canadians. Find the term life insurance rates you desire just a few clicks and see how you can save up to 20 per cent on your policy.

What is whole life insurance?

Whole life insurance is a type of permanent life insurance. It provides lifelong coverage to the policyholder. So your beneficiaries will get a payout, regardless of when you pass away.

Whole life insurance includes a tax-free, lump sum payout, like term, but also a cash surrender value.

Because the payout is guaranteed, it tends to be much more expensive than term life insurance (up to seven and a half times more!). This type of insurance coverage is usually chosen for it's guarantee cash value options. A life insurance company that provide cash value components, usually sell it as a kind of insurance that offers growth potential to help build wealth.

Although this type of coverage seems amazing, this popular type of policy does come with an expensive caveat. The premiums you pay are higher than the amount needed to cover the risk of your death. These “excess premiums” form the policy’s cash value.

This cash value will grow tax-deferred at a minimum guaranteed rate. Once you've built up enough cash value (this usually takes years), you can withdraw it from your policy.

But the amount your cash value will grow by is minimal compared to traditional savings and investment accounts like a TFSA or RRSP. So whole life insurance is usually only a good idea for those who have already maxed out their other investment options.

Term vs. whole life insurance

For most Canadian families, term is the way to go. Having life insurance protection for longer than you need 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 matters, like when your mortgage is at its highest and you have young kids.

Here's a life insurance cheat sheet for comparing term and whole life insurance.

Video summary: Term versus whole life insurance 101

What happens when your term is up?

When your term life insurance is up, it expires. Ideally, you'll have taken care of your temporary coverage needs at this point (i.e. paid off mortgage, kids have grown up and no longer rely on your financially). But you do have options as your term ends. Depending on your policy, you'll likely have the option to renew your policy or convert to permanent life insurance. You'd have to start this process before the policy expires.

What happens at the time of renewal?

Renewals allow you to keep your coverage going so you’re not left without a policy. Guaranteed renewability is pretty much standard for most term coverage. It lets you renew your policy for a pre-set price when it’s about the expire — without needing to go through underwriting or medical exams. This makes it a good option for those that have had a change in health that would make them ineligible for a new policy.

What is universal life insurance?

Universal life insurance is a type of permanent life insurance with adjustable monthly payments. Although it's much 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, and the rest is invested.

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

Be careful!

Universal life insurance comes with a ton of fine print. This is only a good option if you're very investment-savvy and want to be hands-on with your policy.

What are the different types of life insurance plans?

Like we previously talked about, the most popular type of life insurance products fall under two main categories, term life insurance and permanent life insurance. Here’s a visual breakdown:

But there are other types of life insurance to keep in mind.

Group life insurance

Group life insurance is usually offered as part of an employee benefits plan. Many people have this type of coverage through work. In most cases, group life insurance gives you coverage that's only one to two times your annual income.

But group life insurance coverage tends to be inadequate for most families. Your annual salary (or even twice that) might seem like a significant amount of money. But it’s likely not enough to cover your debts, mortgage, and dependents' living expenses, or their future needs. 

Be careful!

The main drawback of this type of coverage? You lose it if you leave your employer. If you quit or are laid off, your group policy ends.

Joint life insurance

Joint life insurance Canada covers two people under one policy. There are two main types of joint life insurance:

1. Joint first-to-die: This provides a payout when the first partner passes. After this, the policy ends, so the surviving partner would need to apply for a new policy if they still need the coverage.
2. Joint last-to-die: This provides a payout when the last surviving partner passes. Last-to-die is commonly used to support the couples' dependents.

Because couples pay only one monthly premium, it can be less expensive than holding separate policies.

Be careful!    

There is less flexibility with this type of coverage. One partner will be without coverage or without a payout when the other partner passes. And if the couple separates, it can be difficult to split the policy.

In most cases, purchasing separate life insurance policies is the better option for couples. It provides more flexibility and two payouts, so neither partner is left without coverage or a life insurance payout.

With PolicyMe, couples can save 10 per cent when they apply for separate term policies together. Plus, you'll get $10,000 in free child coverage.

No medical life insurance

No medical life insurance, otherwise known as simplified or guaranteed issue life insurance, is best for those with pre-existing conditions, who engage in “high risk” activities or who can’t get a medical exam. While it’s quicker and easier to get approved, these policies usually cost much more and offer a smaller payout.

Indexed universal life insurance

Indexed universal life insurance (IUL), like standard universal life insurance, divides your premiums partially among investment options. For IUL, though, this investment is tied to the performance of an index.

Variable life insurance

Variable life insurance is a type of permanent life insurance policy that lets you set a minimum payout. The bulk of your premiums go into one or multiple investment accounts, and there's a potential for the death benefit to be larger depending on how your investments perform.

This type of life insurance appeals to investment-savvy policyholders who want to get more than just a death benefit out of their life insurance, but who prefer whole life insurance's regular premiums.

Variable universal life insurance

This type of life insurance combines both variable and universal life insurance. Part of your premiums go into investments, but like mutual funds, you can choose how much is invested in each account and assess how the funds perform over time. But these types of life insurance policies can have pricey management fees associated with them.

Participating whole life insurance

With participating whole life insurance, the policyholder has the opportunity to share in the profits of the insurance company. Part of your monthly premiums go into a separate account with other policyholders. This account is professional managed and can pay out a dividend.

Annually, the company will evaluate its profits based on the actual claims and expenses of the participating investment fund. These profits are then distributed to the policyholder.

Non-participating whole life insurance

This is another term for a standard whole life insurance policy. With non-participating whole life, you pay a consistent premium throughout your lifetime. This means more predictable costs and lower premiums compared to participating whole life insurance, but without the dividends.

Final expense insurance

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

It's a form of permanent life insurance, though the payout is usually much less than traditional life insurance policies as it's only intended to cover certain costs.

Mortgage life insurance

Mortgage life insurance is a type of policy that covers the balance remaining on your house if you pass away. 

The policy works like this: if you pass away, your insurer guarantees that the remainder of your mortgage will be paid to your mortgage lender so that your family can stay in the home you bought.

But mortgage life insurance can cost significantly more than a term life policy for the same amount. And since it’s strictly for your mortgage only, the payout won’t cover any of your other financial obligations or help support your family after you’re gone. 

Critical illness life insurance

Critical illness is a policy that offers a pay out if you are diagnosed with a specific sickness that is listed in the policy description. It pays out once, when the policy ends and it varies based on the insurance company.

For most this coverage is ideal when they're looking to protect themselves from a disease that may be hereditary, or due to being unable to find another, affordable policy.

How do I pick the type of life insurance that's best for me?

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

• Your age: Your age greatly influences the cost of your life insurance. Some types of policies, like permanent life insurance, become prohibitively expensive the older you become. 
• Your health: Health can have a major impact on how much you'll pay for premiums, or if certain types of policies will insure you at all.‍
• Your financial situation: If your family carries any debt, you should consider a life insurance policy that would cover those expenses when you pass away.‍
• Your goals: Do you have permanent financial obligations, like a disabled dependent? Are you willing to pay more for a policy with a guaranteed cash value you can access?

In most scenarios, term life insurance is the best type of policy for the average Canadian family. It’s affordable and provides coverage for the years you need it the most, like when your kids are young or while you’re paying off your mortgage. 

Term might still be your best option, even if you're interested in the cash value component of whole. The amount you'll save on premiums can be invested at your discretion instead of being tied up in your policy.

"Buy term and invest the rest. Cover yourself when you need it most, and at the end of your term, you can reassess your coverage needs." — Stephanie Roux, Licensed Life Insurance Advisor

Bottom line: term life insurance is the best type of life insurance for most Canadians

Some types of life insurance are more suited to investment-minded people, while others are meant to protect your family first and foremost.

When it comes to life insurance, make sure you have:

• The right amount of coverage
• For as long as you need it
• Without overpaying

For most Canadians, that means a term life insurance policy. You can get a no-commitment quote in minutes with PolicyMe at some of the most affordable life insurance rates in the country.

FAQ: Types of life insurance in Canada