Types of life insurance in Canada
Life insurance is a complex beast, and there are as many types of life insurance to choose from. But don't worry, we've made it simple to understand.
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What are the types of life insurance in Canada?
Matt Hands, VP, Insurance
It’s no understatement to say life insurance is one of the most complex products you’ll ever buy. While there are only two main types of life insurance categories, there are dozens of policy varieties underneath those categories, each suited to specific customers needs.
The two main types of life insurance available in Canada are term life insurance and permanent life insurance.
Term life insurance
Term life insurance is issued for a set number of years, usually between 10 and 30, and typically requires a medical test. Your premiums will be the same each year of the term, and your chosen death benefit is paid to your beneficiaries if you die within the term. Term life insurance offered up to a maximum age, typically around 85 years old.
Permanent life insurance
Permanent life insurance is a policy that lasts your entire lifetime. As long as you pay your premiums, you’ll never ‘age out’ like you do with term insurance. Because permanent policies are guaranteed to pay out, they’re much more expensive than term policies with similar coverage. To make up for their expense, permanent life insurance policies offer other benefits, including tax-advantaged investment.
How to select the right type of life insurance
The best life insurance for you depends on your own needs, and learning about the options available to you is very worthwhile. To make buying life insurance easier, we’ve laid out the bare minimum you need to know below - see our dedicated articles for more information on a particular product.
Understanding the types of term life insurance
Not all term life insurance is the same! Here are some features that differentiate term life insurance policies.
Renewable term life insurance
Renewable life insurance is a type of term insurance policy that lets you continue your coverage by renewing/extending your coverage term without having to re-qualify. There is a higher cost to a renewable policy, because it factors in the impact of aging and potential health issues arising in the future, which expose life insurers to more risk. That means you should expect your premiums to increase upon renewal (i.e. your new term will cost you more than your previous term).
If you’re in good health, you may get a better rate by opting to re-qualify for a new term instead of simply renewing. Re-qualifying requires a new medical check, but can save you significantly on your premiums with a clean bill of health.
Conversely, if your health declined during your insured term, renewing could mean lower premiums than if you were forced to re-qualify. Renewals are available until you reach the maximum age, which is normally 85. This means you’ll be able to renew your final 10-year term policy at age 75, for example.
Convertible term life insurance
Convertible term life insurance gives you the option to convert to a permanent life insurance policy at set anniversaries. Like with renewable terms, you won’t have to re-qualify if you decide to convert your policy. You can generally convert to any form of permanent life insurance offered by the same provider.
The benefit of convertible policies is you can take on a larger policy if your situation changes. However, that means the insurance company takes on more risk, in case you need to take them up on it. As a result, convertible term insurance premiums are generally higher than a comparable non-convertible term life insurance policy.
Joint life insurance
Many term and permanent life insurance can be purchased as single or joint policies. A joint life insurance policy insures two people (generally spouses or common-law partners) as a single ‘life insured’. Joint premiums are higher than single coverage, which makes up for the increased risk that the benefit will be paid out.
Joint policies are either joint first-to-die or last-to-die. Joint first-to-die pays the death benefit to the surviving partner after either of them die, while last-to-die pays the benefit to the elected beneficiary after both people on the policy die. Note that a joint policy is different to a ‘combined’ policy, which is when you purchase multiple, single policies from one insurer. This gives you a discount on premiums, so is sometimes worth considering.
Level, increasing, or decreasing benefits
Term and permanent insurance both give you the option of a level, increasing, or decreasing death benefit. Level benefits are the most common, but increasing and decreasing benefits are sometimes useful. An increasing death is used to cover liabilities that increase over time, such as the tax payable on your home upon your death. A decreasing death benefit is best suited to liabilities that decrease in value over time, such as a debt you’re paying off.
Understanding the types of permanent life insurance
Just like term life insurance, permanent life insurance comes in a few varieties. Permanent premiums are generally more expensive than term premiums while you’re young, but are cheaper later in life, offset by the more expensive premiums paid earlier.
Here are the main types of permanent life insurance you’ll come across.
Term-to-100 life insurance
Term-to-100, or term-100 life insurance is a hybrid of term and permanent insurance. It works like a simple term policy, but covers you for life. Like other permanent life insurance, it’s guaranteed to pay out, which results in higher overall premiums compared to term policies. The ‘100’ portion of the name refers to the age after which the death benefit is either paid out early, or at which point you stop paying premiums (but retain your coverage).
Whole life insurance
Whole life insurance provides life insurance coverage for your entire lifetime, in addition to building up a ‘cash surrender value’ (CSV) over time. The insurance company then invests these additional funds, and the returns are either used to reduce your premiums (non-participating) or added back to your cash value as interest (participating).
The cash value is what sets whole life insurance apart from term-100 insurance. Your cash value is an asset, and can be used to reduce your premiums, borrow against, or withdraw from. If you cancel a whole life insurance policy, you’ll receive your cash value back, less any termination fees imposed by your insurer.
Participating vs. non-participating
A whole life insurance policy is either participating or non-participating. The difference is in what is done with the returns from investing your CSV. In a non-participating policy, the insurance company estimates their expected returns at the start of the year and factors them into your premiums each year. This will generally reduce your premiums, unless negative growth is expected over the coming year.
In a participating policy, interest gained goes back into your CSV. You can think of participating life insurance as a life insurance policy bundled with an investment account. If the insurance company’s assets grow in a year, you’ll receive the returns (minus a fee) as a policy dividend - not to be confused with shareholder dividends, which are very different.
Because the life insurance company’s returns are given to you directly, your premiums won’t be offset by projected returns, like they are in non-participating life insurance. Participating life insurance policies are principal guaranteed, so if the company sees a negative return, your CSV won’t reduce. Because the insurance company takes on that risk, participating policies attract higher premiums.
Universal life insurance
Universal life insurance is the most sophisticated form of insurance, but it’s really just a kind of participating life insurance. The differences are around flexibility and tax.
While whole life insurance doesn’t let you choose an investment strategy, universal policies let invest your CSV in any way you wish - cash, bonds, exchange traded funds, etc. Because of this premiums in universal policies are often referred to as investments. Universal life insurance also offers detailed reports and customization of your mortality costs, administration costs, and investment returns.
There are also tax advantages to some components of universal life insurance. While your investments will be subject to a provincial ‘policy tax’ of 2-5%, the investment returns on your CSV are tax-free until withdrawal (subject to yearly limits). As a rule of thumb, universal life insurance is most suited for high net worth individuals who are already maxing out any tax-advantaged contributions to RRSPs and TFSAs.
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Other Canadian life insurance product types
While the types of life insurance covered above are the most popular products purchased in Canada, there are some other coverage options worth mentioning.
Guaranteed life insurance
Guaranteed life insurance is a form of permanent life insurance that you’re guaranteed to be accepted for, with no medical or personal information required. It’s suited for either older people, or people with pre-existing conditions that render them uninsurable.
There’s typically a two year period where the death benefit won’t be paid out, though your beneficiary would still receive a refund on the premiums paid if you were to die within that time.
Guaranteed life insurance has a limited maximum death benefit, typically around $25,000. The premiums are expensive as a result of no medical information being required. If you’re able to qualify for any other life insurance, it’s likely that will be a better option.
No-medical life insurance
No-medical life insurance, or simplified life insurance is similar to guaranteed life insurance, in that it’s available to people who aren’t otherwise insurable. No medical check is required to be insured, but some medical questions will be asked to determine your risk, and can impact your insurability (i.e. you could be denied coverage).
No-medical life insurance premiums are higher than normal insurance, due to the additional risk exposure. The provider may also cap the coverage limit due to the increased risk. The benefit of no medical insurance is that the approval time is much quicker, but if you are healthy and seeking coverage, it's best to look for more traditional coverage options as you will save on premiums.
Mortgage life insurance
Mortgage life insurance is a special type of term insurance, that can be purchased when a mortgage is taken out. It is generally offered by your mortgage provider as a way to protect your property investment, but is generally sold by a life broker or directly from a life insurance company.
The purpose of mortgage life insurance is to make sure the mortgage is paid up if you were to die while you still owed money - all the money goes directly to the bank or lender to pay off the mortgage. It’s a decreasing benefit, factoring in your repayments over the course of the loan. It’s generally a better idea to cover your mortgage debt on a normal term life insurance plan, either with stand-alone coverage or as part of your primary life insurance policy.
However, mortgage insurance is sometimes required legally, typically when you have less than a 20% deposit on your new home. This is known as mortgage default insurance (CMHC insurance).