What Is Term Life Insurance?
Term life insurance is a type life insurance product that covers you for a specific period of time, typically from 5 to 30 years. When you buy term life insurance, you lock in your premium and coverage for the entire term. When your term expires, you may have the option to renew your policy at a higher cost premium or let your coverage expire. Some policies also let you convert to permanent life insurance, typically between one and five years before the policy ends.
When you buy term life insurance, you choose the term length (how long you want to be covered for) and your coverage amount (how much you want your beneficiary to receive when you die). If you die within the term set out by your policy, your insurance company will pay the coverage amount, also known as the death benefit, to your beneficiary.
When should you buy term life insurance?
Term life insurance is best for people who have a temporary need for life insurance. Some examples include:
- If you have a mortgage, and want to leave your family enough money to pay it off in case you die
- If you have young children who need to be provided for
- If you’re planning to retire and only need coverage for as long as you expect to work
Renewable vs. convertible term life insurance
Renewable term life insurance is coverage that automatically renews at the end of the term. If your coverage expires after 10 years, you’ll automatically be renewed into a new 10-year term. When you choose renewable term life insurance, your premiums will increase at renewal, so it’s a good idea to compare term life insurance quotes before your term expires.
Convertible Term Life Insurance gives you the option to convert your term life insurance policy to a permanent life insurance policy. The primary benefit of having a convertible policy is that you won’t have to pass a medical exam to get permanent coverage. If you’re diagnosed with a serious illness while you have a convertible term life insurance policy, you can convert to a permanent life insurance policy you might not otherwise have been able to get.
How much life insurance do you need?
One of the most important choices in choosing a life insurance policy is deciding how much coverage you need. There are a number of different questions to ask that will influence your decision:
- Your family situation: If you have young children, how much money would it cost to raise them?
- Your debts: How much do you owe on your mortgage and other loans? Who will be responsible for making payments if you pass away?
- Your income: How much do you make after-tax each year? How long will your family need your income to be replaced?
Mike is 35 years old, earns $70,000 a year, is married, has 2 children under 5, and has a mortgage with 20 years left to pay with $350,000 outstanding.
|Cost to raise 2 children to age 18||$500,000|
|College tuition for two children||$50,000|
|5 years income replacement||$350,000|
In this scenario, Mike’s major expenses are the cost of raising children and his mortgage. In this case, it makes sense for Mike to choose a 20-year term. After 20 years, his kids will be over 18, and his mortgage will be paid off. At that time, he can save money on life insurance by renewing into a lower coverage amount.
The amount of coverage you choose is up to you. You might decide to buy enough term life insurance to replace your salary for a certain number of years, enough to pay off your mortgage, or just enough to cover funeral expenses. There’s no rule against having multiple life insurance policies, so you can buy additional coverage any time you need it.
What factors influence term life insurance rates?
Term life insurance rates are based on how likely it is you’ll pass away during the term. The biggest factors that impact how much you’ll pay for term life insurance are how old you are when you sign up for your policy, the length of the term, and whether you are a smoker.
There are a few factors insurance companies cannot take into account when setting your rates, including Illnesses that develop or are discovered after your policy takes effect.
To learn more about what factors affect life insurance rates, see our education centre topic What Is Life Insurance.
When can you be denied for term life insurance?
Sometimes, insurance companies might refuse to sell you term life insurance. Most term life policies also have a maximum enrolment age, depending on the length of the term. For example, if you’re 65 years old you might be approved for a 10-year term, but you probably won’t be able to get a 30-year term. Other reasons include chronic or terminal illnesses, or other risks like past convictions for impaired driving.
If you’re turned down for term life insurance because of your age, health or other factors, you could still qualify for guaranteed life insurance.
Some term life insurance providers allow you to purchase extended coverage, or riders, to cover you for other circumstances:
- Critical illness provides payout if you develop a life-threatening illness like heart disease, stroke, or cancer.
- Children’s term pays out in the event your child dies.
- Accidental death pays an additional benefit if your death is the result of an accident.
- Disability waiver of premium allows you to stop paying your premiums if you become disabled.
- Did you know?
- 73% of Canadians say they can’t afford life insurance.1
- Consider this…
- $84/month for coffee2 vs. $24.08/month for $250,000 life insurance.3
- Life Insurance is affordable!
References and Notes
- LIMRA: Canadian Life Insurance Ownership Study, 2013.
- Initial monthly cost for a healthy, 40 year old female, non-smoker purchasing $250,000 of Empire Life Solution 20 life insurance as of December 7, 2016. Price increase every 20 years.