Different types of life insurance in Canada: choosing the right plan

Many people think there are only two kinds of life insurance in Canada: term life insurance and whole life insurance. It is true that most policies are either one or the other of these two types of life policies. But there are many more options and different types of life insurance Canada has to offer!

Read on to find out about your options for life insurance and types you should choose.

What are the different types of life insurance in Canada?

There are two main types of life insurance policy in Canada:

1. Term life insurance, which covers you for a set period of time called a “term”
2. Permanent life insurance, which covers you for your entire lifetime

All policies can fit into one of these two major categories of life insurance, which we take a closer look at in this article. But, there are many different types of coverage, based on the type of policy or type of underwriting you choose. See more below.

Term life insurance

Term life insurance is a type of life insurance that lasts for a specific period of time or ‘term’. The term can be a fixed number of years usually ranging between 10-40 years, or a certain age, the most common being up to age 65 (retirement).

There are two variants of term life insurance:

• Traditional term life insurance — the standard term policy that lasts a certain number of years. The most popular and affordable type of life coverage
• Annual renewable term life insurance (ART) — a type of policy that lasts for one year and gets renewed every year. Premium payments start low but can increase a lot over time

How does term life insurance work?

With term life insurance, you pay a premium to an insurance company for a set number of years. In turn, the company agrees to give money to anyone you choose (beneficiaries) if you die within your term.

Usually, the shortest term you can get for term life insurance in Canada is 1 year and the longest is up to 40 years. But this also depends on the provider. Some companies won’t offer less than 5 years and some may not offer more than 30 or 35 years, especially for seniors.

You could get a 1-year term that renews every year. But this is also an expensive option.

Who should get term life insurance?

Term life insurance is ideal for those who:

• Want affordable life insurance for a set number of years
• Are going through a major life event as a young adult, like getting married, having children, buying a home, etc
• Have temporary needs like supporting a financial dependent, paying school fees, paying debts, etc
• Have outstanding mortgage payments
• Are on a tight budget

Pros and cons of term life insurance

Pros

• Affordability: Lower premiums compared to permanent life insurance
• Simplicity: Easy to understand and straightforward coverage
• Flexible terms: Choose a coverage duration that fits your needs

Cons

• Temporary coverage: Only provides protection for a specified term
• No cash value: Doesn’t accumulate savings or investment component
• Renewal cost: Premiums can increase significantly upon renewal

Permanent life insurance

Permanent life insurance, as the name suggests, will never end as long as you continue to pay your premiums. In other words, a permanent life insurance policy will cover you for your entire life. Upon your demise, your beneficiaries will receive a tax-free death benefit.

There are several types of permanent life insurance policies that Canadians can choose from. These are:

• Non-participating whole life insurance — has an investment component that builds cash value over time but does not pay dividends
• Participating whole life insurance — has a cash value component and also pays annual dividends
• Universal life insurance — has an investment component that the insured person manages. Also called indexed universal life insurance policy
• Term-to-100 life insurance — a policy that lasts for the rest of your life but does not build cash value like other types of permanent coverage
• Funeral or final expense insurance — a permanent life insurance option that is designed to cover a person’s end-of-life expenses like funeral costs and also help with estate planning

How does permanent life insurance work?

In addition to the lifetime insurance coverage, most permanent insurance policies also include a savings or investment component. Part of the premium is used to pay for investments, which accumulate within the policy on a tax-deferred basis and generate a cash value that can be accessed as needed by the policyholder.

The policyholder may use the cash value as savings available for retirement through partial or full withdrawals or by taking loans against the cash value by offering it as collateral to a lender. Due to the lifelong coverage and the embedded investment component, the premiums for permanent life insurance are much higher than other products.

Who should get permanent life insurance?

Permanent life insurance is best suited to protect ‘permanent’ or ‘lifelong’ needs such as:

• Estate tax liabilities
• Care for a disabled child or dependent
• Liquidity for closely held businesses
• Funeral expenses

Pros and cons of permanent life insurance

Pros

• Lifetime coverage: Offers protection for your entire life
• Cash value: Accumulates savings over time that you can borrow against
• Fixed premiums: Steady payments that don’t increase with age
• Dividends: Potential for dividend payments with certain policies

Cons

• Higher cost: Generally more expensive than term life insurance
• Complexity: Can be more complicated to understand and manage
• Lower returns: Cash value growth may be slower compared to other investments

Types of permanent life insurance

What is whole life insurance?

Whole life insurance is the most popular type of permanent life policy. It has most of the features of permanent policies, including:

• Lifelong coverage
• Cash value growth
• Annual dividends (participating or par policies only)
• Guaranteed payout
• Higher premiums than term insurance

What is universal life insurance?

Universal life policies are similar to whole life insurance, except you control the investment options yourself. Normally, the insurance company does it for you.

Experienced investors may use universal policies because it has the potential for a higher rate of return when they manage it themselves. But, it also means there’s a higher risk of loss.

Universal life offers:

• Lifelong coverage
• Self-directed investment component with cash value growth
• Growth potential depends on market conditions
• Guaranteed payout
• Higher premiums
• Flexible premium amounts can change

Compare the different types of life insurance policies

While all life insurance pays out a death benefit, not every policy is built the same. So how do they compare? The chart below shows how some of the most popular types of life policies compare.

Types of life insurance by underwriting

Fully underwritten policies

A fully underwritten policy is a type of policy where the life insurance company asks many personal questions about your health, job, and more to figure out how risky it is to insure you. They might also ask you to do a medical exam.

Accelerated policies

These are a type of policy that does underwriting more quickly by using technology and sometimes skipping the medical exam.

No-medical life insurance

Simplified issue life insurance — a life policy that only asks a few health questions and does not need a medical exam. Gives you a higher chance of being approved but at a higher cost and with less flexibility

Guaranteed life insurance — a life policy that does not ask any health questions or need a medical exam. You are guaranteed to be approved but there are many drawbacks

Different underwriting options exist for both term and permanent types of insurance. Although, no-medical policies usually only offer lifelong protection.

Types of no-medical life insurance

No-medical life insurance is a type of policy that allows individuals to obtain coverage without undergoing a medical exam. This can be particularly beneficial for those who may have difficulty qualifying for traditional life insurance due to health concerns or other reasons. Here are the main types of no-medical life insurance and who they are best for:

Accelerated Issue Insurance

Accelerated Issue Insurance provides a quick approval process, often within days, and requires minimal health-related questions. It offers moderate coverage amounts and can be a good fit for:

• Busy professionals: Those who need coverage quickly without the time for extensive medical exams
• Individuals with minor health issues: Those who may have slight health concerns but are generally in good health
• Young families: Parents who want to ensure they have coverage in place without delays

Simplified Issue Insurance

Simplified Issue Insurance requires a more detailed health questionnaire but still avoids needing a medical exam. It usually offers higher coverage amounts than Accelerated Issue Insurance and is suitable for:

• Middle-aged individuals: People in their 40s or 50s who need moderate to high coverage
• Those with manageable health conditions: Individuals with conditions like controlled diabetes or high blood pressure
• Individuals seeking faster approval: Those who prefer a quicker process than traditional life insurance but need more coverage than Accelerated Issue policies provide

Guaranteed Issue Insurance

Guaranteed Issue Insurance is available to anyone who applies, regardless of their health status. There is often a waiting period before full benefits are payable, and it typically provides lower coverage amounts. This type of insurance is ideal for:

• Seniors: Older adults who may not qualify for other types of life insurance due to age or health
• Individuals with serious health conditions: Those with significant health issues who are otherwise uninsurable
• People needing basic coverage: Individuals looking for a policy to cover end-of-life expenses and minor debts

Other life insurance types

While these are the major types of policies you can get from an insurance company, there are alternative options available through a bank or lender. These include:

Mortgage life insurance

Mortgage Life Insurance is a policy designed to pay off the remaining balance of your mortgage if you pass away before it’s fully paid. This type of insurance is particularly beneficial in the following scenarios:

• Homeowners: Ensures that the mortgage is paid off, allowing family members to keep the home without financial strain.
• Young Families: Provides security for families with young children, ensuring they have a stable living situation.
• First-Time Buyers: Offers peace of mind for new homeowners who may have significant financial commitments tied to their mortgage.

Credit life insurance

Credit Life Insurance is a policy that pays off a specific debt if the borrower dies before the loan is repaid. It is commonly used in the following situations:

• Auto loans: Ensures that car loans are paid off, preventing repossession.
• Personal loans: Provides coverage for personal loans, protecting co-signers or family members from financial burden.
• Credit card debt: Pays off outstanding credit card balances, reducing financial pressure on the deceased’s estate.