WATCH: Term life insurance explained
What is term life insurance?
Term life insurance is a policy that provides protection for a set number of years — such as 10, 20, or 30 years. The “term” may also extend to a certain age, like until you turn 65 years old.
If you outlive your term, your coverage will expire and your beneficiaries won’t get any money. But if you die during your term, your loved ones will receive a one-time lump sum payment. This is known as the “guaranteed death benefit.” You can name multiple beneficiaries and decide how to allocate the funds between your beneficiaries when you sign up for a policy.
The amount of coverage you can buy varies between insurers. Depending on your income, assets and financial obligations, you could end up purchasing a policy that’s valued anywhere from $10,000.00 to $10 million. Let’s say you took out a 20-year, $250,000.00 term life policy. If you pass away while the policy’s in force during those 20 years, that amounts to $250,000.00 which will be distributed tax-free among your beneficiaries according to your wishes.
Why buy term life insurance?
Term policies are popular with people who don’t want life insurance for their entire lives. For example, it could be an ideal life insurance option for young parents who want just enough coverage for their family until their kids are old enough to start earning their own money.
How to purchase term life insurance
Most life insurance providers offer a term life insurance option, so there’s an opportunity to shop around and find the best policy for your needs. Once you’ve decided on your term and how much coverage you want to buy, follow these steps:
- Get quotes from a handful of providers.
- Compare the quotes, including the policy features, premiums and available riders.
- Choose the company that best suits your needs and budget.
- Apply for coverage. Typically, this involves filling out a form with your personal, contact and employment details, as well as a questionnaire about your health, lifestyle, and family medical history. Some insurers will require a medical exam, which can be scheduled at a convenient time for you. During the medical exam, a technician will likely record your height, weight, blood pressure, and ask questions to assess your medical history. This information will then be passed on to your insurer.
- Assess and adjust your coverage as needed. When your insurer comes back with a proposed policy, review it and request any changes.
- Sign off on your policy. When you’re happy with your policy and premium, sign your policy documents and designate your beneficiaries.
Can I get coverage without taking a medical exam?
Yes. Some insurers offer term life policies that don’t require a medical exam, and some even offer instant-approval policies. If you opt for a no-exam policy, just know your insurer will likely charge a higher premium to compensate for the risk. In most cases, you’ll still need to complete a questionnaire about your health and family medical history.
What factors impact the cost of term life insurance
It’s been estimated that Canadians on average pay close to $58.00 every month on term life insurance policies. But this number can vary substantially depending on the policy holder’s circumstances. Also, different insurers may put more weight on some criteria over others. Here are some common factors insurers will use to price your policy:
- Age. Perhaps the biggest price determinant – lower ages will typically translate into lower premiums.
- Gender. Because men have a lower life expectancy than women, men will generally have to pay higher premiums than women.
- Certain health indicators. Usually your weight, height, blood pressure and personal medical history will play a part in how much you have to pay.
- Family health history. If there is a history of diseases in your immediate family – like cancer, cardiac arrest, kidney disease or stroke – it will likely affect your premiums.
- Smoking. If you’re a smoker, how often you smoke will usually be a factor when determining the price of your premiums.
- Substance use. A history of alcohol or drug abuse resulting in mandated rehabilitation may increase your premiums.
- High-risk occupations and hobbies. Certain lifestyle factors like your occupation and hobbies can be considered riskier than others and could impact your premiums. For example, working in construction is riskier than accounting, and a skydiving hobby is obviously more dangerous than needlepoint. Insurance companies will likely take all these lifestyle components into account when deciding your premiums.
- Driving and criminal records. The price of your policy may also be impacted by things like having a series of traffic tickets, DUIs or arrests on your record.
Pros and cons of term life insurance
- Cost-effective. Term life insurance is the cheapest type of coverage.
- Tax-free payout. The guaranteed death benefit is non-taxable.
- Convertibility feature. Some providers offer a conversion option, which means you can transition to a permanent policy without cancelling your current term policy.
- No-exam policies on offer. Since term life insurance is temporary and straightforward, some insurers issue same-day policies.
- Expiry date. Your insurer will terminate your coverage at the end of your term, and you’ll lose all of the money payed towards your premiums. If you still need life insurance, you’ll have to purchase a new policy or renew your current one — usually at a higher premium.
- No cash value. These policies don’t become a cash asset over time or offer a return of investment.
Is term life insurance worth it?
If you have people relying on your income, a life insurance policy can ease the financial burden on your beneficiaries when you die. Term life insurance is affordable. It’s designed to replace your income during the years your family needs it most, like when you’re paying off a mortgage or raising children.
Since it’s cheap and temporary, a term policy is a simple way to protect your loved ones if you were to die prematurely.
Types of term life insurance
There are various types of term life insurance. These include:
- Joint first-to-die term insurance. If you’re considering getting term insurance as a couple, joint first-to-die is a good option. It’s usually cheaper than two individual policies, and would be payed out to the surviving partner should the other die within the term. However, realize that it can be fairly inflexible to divide in the event of a divorce.
- Annual renewable term (ART) life insurance. This is a one-year policy that your provider guarantees to renew every year for a set number of years. During this “insurability period,” you can renew your coverage without reapplying or taking another medical exam — but you’ll pay a higher premium at each renewal. ART policies are best for covering short-term needs.
- Return of premium (ROP) term life insurance. Usually sold as a rider, ROP policies refund all or part of your premiums if you’re still alive at the end of your term. While there’s a possibility you could get your money back, this type of coverage is expensive. You can expect to pay roughly 50% more in premiums than a traditional term life policy.
- Simplified issue term life insurance. This policy doesn’t require a medical exam — only the health questionnaire. While coverage often kicks in immediately, simplified issue policies are expensive and and the death benefit is capped at small amounts. They suit those who need coverage ASAP and can afford the higher premium.
- Guaranteed issue term life insurance. If you want to avoid answering any questions about your health, look into guaranteed issue term life insurance. This policy skips the medical exam and health questionnaire, and approval is guaranteed. It’s often marketed to seniors who just want to cover their final expenses. Keep in mind that because this is often more expensive than other term policies, it should be used as a last resort only if you’re denied traditional and simplified life insurance.
Term or whole life insurance: Know the difference
For the average person, term life insurance is sufficient. It’s the cheapest coverage that still provides peace of mind and a sense of financial security for your family when they need it most. It suits those who want to cover specific, temporary financial obligations, like a mortgage, student loans, or child care.
If you want lifelong coverage, it’s worth looking into whole life insurance — a type of permanent policy. It’s much more expensive than term life insurance because it has an investment component. When you pay your premium, part of it is invested to give your policy a cash value. During your life time you can even borrow from this cash value in some cases. Because of this cash value component, whole life insurance is ideal for those who want to treat their policy as a buildable cash asset.
Term life insurance offers protection for a set period of time, making it ideal for those who have a specific need for life insurance and want cheaper coverage. But it doesn’t have a cash value, so if you survive the policy, you won’t get any money.
Before buying a policy, be sure to compare life insurance providers and policy features.
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