From an insurance perspective, there’s no good or bad or different types. A $100,000 death benefit from one type of life insurance looks exactly the same as a $100,000 death benefit from another type. Ultimately, the product (the death benefit) you purchase with life insurance is the same across all policy types.
So what generates the conversation around different types? The answer lies in how you pay premiums over time.
Here’s how it works. True life insurance premiums would be based on your risk of dying. The biggest factor for that risk is your age – every year you’re a year older, you’re one year closer to dying. So technically your life insurance premiums should go up every single year. A policy of this type (premiums that go up every year) would be called “One Year Term”. It’s ‘One Year’ because your premiums increase every year, and it’s term because it’s pure life insurance coverage.
Canadians however, are not interested in a life insurance policy where premiums go up every year – the life insurance becomes unaffordable as we get older.
So what’s the solution to premiums that go up every year? The solution is to take the underlying yearly increasing costs and level them out (or sort of average them out) over a specific period of time.
Take the underlying one-year increasing costs of life insurance for the next 10 years and average them out. If a life insurance company charges you the average premium for the next 10 years, they still take in the same total premium over the 10 years. But your premiums are now level for the next 10 years. Such a policy is called a 10-year term, and it’s a policy type available right here on The Term Guy website.
This process gives us all the variations of term life insurance. Simply take the underlying yearly-increasing costs and average them over 20 or 30 years, and you now have a 20-year term or 30-year term. It’s still all the same life insurance, just with premiums that are level for 10, 20, or 30 years.
At the end of the ‘term’ (which is the level period for the premiums), most term policies will remain in force, but at a higher premium. This future time frame of higher premiums is known as a renewal. Premium increases at renewals are so high, that most consumers should expect to cancel their term life insurance policy at the end of the term. However, the ability to renew a policy (called “renewable term”) is an extremely important feature that you should ensure that your term policy has. Note that many term policies purchased online do not have renewals. Policies offered online at The Term Guy, however, are renewable for life.
The conversion privilege allows you to switch your term life insurance policy to a permanent lifetime policy in the future without providing any medical information. It effectively locks in your insurability now, then allows you to use it in the future to switch to permanent life insurance.
Conversion is an extremely important option. If you don’t need the privilege, then you won’t care that it’s available. However, if you become uninsurable during your term, then the option will be ‘everything’ because it allows you to lock in life insurance for the rest of your life without regard to your current uninsurability. At that point, it’s likely to be the only way you’ll be able to get life insurance.
Many term policies purchased online do not have conversion. Policies offered online at The Term Guy do offer the conversion privilege, at no charge.
Accelerated Death Benefits allow you to access a portion of your death benefit while still alive. The idea is that you have a shortened lifespan (often less than 2 years) but need access to some of the funds prior to your passing. Based on an evaluation by the life insurance company at that time, you may be able to access some of your death benefit while still alive, in the form of a policy loan.
Most term life insurance policies in Canada are 10 year term, 20 year term, and 30 year term (with 20 year term being the most popular). Other terms such as 15 and 25 year exist but are much less common and are not price competitive.
For example, a 15 year term will be substantially more expensive than a 10 year term, but not that much cheaper than a 20 year term. So consumers will typically either take the increased savings of a term 10, or bump up to a full 20 year term at very little incremental cost.
The second general class of life insurance is permanent life insurance.
We saw with term life insurance that premiums are simply averaging of one year term insurance costs (or the actual cost for your age) over longer periods such as 10, 20, or 30 years. What happens if we extend this process over your entire lifetime? I.e. what’s the average cost per year of life insurance over your entire expected lifetime?
Doing this gives us a ‘level term for life’ and is called permanent life insurance. Permanent life insurance has level premiums for life.
Permanent insurance will have premiums that are initially much higher than term life insurance. But because term life insurance premiums increase over time and permanent life insurance premiums do not, eventually the premium for permanent life insurance will actually be cheaper than term life insurance.
The cash surrender value is often misunderstood. It is not an investment.
In the early years of a whole life policy, you are paying premiums far higher than the actual yearly cost of insurance. The insurance company doesn’t spend that overpayment. Instead, they invest the money from these policies in a fund called a reserve. They are saving these funds to build your death benefit – so that when you die in 50 or 100 years they don’t have to find the death benefit somewhere – it’s already been saved up over the years from those overpayments of premiums. In fact, the calculations are such that the insurance companies project to have your entire death benefit saved at your expected age of death. Basically, your early premiums go towards funding your death benefit in the future – exactly how you’d expect it to work if you think about it.
If you cancel your policy early however, the life insurance company no longer needs that reserve towards your death benefit. They refund you a portion of that amount, which is known as your cash surrender value. Again, it’s a repayment of their savings towards your death benefit and not an investment.
Enhanced Whole Life is actually a combination of Whole Life and one year term. The one-year term portion is inexpensive in the early years, so it helps keep the total premium cost low.
Through the years, the whole life section creates additional mini-whole life policies called paid up additions. These paid up additions slowly replace the one-year term portion of the policy. This process however is not guaranteed.
Ideally, the paid up additions replace the one-year term portion before the one-year term becomes absurdly expensive (remember that one-year term life insurance costs increase every year as you get older). However, because this process is not guaranteed, it’s possible that you end up with a policy in the future that still has a very expensive one-year term insurance component – which can cause your premiums to skyrocket.
Because of the lack of guarantees in Enhanced Whole Life and the resulting downsides of expensive and unaffordable insurance in the future, we do not recommend enhanced whole life.
Term to 100 is simply level premiums for life, no cash surrender values, no other attributes. It’s similar to whole life insurance but does not have a cash surrender value.
Term to 100 used to be very popular in Canada but companies have, for the most part, either dramatically increased premiums for this type of insurance, or stopped offering these policies altogether.
Universal life insurance is a hybrid policy consisting of two internal components – a life insurance component, and an investment component. Premiums paid into the policy first pay down the insurance costs. If you choose to pay above this amount, any additional premiums are placed into the investment portion of the policy.
These investments are generally not guaranteed and thus expose your life insurance policy to the possibility of not performing as expected.
There are generally two different types of universal life insurance policies that are distinguished by the type of life insurance costs inside the policy.
This type of policy has one-year term premiums as the ‘Cost Of Insurance’ or COI. Insurance costs are thus inexpensive in the early years of the policy, but skyrocket as you get older.
To offset the skyrocketing future insurance costs, these policies are typically structured so that you pay additional premiums into the investment portion. In the future when the insurance costs become unaffordable, the investment portion is then projected to help pay the insurance costs.
If the investments don’t perform as expected you can be left with a policy where the investments are not enough to pay for future insurance costs – which means you would be required to make up that difference through increased premiums. And that can leave you with an unaffordable life insurance policy in the future.
Due to this lack of guarantees and the possibility of future premiums skyrocketing, The Term Guy does not recommend Universal Life insurance policies that have a YRT COI structure.
This type of universal life insurance policy has costs of insurance that are term to 100 – guaranteed level for life. With these policies, if you simply pay the monthly insurance costs and contribute nothing to the investment portion, you effectively have a term to 100 life insurance policy; fully guaranteed level premiums for life. This has become an effective and inexpensive way for Canadians to access a term to 100 life insurance policy.
Note: Some life insurance companies will use a whole life policy instead of a term to 100 COI. The effect is the same – you have level premiums for life, guaranteed. Depending on the competitive cost, this can also be an effective way for Canadians to access permanent life insurance.
Some whole life policies have a participating component that produces a small amount of money back each year. These dividends can then be used in a variety of fashions. One common choice is Paid Up Additions, which are small whole life insurance slices that have no future premiums due (they’re paid up). The benefit to dividends is that while they are not guaranteed and could be $0 in any year, they are vested so they can’t be clawed back. If you are using dividends to purchase Paid Up Addition whole life insurance slices (which basically increase your coverage amount in small amounts over time), those increases are locked in and cannot decrease.
While dividends are seldom financially effective for adults, they can be useful for children’s life insurance policies as it allows the coverage amount to grow over time. This allows the policy to roughly keep pace with inflation, even if the child becomes uninsurable in the future.
The optional investment portion of a universal life insurance policy is tax deferred. Growth inside the policy is not taxed unless withdrawn which can be beneficial in some circumstances. However, other fees in the investment place a heavy drag on the investments. The Term Guy does not recommend using the investment portion of a universal life insurance policy except in rare circumstances. Almost all Canadians should avoid using a Universal Life insurance policy for its investment benefits – you’ll find more effective investments elsewhere.
We’ve seen that the different types of life insurance policies are based on how we pay the premiums over time. Therefore we want to match the policy that has premiums that are level for the time frame that we need the life insurance coverage for.
10-year term premiums will be the least expensive policy type over 10 years. Therefore, if you need insurance for roughly 10 years and then no longer need coverage, a 10-year term policy would be your least expensive choice for 10 years.
After 10 years, a 10-year term policy has much higher renewal premiums. Therefore, over time frames closer to 20 years, a 20-year term policy (with level premiums for 20 years) will be less expensive than a 10-year term policy that you’re paying renewal premiums on. If you need life insurance for roughly 20 years, a 20-year term policy will be your least expensive solution. Similarly for a 30-year term.
If you need life insurance beyond 30 years, a permanent insurance policy is going to be less expensive over your entire lifetime (even though initially premiums are substantially higher than a term life insurance policy). If permanent insurance is needed, The Term Guy suggests comparing premiums on Guaranteed Whole Life and Universal Life Insurance with Level COI – and selecting from those two types of policies. Both will give you guaranteed level premiums for life.
The best type of life insurance for Canadian families during their income-earning/family years is term life insurance. It provides inexpensive life insurance during those years when it’s important to keep costs as low as possible.
However, as we get older, many of us start to look at final expense coverage as described above. Term insurance, however, does not provide for effective final expense coverage. For final expense coverage, the proper solution is permanent life insurance.
If we accept that we need a large amount of life insurance during our family years, and a smaller amount for the rest of our lives after that, then the perfect policy is a blended, or ‘layer-cake’ policy that consists of a permanent component and a term life insurance component.
E.g. A Canadian needs $750,000 for 20 years during their income-earning period, and $50,000 for final expenses after that until death.
A Canadian purchases $700,000 term 20 (premiums level for 20 years) plus $50,000 permanent life insurance (premiums level for life). They now have a total of $750,000 for 20 years at which point they cancel their term policy and are left with $50,000 of permanent life insurance. Note that at that time they are now 60 years old, but the $50,000 premiums are based on a 40-year-old – because they locked in the premiums for the permanent portion of the policy 20 years ago.
A Canadian purchases $750,000 of a 20-year term. At the end of 20 years, they cancel their 20-year term and purchase $50,000 of permanent life insurance.
There are two problems with the modified perfect policy. First, there’s no guarantee that you will be able to medically qualify for the $50,000 of permanent life insurance in 20 years. The solution to this is to have a term life insurance policy that offers the conversion option. With the conversion option, at age 60 you simply convert the 20-year term to permanent life insurance (no medical exam or requirements needed), then reduce the coverage amount down to $50,000 – guaranteed a permanent policy without a medical exam. This illustrates why the conversion option is so important in a term life insurance policy – because it guarantees your ability to purchase a permanent life insurance policy in the future. Again, we note that conversion is not available in many online life insurance policies (the conversion option is included at no charge on policies offered here at The Term Guy website).
The second problem is that even if you use the conversion option, premiums for the new permanent life insurance policy will be for a 60-year-old – compared to the premiums in the perfect policy where the permanent policy premiums were locked in at age 40. There’s no solution to this and it should be considered a trade-off. For many Canadian families, cheaper term premiums at age 40 are an acceptable trade-off to having higher permanent life insurance premiums later in life. As long as your term life insurance policy has the conversion option, you’re simply pushing the cost of permanent life insurance into the future where hopefully you’ll have more discretionary cash for life insurance premiums anyway.
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Policies are underwritten by Wawanesa Life Insurance, a Canadian life insurance company rated A Excellent.
The Term Guy is a licensed life insurance agency serving residents of Ontario (Lic #37992M), British Columbia (Lic. #LIC-2021-0030559-R02), and Alberta (Lic. #5-11247944-2021).