Types of Life Insurance in Canada (A Simple Explanation)

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Deciding which type of life insurance is right for you can depend on several factors, like how long the policy should last, type of coverage, and how much you can pay.

We’ll break down the types of life insurance policies and how to determine which is best for you and your family. As jargon- and fluff-free as possible!

Choosing the best life insurance policy for you and your family is a big decision. Here are some points for you to consider.

  • The type of life insurance you choose to buy should be closely related to your age and stage of life.
  • Life insurance is a good idea if you have dependents to ensure they are financially supported if you pass away.
  • Your life insurance application will be assessed based on coverage needed, your overall lifestyle, health and your age.

What are the three main types of life insurance?

The three main types of life insurance policies in Canada are term life insurance, whole life insurance and universal life insurance. 

There are other kinds of insurance as well and we go into them in-depth here, if you want to skip down to it. But here’s the TL;DR version of the three primary types.

1) Term life insurance

Cost: $ Term life insurance is the most cost-effective type of insurance.
Policy length: Flexible—it can be for a term of 10, 20 or 30 years or can be set up to expire when you reach a certain age.
Key advantage: Affordable coverage for the years you have financial obligations.
Ideal policyholder: The average Canadian family with kids and a mortgage.

2) Whole life insurance: 

Costs: $$$ Whole life insurance tends to be more expensive because of the length of coverage and features included.
Policy length: For as long as you’re alive, assuming you’re making your monthly payments.
Key advantage: Policies have a cash value, stable monthly payments, and a guaranteed payout.
Ideal policyholder: Wealthy Canadians that have already maxed out their TFSA and RRSP and want to pass on a tax-free inheritance, or those with permanent financial commitments, such as a disabled child.

3) Universal life insurance: 

Costs: $$$ Universal life insurance costs more than term life insurance, but you’re able to adjust your monthly payment, but tinkering with your plan can sometimes backfire and end up costing you more.
Policy length: It’s a type of permanent life insurance, so it will last your entire life, as long as you’re making your monthly payments.
Key advantage: Flexibility to change your payment and death benefit amounts, and the potential of a high return on the investment part of your policy.
Ideal policyholder: Younger people making a very high income, who don’t need the money for decades and are not risk averse.

How do I decide what type of life insurance is best for me?

The type of life insurance that’s best for you depends on the following factors:

  • Your age: A significant factor when considering what type of life insurance is best suited for you. The best time to invest in a life insurance policy is when you’re young and healthy. Your premiums will be lower, and you’re less likely to have medical issues. 
  • Your financial situation: Suppose you and your family carry a mortgage on your property or hold any debt. In that case, you should consider a life insurance policy that would cover those expenses when you pass away.
  • How you want to protect your dependents: If you’re the breadwinner in your family, you should also consider a life insurance policy that will cover your income plus some extra income to cover higher-end expenses when you pass away. Learn more about life insurance for couples, life insurance for children.
  • Your goals:  Do you want to leave money behind to help your family cover any estate taxes or funeral expenses? Do you have permanent obligations, like a disabled dependent? Are you willing to pay more for a policy with a guaranteed cash value you can access?

Recommended reading: How Does Life Insurance Work?

In most scenarios, term is the best type of policy for the average Canadian family. It’s affordable and provides coverage for the years you need it the most: when the kids are young, while you’re paying off your mortgage, etc. 

To make it easy for busy families, PolicyMe has taken the unnecessary steps out of getting term life insurance (for example, many applicants won’t need a medical exam) to make the process as quick as possible for anyone looking for affordable term policies.  

What are the different types of life insurance plans?

Here’s a quick guide for all the types of life insurance, including those you’ve (probably!) never heard of. 

Broadly speaking, the most popular type of life insurance products fall under two main categories, term life insurance and permanent life insurance. Here’s a visual breakdown of those types:

Types of Life Insurance in Canada: Chart breaking down the main types of life insurance

Term life insurance

Term life insurance is paid out to the beneficiary if the insured person passes away during the length of the policy. You can choose either a fixed length (10, 20 years etc.) or set it at a certain predetermined age.

Need all the details? Skip down to our full explanation of term life insurance here.

Whole/permanent life insurance

If you have a whole life insurance policy, the cost of your individual payments never changes. The cost of your life insurance premiums doesn’t increase because you’re locked into your rate, regardless of any medical changes. 

Need all the details? Skip down to our full explanation of whole/permanent life insurance here.

Universal life insurance

Universal life insurance is like whole life insurance. You still have coverage for your entire life, but you don’t pay premiums. Instead, you make investments into your policy for the amount of your choosing. 

Need all the details? Skip down to our full explanation of universal life insurance here.

Group life insurance

Group life insurance is provided by an employer. It’s usually part of a company’s benefits package and provides coverage for your family if you pass away. However, you lose this benefit if you leave the company before your passing. 

Need all the details? Skip down to our full explanation of group life insurance here.

Mortgage life insurance

Mortgage life insurance covers the outstanding balance you owe on your house. Because this type of policy is generally not fully underwritten (meaning the premium amounts aren’t based on your health); it’s a pricey option. A mortgage life policy can cost much more than a term life policy with the same length and coverage.  

Need all the details? Skip down to our full explanation of mortgage life insurance here.

No medical life insurance

No medical life insurance, otherwise known as simplified/guaranteed issue life insurance, is best for those with pre-existing conditions, who engage in “high risk” activities, or can’t get a medical exam. While it’s quicker and easier to get approved, these policies usually cost much more and offer a smaller payout.

Indexed universal life insurance

Indexed universal life insurance combines a few types of life insurance products. It provides a payout once the owner has passed away, like whole life insurance but also has a cash value component, like a permanent life insurance policy that increases as you pay premiums. 

Variable life insurance

Variable life insurance is a type of policy that is for the more investment-minded owner. There’s an investment component: a cash value that depends on how your selected investments perform. 

Variable universal life insurance

This type of life insurance is also a bit of a mixture of variable and universal. You can pick and choose your investments, death benefit and premiums. 

Participating whole life insurance

Participating whole life insurance is lifelong and pays your chosen beneficiary a tax-free payment when you pass away. If you pay your premiums throughout your life, the policy’s value will increase over time. 

Final expense insurance

Final expense insurance covers medical bills, burial and any funeral costs that accumulate after someone passes away. Some companies also call this burial insurance. 

What is term life insurance?

Term life insurance is ideal for most young Canadian families since you’re only paying for coverage during the years you need it most (in your 30s, 40s and 50s).

  • It’s a type of life insurance that gives you coverage for a fixed period of time, such as 10, 20, or 30 years.
  • It’s the best option if you’re looking for protection for the years you have significant financial obligations (like a mortgage and kids at home). 
  • Your beneficiaries will receive a payout if you die during the timeframe of your policy.

If you still need insurance after the term expires, you have two options. 

  • If you’re still pretty healthy, you can just apply for a brand new policy (at a higher rate).
  • If you’ve been diagnosed with a severe illness, term life insurance comes with a “guaranteed renewability” feature, so you can still be covered. 

On average, PolicyMe offers the most affordable rates for term insurance in Canada, with a no-obligation instant quote you can get online. 

What is whole life insurance?

Whole life insurance is an option for wealthy Canadians who are interested in passing on a tax-free inheritance or have permanent obligations, like a disabled dependent. 

  • It pays out a benefit to your beneficiaries, regardless of when you pass away. In other words, it covers you for your entire lifetime. 
  • It’s much more expensive because a payout is guaranteed, regardless of if you die young or old. 
  • Whole life insurance includes a death benefit (just like a term life insurance policy) and a cash surrender value. 

How does it work? 

The premiums you pay early on are higher than the amount needed to cover the risk of your death. These “excess premiums” form the policy’s cash surrender value.

But as you age, the premium you're paying won’t be enough to cover the cost of your policy. At this point, your insurance company will start pulling money out of your cash surrender value account to cover the difference.

Term vs. whole life insurance

For most young families, term life insurance is the way to go. Having life insurance protection for longer than you need may not seem like such a bad thing, but why pay for something you don’t need? 

Term life insurance lets you pay for coverage only during the years when it matters (when your mortgage is at its highest and you have young kids).

Here is a super easy cheat sheet for comparing term and whole life insurance.

Types of Life Insurance in Canada: Chart detailing difference between term vs whole life insurance

If you’d like to learn more about why we almost always recommend term life insurance to our customers, read Term vs Whole Life Insurance: What’s the Difference? for the full breakdown.

What is universal life insurance?

Universal life insurance is a type of whole life insurance with adjustable monthly payments. Although it can seem more complex, universal life insurance gives you more flexibility than whole life insurance policies do. 

Universal life insurance combines life insurance with tax-advantaged investing. Like with whole life insurance, part of your universal life insurance premium is used to cover your death benefit, whereas the rest is invested.

The investments form the cash value of the policy. In this case, but your insurance company gives you some flexibility to choose how and which funds you'd like to invest in. 

What is mortgage life insurance?

Mortgage life insurance is a type of policy that covers the balance remaining on your house if you pass away. 

If you own a home, you may have been asked whether you want to purchase mortgage protection during the homebuying process. 

The policy works like this: if you pass away, your insurer guarantees that the remainder of your mortgage will be paid off so that your family can stay in the home you bought, and their standard of living won’t have to change. 

But mortgage life insurance can cost significantly more than a term life policy for the same amount. And since it’s strictly for your mortgage only, the payout won’t cover any of your other financial obligations or help support your family after you’re gone. 

What is group life insurance?

Group life insurance is usually offered as part of an employee benefits plan. Many people have this type of coverage through work, and In most cases, group life insurance gives you coverage that's 1 to 2x your annual income.

But group life insurance coverage tends to be inadequate for most families. Your annual salary (or even twice that) might seem like a significant amount of money. But it’s likely not enough to cover your debts, mortgage, and dependents' living expenses, or their future needs. 

Recommended reading: Group vs. term life insurance

In summary: the right type of life insurance depends on your needs and financial situation

The trick to life insurance is making sure you have the right amount of coverage without overpaying. PolicyMe’s rate engine helps you determine how much coverage you need and provides you with an instant, affordable quote.

Not sure how much life insurance you need? Use our term life insurance calculator.

FAQs: Types of life insurance coverage

What types of life insurance have cash value?

Both whole and universal life insurance policies have cash values. You pay a monthly premium for the coverage portion of the plan, and any money you contribute in excess goes into the savings component of the plan. 

As long as you have enough money to fulfill the minimum coverage required of your policy, you can withdraw from the savings portion. But you may have to pay a fee to do so, and you’ll be subject to other restrictions.

These withdrawals could impact the amount of your death benefit, and these plans already cost significantly more than term life policies. You could easily purchase a term policy and invest the difference independently. You’ll have more control over how your money is invested and enjoy more flexibility in using your funds. 

What kind of life insurance starts out as temporary? 

Convertible life insurance is a type of term insurance that allows you to change it to a whole or universal policy at a future date without a medical exam. 

Convertible life insurance costs more than conventional term policies because of this flexibility. And if you choose to convert it into a permanent policy, your premiums will increase. 

Convertible life insurance is potentially ideal for someone who can’t afford or would prefer not to pay the high premiums of a permanent policy. If they expect needing whole/universal coverage once they’re older or their health has declined and are worried they won’t qualify, convertible life insurance could be a good option. 

What type of life insurance can you borrow from? 

You can borrow from permanent whole life insurance policies. Although interest rates are low and this type of borrowing doesn’t affect your credit rating, these loans are borrowed against your policy's cash value

So technically, you’re not taking the money from your policy - the insurer is loaning you the funds using your policy as collateral.

If you’re unable to repay the loan according to your policy’s schedule, your death benefit may be reduced, or you could lose your coverage altogether. 

What type of life insurance is best for seniors? 

In general, seniors in good health who need life insurance should consider term life insurance. These plans are generally more affordable than permanent or no medical options, and you can always opt to renew your coverage if you still need it when the term expires.

However, if you want to minimize estate taxes when leaving behind an inheritance for your beneficiaries, whole life insurance may be more suitable. 

And if you have significant health issues that may make it a challenge to be insured, you may choose to opt for a no medical policy instead.

What type of life insurance is best for smokers? 

Term life insurance is likely to be the most affordable life insurance option for smokers. Although it’ll cost more than comparable policies for a non-smoking policyholder, the premiums can still be relatively inexpensive. 

As a smoker, your insurance provider will most likely ask for a medical exam before approving your application. 

You can get quotes from a few different insurers and compare to find one with the best rates for your situation. Some companies may offer you the option of lower premiums if you can kick the habit for at least 12-24 months. 

What different types of life insurance riders are there? 

Insurance riders let you customize your coverage. They’re optional add-ons you can purchase to supplement the basic terms of your policy. 

Some examples of riders include:

  • Accidental death benefit rider- provides a lump sum payment for your beneficiaries if you die due to an accident.
  • Guaranteed insurability rider - allows you to buy more coverage in the future without a medical exam.
  • Child term rider- includes life insurance coverage for your children.
  • Critical illness rider - provides a lump sum payment if you’re diagnosed with a critical illness outlined in your policy.
  • Mortgage disability insurance - helps cover your mortgage payments if you become disabled.

Different insurers will have different insurance riders available.

While PolicyMe doesn’t have any optional riders for our term life insurance plans, all our policies include free child coverage of $10,000.

Laura McKay

COO & Co-Founder

About the Author

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