Types of Life Insurance in Canada Explained

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In This Article

Key takeaways:

  • Term life insurance is quite affordable and covers you for just as long as you need it, making it one of the best options for most Canadians.
  • Whole life insurance is best for high-net-worth individuals looking for tax-deferred benefits.
  • Universal life insurance is ideal for investment-savvy individuals in a high tax-bracket who have already maxed out their TFSA and RRSP.

What is term life insurance?

Term life insurance is a type of policy that provides you coverage for a fixed period of time, such as 10, 20 or 30 years. If you pass while the policy is active, your beneficiaries will recieve a tax-free lump sum payment known as a "death benefit."

Term is the most cost-effective type of insurance for most Canadians. Premiums for term can be up to seven and a half times less expensive than those for whole life insurance.

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). 

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

  1. If you're still pretty healthy, you can apply for a new policy (usually at a higher rate).
  2. You can renew your current policy. If your policy comes with a guaranteed renewability feature, so you can keep your coverage even if your health dramatically changes. Premiums for your renewed term will be much more expensive, though.

PolicyMe makes life insurance simple and affordable for Canadians. Find the term life insurance rates you desire just a few clicks and see how you can save up to 20 per cent on your policy.

What is whole life insurance?

Whole life insurance is a type of permanent life insurance. It provides lifelong coverage to the policyholder. So your beneficiaries will get a payout, regardless of when you pass away.

Because the payout is guaranteed, it tends to be much more expensive than term life insurance (up to seven and a half times more!).

Whole life insurance includes a tax-free, lump sum payout, like term, but also a cash surrender value.

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

This cash value will grow tax-deferred at a minimum guaranteed rate. Once you've built up enough cash value (this usually takes years), you can withdraw it from your policy.

But the amount your cash value will grow by is minimal compared to traditional savings and investment accounts like a TFSA or RRSP. So whole life insurance is usually only a good idea for those who have already maxed out their other investment options.

Term vs. whole life insurance

For most Canadian families, term 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, like when your mortgage is at its highest and you have young kids.

Here's a life insurance cheat sheet for comparing term and whole life insurance.

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

Video summary: Term versus whole life insurance 101

What is universal life insurance?

Universal life insurance is a type of permanent life insurance with adjustable monthly payments. Although it's much 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, and the rest is invested.

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

What are the different types of life insurance plans?

Like we previously talked about, 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:

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

But there are other types of life insurance to keep in mind.

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. In most cases, group life insurance gives you coverage that's only one to two times 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. 

Joint life insurance

Joint life insurance Canada covers two people under one policy. There are two main types of joint life insurance:

  1. Joint first-to-die: This provides a payout when the first partner passes. After this, the policy ends, so the surviving partner would need to apply for a new policy if they still need the coverage.
  2. Joint last-to-die: This provides a payout when the last surviving partner passes. Last-to-die is commonly used to support the couples' dependents.

Because couples pay only one monthly premium, it can be less expensive than holding separate policies.

In most cases, purchasing separate life insurance policies is the better option for couples. It provides more flexibility and two payouts, so neither partner is left without coverage or a life insurance payout.

With PolicyMe, couples can save 10 per cent when they apply for separate term policies together. Plus, you'll get $10,000 in free child coverage.

No medical life insurance

No medical life insurance, otherwise known as simplified or guaranteed issue life insurance, is best for those with pre-existing conditions, who engage in “high risk” activities or who 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 (IUL), like standard universal life insurance, divides your premiums partially among investment options. For IUL, though, this investment is tied to the performance of an index.

Variable life insurance

Variable life insurance is a type of permanent life insurance policy that lets you set a minimum payout. The bulk of your premiums go into one or multiple investment accounts, and there's a potential for the death benefit to be larger depending on how your investments perform.

This type of life insurance appeals to invetment-savvy policyholders who want to get more than just a death benefit out of their life insurance, but who prefer whole life insurance's regular premiums.

Variable universal life insurance

This type of life insurance combines both variable and universal life insurance. Part of your premiums go into investments, but like mutual funds, you can choose how much is invested in each account and assess how the funds perform over time. But these types of life insurance policies can have pricey management fees associated with them.

Participating whole life insurance

With participating whole life insurance, the policyholder has the opportunity to share in the profits of the insurance company. Part of your monthly premiums go into a seperate account with other policyholders. This account is professional managed and can pay out a dividend.

Annually, the company will evaluate its profits based on the actual claims and expenses of the participating investment fund. These profits are then distributed to the policyholder.

Non-participating whole life insurance

This is another term for a standard whole life insurance policy. With non-participating whole life, you pay a consistent premium throughout your lifetime. This means more predictable costs and lower premiums compared to participating whole life insurance, but without the dividends.

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. 

It's a form of permanent life insurance, though the payout is usually much less than traditional life insurance policies as it's only intended to cover certain costs.

Mortgage life insurance

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

The policy works like this: if you pass away, your insurer guarantees that the remainder of your mortgage will be paid to your mortgage lender so that your family can stay in the home you bought.

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. 

Critical illness life insurance

Critical illness is a policy that offers a pay out if you are diagnosed with a specific sickness that is listed in the policy description. It pays out once, when the policy ends and it varies based on the insurance company.

For most this coverage is ideal when they're looking to protect themselves from a disease that may be hereditary, or due to being unable to find another, affordable policy.

How do I pick the type of life insurance that's best for me?

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

  • Your age: Your age greatly influences the cost of your life insurance. Some types of policies, like permanent life insurance, become prohibitively expensive the older you become. 
  • Your health: Health can have a major impact on how much you'll pay for premiums, or if certain types of policies will insure you at all.
  • Your financial situation: If your family carries any debt, you should consider a life insurance policy that would cover those expenses when you pass away.
  • Your goals: Do you have permanent financial obligations, like a disabled dependent? Are you willing to pay more for a policy with a guaranteed cash value you can access?

In most scenarios, term life insurance 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, like when your kids are young or while you’re paying off your mortgage. 

Term might still be your best option, even if you're interested in the cash value component of whole. The amount you'll save on premiums can be invested at your discretion instead of being tied up in your policy.

Bottom line: term life insurance is the best type of life insurance for most Canadians

Some types of life insurance are more suited to investment-minded people, while others are meant to protect your family first and foremost.

When it comes to life insurance, make sure you have:

  • The right amount of coverage
  • For as long as you need it
  • Without overpaying

For most Canadians, that means a term life insurance policy. You can get a no-commitment quote in minutes with PolicyMe at some of the most affordable life insurance rates in the country.

FAQ: Types of life insurance in Canada

What is the most commonly purchased life insurance product in Canada?

Individual term life insurance is the most commonly purchased life insurance product in Canada, according to the CLHIA's most recent data.

Individual term life insurance made up 40 per cent of the value of total policies in force. Group term life made up 35 per cent, individual universal made up 13 per cent and individual whole life made up 12 per cent.

By individual we mean purchased separately from a group employer plan. Individual life insurance made up 65 per cent of the value of total policies in force as of 2021, up from 57 per cent in 2011. This growth is largely due to the rise in popularity of term life insurance.

Use an insurance price calculator to find the best rates.

What types of life insurance have cash value?

Both whole and universal life insurance policies have a cash value. 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.

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. 

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 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.

Different insurers will have different insurance riders available.

What types of life insurance are permissible in Islam?

In Islam, the type of life insurance that's generally considered permissible is called "Takaful." It's a special form of insurance designed to comply with Islamic principles. The idea behind Takaful insurance is that it's based on mutual cooperation, responsibility, assurance, protection, and investment among groups of participants.

Here's how it works: instead of paying premiums like you would in traditional insurance, participants make contributions to a common pool of funds. If a participant suffers a loss, they're compensated from this pool. Any surplus remaining after meeting all claims and other expenses is returned to the participants.

It's important to note that different scholars may have varying views on the permissibility of other types of life insurance in Islam. Some members of the Muslim community also believe that term life insurance and cooperative life insurance are halal.

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