What is Term Insurance and How Does it Work?
What is term insurance?
Term life insurance is one of a few different types of life insurance available in Canada.
As its name implies, it provides coverage for the duration of your chosen term at the initial premium provided in your contract. If you die during the term of the policy, your beneficiaries receive the tax free death benefit payout and they decide how to use those proceeds1.
In Canada, term lengths can range from five to fifty years in some cases. After the initial term the policy, the term renews automatically at the same coverage level, but with an increased premium. This premium schedule can be found within the original policy contract.
Usually term insurance expires at the age of 85, or as long as premiums continue to be paid.
A term policy can be terminated at any time without impact to credit ratings of the owner or insured. However, term insurance has no cash value that builds over time, and if you cancel, you get nothing in return for the premiums paid. Think of it similar to renting a house, you don't have any asset to take with you when you choose to move you've simply paid your rent for the time you were present in that property.
When is a good time to consider term insurance?
Many opt for term life insurance because it offers low-cost coverage for a certain needed period of time.
It is more feasible to obtain larger coverage amounts when needed like, for example, when individuals are in heavier debt stages of life. It is generally well-suited for covering debts with a known lifespan, like a mortgage, or to protect child dependency years/education costs.
Matching these needs with the applicable term lengths can ensure you have protection for the risk you may not be able to fund yourself through available assets or income that would no longer be earned if you passed away. Let Statera Financial Planners help you organize what that need may look like.
Are term renewals a good thing to maintain?
When your initial term is up for renewal, very often the premiums include a hefty increase and sometimes make it unfeasible to maintain any coverage from a cashflow perspective for the next term. While it is important to try and match the original term length to the risks it is covering, we all know that things can change. So, what are the options?
- If you're still in similar health to what was noted on original application, it is very likely you will benefit from considering a brand new insurance rewrite for whatever amount of coverage is still currently required. In some cases the exact same coverage amount can be obtained at 50% less cost to the renewal price!
- If your health status has changed or you have had a major illness, it may be possible that you are now considered uninsurable for newly written insurance. So, the question then is.. "Do I still have a need for coverage, and if this is my best option can I afford to maintain it?". If the need is there, and you have no other coverage options, maintaining the renewal ensures you still have insurance during a time when you may otherwise be left stranded.
- The other consideration to maintaining the renewal is if sometime in the future you see benefit to converting your term insurance, without the need of new medical underwriting, to a form of whole life insurance (exists beyond the age 85 limit currently set within term insurance). If you have estate or taxation issues that require funding regardless of your age of passing, you may want to consider the conversion privilege within a term policy2. Talk to Statera Financial Planners to learn more about this feature.
1 Life insurance proceeds only remain tax-free if they are paid out to a named beneficiary or charity. If you named your own estate as the receiver, those funds then become an asset of the estate and are taxed in accordance to your estate and/or probation fee requirements.
2 Conversion privileges often have an expiry age, sometimes that being 70 years old.