Types of term life insurance
Term life insurance definition: Term life insurance has premiums that are guaranteed level for a predefined period of time called the ‘term’. Common terms in Canada are 10 year term, 20 year term, and 30 year term though other terms are available from some life insurance companies. Coverage or death benefit during the term is also guaranteed level.
There are a variety of ways we can classify term life insurance policies, commonly by duration or policy benefits.
Renewable and Convertible Term Life Insurance
Renewable and convertible term life insurance has two additional policy benefits included in the premiums.
The renewable benefit means that at the end of the term the policy remains in force unless you cancel it, but the premiums increase. These are called the renewal premiums. Renewal premiums are generally so much higher than a new policy that we would not expect most Canadians to keep their policy past renewal. In other words, a 10 year term policy is effective and cost-effective for 10 years, but not for years 11+.
Convertible term life insurance means that up to a specific age (often age 70 or 71) you have the option to exchange your term life insurance policy for a permanent, lifetime policy. This exchange can be done with no medical exam, and you maintain the same health class as when you obtained your original term life insurance policy. The convertible option is must have in your term life insurance policy as it guarantees that you can purchase insurance in the future no matter what happens to your health or insurability.
Non-Renewable and Convertible Term life insurance
If a term life insurance policy is non-renewable and convertible then at the end of the term the policy simply expires – coverage is over and there are no options to renew or maintain your life insurance. That means that if you become uninsurable in the future these policies simply dump you out at the end of the term without any coverage, and any ability to get new coverage.
You should always ensure that your term life insurance policy is renewable and convertible.
Note: All term life insurance policies quoted on this website are renewable and convertible term.
Term life insurance policies by duration
Another way to classify term life insurance is by the duration or the term. As noted above, the term of a term life insurance policy refers to how long a life insurance policy guarantees that the initial premiums are level for. Common terms in Canada are term 10, term 20, and term 30.
Term 15 and term 25 are also available from many carriers but these terms tend to be less competitively priced than term 10,20 and 30. As a result, many consumers looking at a term 15 for example will either drop down to a term 10 for substantial premiums savings, or jump up to a term 20 for little additional premiums. Life insurance companies in Canada know this and tend to price their life insurance centred on term 10, 20 and 30.
Suitability of term insurance
While renewable and convertible term life insurance does have coverage that extends past the initial term (i.e. term 10 policies remain in force in years 11+) the renewal premiums are so high that Canadians will generally cancel their policy at the end of the term before the renewal premiums come into effect.
As a result, you should be looking for a term life insurance policy with a term at least as long as you expect to need life insurance. If you need coverage for 20 years, you should be considering a 20 year term life insurance policy and not a 10 year term. A 10 year term policy in this instance means that in 10 years, when you still need life insurance, you’ll be faced with either renewal premiums, or be shopping for a new term policy. And we already know that renewal premiums quickly become unaffordable, and we don’t know if you can qualify for a new policy in 10 years – most of us are not getting healthier as we get older. A longer term policy means your premiums are locked in and guaranteed not to change for that longer term, and there’s no requirement for a medical exam so you can keep the policy even if you become uninsurable.
In many cases, those aged 20-35 will look at a 30 year term life insurance policy, people aged 35-50 may look at a 20 year term life insurance policy, and people 50+ consider a 10 year term life insurance policy.