Beginner’s Guide to Term Life Insurance

The ultimate beginner’s guide to term life insurance. Term life insurance is one of the most popular types of life insurance purchased in Canada. This article breaks down many different aspects of term life insurance in easy to understand terms.

• What is Life Insurance?
• What is Term Life Insurance?
• Who Buys Term Life Insurance?
• How Much Term Life Insurance Should I Buy?
• What Length of Term Life Insurance Should I Buy?

What is Life Insurance?

Life insurance is a type of insurance product which pays out a lump sum amount in the event that the insured person dies. Life insurance pays out tax free in Canada.

There are three main types of life insurance available to purchase in Canada. These are term life insurance (which is described in detail in this article), whole life insurance (type of permanent life insurance) and universal life insurance (type of permanent life insurance which is also called term to 100 insurance).

Example
Sam takes out a life insurance policy on himself for $500,000 to make sure that if he dies his family is protected financially. This life insurance policy will pay out $500,000 to the beneficiaries listed on the policy if he dies.

What is Term Life Insurance?

Term life insurance is one of three main types of life insurance products available in Canada. It suits the majority of Canadians needs for life insurance mainly because of its affordability and structure.

There are two main product features of term life insurance- the length of the term and the death benefit coverage amount.

The length of the term is the amount of years that the cost of the policy (also called the premium) and the death benefit coverage amount are level for.

The death benefit coverage amount is the amount of money that is paid out tax free to the beneficiaries listed on the policy in the event the insured life dies.

You are able to make changes to the policy or cancel the policy at any time without incurring any fees or penalties.

Example
Sam purchased a 20 year term life insurance policy from RBC Insurance for $500,000 with a monthly premium of $38.25. For 20 years the policy will provide him with $500,000 of life insurance death benefit coverage (it will not increase or decrease, it will remain level) and the cost of the policy will be $38.25 monthly (it will not increase or decrease, it will remain level).

Who Buys Term Life Insurance?

Term life insurance is purchased by many different types of people for many different reasons.

Young Families
Young families purchase a lot of term life insurance. The reason is to provide financial protection in the event that one of the parents in the family pass away unexpectedly. Many young families have young children and debt (e.g. student debt, mortgage, lines of credit, credit cards, etc.) that need to be protected in the event of a death. A 20 year term policy is usually a very good solution because it will provide financial aid when the family needs it the most. It will cover them while their children are still financially dependent on them.

Anyone with a Mortgage
A lot of Canadians purchase term life insurance to cover their outstanding mortgage debt. Most banks offer something called mortgage life insurance which is supposed to pay out the balance of a mortgage in the event of death. There are many issues with this type of insurance coverage from the bank (while usually being quite expensive). Many people will decline the coverage offered from their bank and purchase a term life insurance policy instead. The length of the term life insurance policy depends on how long you will have the mortgage for. For example, if you have 8 years left on your mortgage you may want to consider a 10 year term life insurance policy.

Business Owners
It is very common for business owners to purchase term life insurance.

How Much Term Life Insurance Should I Buy?

The amount of term life insurance you should buy (if any) is unique to yourself and your family. There is not a set amount that should be recommended for everyone. Different financial advisors and life insurance brokers will have different views on the amount of term life insurance that should be purchased.

We feel that you need use term life insurance to protect your families standard of living in the event that one of the parents of the household were to pass away. When broken down, it really depends on the amount of money that your family requires to maintain your standard of living. As a result we typically look at the income coming into the family.

A general rule of thumb that we use is to make sure that you have at least 10x your gross annual income for coverage. This amount could be invested conservatively to provide a combination of principal and interest to replace a loved ones income that they were earning until the children are on their own.

We recommend that you speak with one of our licensed professional life insurance brokers to determine the right amount of life insurance coverage that your family should have in place.

We do have an online calculator that we have built that you can use to help determine the amount of life insurance coverage that you should have in place. You can find it by clicking here.