What is the best type of life insurance?

Simon Huften

Simon Huften is the President of Life Insurance Canada.com Inc.

There’s a saying amongst insurance brokers that the best type of life insurance is that which pays out when you die.  Like many such urban sayings, the oversimplification actually hides a grain of truth.

With the exception of mortgage life insurance policies, life insurance policies are generally expected to pay out when you die, without regard to how or when you die.  The two exceptions to this are death by suicide in the first two years of a policy, and the incontestability clause which to paraphrase, says that a claim can be denied due to failure to disclose information.  Otherwise, you should expect your life insurance policy to pay out upon your death. And not just pay out, but pay out quickly.  Many life insurance death claims are paid within 3-5 days of the claims department receiving all the necessary claim paperwork. 

So you can reasonably expect that most life insurance policies will actually pay out upon your death.  So the urban saying isn’t talking about different policy clauses. 

What the industry is actually referencing when we say the ‘best type of life insurance’ instead has to do with the premiums and how they’re structured over time.  Life insurance policies can be categorized by these different premium structures (which may have very similar policy clauses).  

Term Life Insurance Explained

Term life insurance has premiums that are level for a defined period of time known as the term.  Term life insurance is commonly a 10, 20 or 30 year term though there are other terms available from some companies. At the end of the term period, premiums increase until the policy expiry date, often age 80.

Permanent Life Insurance Explained

Permanent life insurance has premiums that are expected to be level for life.  There are a couple of variations on this theme including whole life insurance and universal life insurance, but the defining characteristic is a policy which has premiums for life.

Which Type of Life Insurance is the Best For You?

The starting point for your best choice amongst these policies is the policy that has the least expensive premiums over the timeframe that you need the insurance coverage for.  If you need insurance for family and income protection and assume that once your children are no longer financially dependent and your mortgage is paid off, then the best type of life insurance will be term life insurance.  Premiums are level during your income earning and child-dependent years then at the end of the term when premiums increase you would expect to cancel the policy – thus the least expensive over that timeframe.

If you need life insurance for losses and expenses when you die – no matter how old you are when that happens, then permanent life insurance will be the best type.  Permanent life insurance is expected to have the least expensive premiums over your entire life expectancy because it doesn’t have the drastically increasing future premiums that term life insurance.

By contrast, if you only need life insurance during your income earning years and you purchase permanent instead of term, and then cancel when coverage is no longer needed, you’ll have overpaid on permanent life insurance (when you could have taken the cheaper term life insurance).

And if you need life insurance for your entire life, then term life insurance will be far more expensive than permanent over the long term (even if permanent is more expensive initially).  Further, term premiums can both become unaffordable and the policy can expire. If either of these two situations arise, you end up without life insurance coverage when you die – and thus leading to the phrase ‘the best type of life insurance is that which pays out when you die’.  

A more in depth comparison of term life insurance and permanent life insurance can be found here. If you still have questions about which life insurance is best for you, please reach out to us or book a call with one of our life insurance specialists.