Term Life Insurance

Pure protection, and why "nothing back" is a feature

Term life insurance answers one question: if you died during the years people depend on your income, would they be financially okay? You choose a death benefit (say $500,000) and a term (say 20 years). Die during the term and your beneficiaries receive the full amount, tax-free. Outlive it and the policy simply ends, with nothing returned.

People instinctively dislike that "wasted" premium, but it is the reason term insurance is affordable. You are not prepaying a benefit that must eventually be paid; you are pooling risk with thousands of other households for the specific years the risk matters. Most people's need for life insurance is temporary (a mortgage that ends, kids who grow up, retirement savings that accumulate), so temporary coverage matches the actual problem. Getting "nothing back" from term insurance is like getting nothing back from your home insurance after a year without a fire: the protection was the product.

How the mechanics work

Premiums are level for the whole term: a 20-year policy costs the same in year 19 as in year 1, because the insurer averages your rising risk across the term. Your health is assessed once, at application (questionnaires, sometimes a paramedical exam), and once the policy is issued, later health changes cannot touch your coverage or your price for the rest of the term.

At the end of the term, most Canadian policies renew automatically without new medical questions, but at steep age-based rates that then climb at each renewal. Renewal pricing is designed for people who have become uninsurable; everyone else re-shops or lets the policy lapse. The practical takeaway: pick a term long enough to cover the whole period of need, because relying on renewals is expensive.

Most term policies also carry a quietly valuable feature: convertibility. Up to a stated age, you can convert some or all of the coverage into a permanent policy from the same insurer without any medical evidence. If your health deteriorates during the term and you discover you will need coverage beyond it, conversion is the escape hatch: the insurer must take you at standard rates for your age, regardless of diagnosis. It is an embedded option most people never use, but for the few who need it, it is worth a great deal, and it is worth confirming a policy has it before buying.

How much coverage, and for how long

The guiding idea: cover the years someone depends on your income, for roughly the money they would need if it stopped. For most households that means the mortgage years and the kids' dependent years, which is why 20-year terms bought by parents in their 30s are the classic purchase.

Two common sizing approaches, both approximations rather than rules:

• Income multiple: roughly 10 times your gross annual income, adjusted down if your partner earns well or your savings are substantial, up if you have many young children or large debts.
• Needs-based: add up the mortgage and other debts, the income your family would need replaced and for how many years, and future costs like education; subtract existing savings and any group coverage. The remainder is the gap to insure.
• Laddering (a cost trick, not a sizing rule): instead of one large 30-year policy, buy two, for example $500,000 for 20 years plus $250,000 for 30, so coverage steps down as the mortgage shrinks and the kids launch, and you stop paying for protection you no longer need.

Term life vs mortgage life insurance

When you sign a mortgage, the lender will offer mortgage life insurance, and the comparison with a personally owned term policy is worth two minutes of attention.

For the same purpose (making sure the house is safe if you die), term life usually wins: the benefit does not shrink while the premium stays flat, your family decides whether paying off the mortgage is even the best use of the money, the underwriting happens up front rather than after death, and the policy survives any lender switch. The main exception is health: someone who cannot pass individual underwriting may find the bank's simplified-issue coverage is the coverage they can actually get.

Term vs permanent: different jobs

Permanent insurance (whole life and universal life) covers you for life, with premiums typically much higher than term for the same benefit, and often a savings or investment component inside the policy. That is not a worse product; it is a product for a different job. Permanent insurance fits lifelong needs: estate liquidity for a tax bill due at death, a dependant who will never be self-sufficient, business succession funding, or equalizing an inheritance. Term fits temporary needs, which is what most working families actually have. The common planning error is not choosing the wrong product; it is buying a small permanent policy when the budget could have bought adequate term coverage, leaving the family underinsured through the years that mattered most. Cover the need fully first; consider permanent layers when a genuinely permanent need exists.

Beneficiaries, tax and probate

The death benefit is paid tax-free to a named beneficiary, and because it passes outside your estate, it also bypasses probate: no court process, no estate administration tax on that money, and payment typically weeks after the claim rather than months. This is the same estate shortcut that makes segregated funds attractive, and it only works if you actually name a beneficiary. Naming your estate instead drags the money through probate and exposes it to the estate's creditors. Name people (or a trust for minor children), keep the designations current after divorce or remarriage, and consider a contingent beneficiary as backup.

Group coverage through work

Employer group life insurance is a nice perk and a poor foundation. Coverage is often only one or two times salary, well short of most families' needs, and it ends when the job does, precisely when replacing it may be hardest. Treat group coverage as a supplement on top of a personally owned policy, not a substitute. Some group plans can be converted to individual coverage on leaving, at prices that usually only make sense if your health has become an obstacle.