How does term life insurance work?
You choose an amount of coverage and a length of time. You pay a premium, usually the same amount every month for the whole term. If you die during the term, the insurer pays the full amount to your beneficiary. If you outlive the term, the coverage ends and nothing is paid.
That is the trade. You are paying only for protection during the years your family depends on your income, which is why the cost is low compared with insurance that lasts for life.
How much coverage and for how long?
Two questions settle most of it:
- How much would your family need without your income? Add the income you want to replace, the mortgage and other debts, and future costs such as education. Subtract savings and insurance you already have. The calculator does this arithmetic.
- How long will they need it? Match the term to the longest obligation: the years until the mortgage is paid, or until the youngest child is independent.
A 20-year term is a common choice for a family with a new mortgage and young children. Someone ten years from retirement with a small mortgage may only need 10.
What decides the price?
Insurers price term life on age, sex at birth, tobacco use, health, family medical history, the amount, and the length of the term. Applying younger costs less, and the price is locked for the term once the policy is issued.
The insurer confirms the final price through underwriting. For many applicants that is a set of health questions by phone or online. For larger amounts or older ages it can include a nurse visit for measurements and samples, paid for by the insurer.
What protections come with a policy in Ontario?
- A review period. Policies normally give you 10 days after delivery to cancel for a full refund.
- A two-year contestability period. After a policy has been in force for two years, the insurer generally cannot void it for an innocent mistake on the application. Fraud is the exception.
- Assuris. If a member life insurer fails, Assuris protects policyholders up to set limits.
- A regulator. Agents and insurers in Ontario are licensed and overseen by FSRA.
What happens when the term ends?
Most term policies can be renewed without new medical evidence, at a higher price based on your age then. Many can also be converted to permanent insurance before a set age, again without a medical. Those two features matter if your health changes during the term, and they differ between insurers.
Common questions
Do I need a medical exam for term life insurance?
Not always. Many insurers approve applicants on health questions alone, depending on age and the amount applied for. Larger amounts and older ages are more likely to need a nurse visit. The insurer pays for it.
Is the payout taxed?
A life insurance death benefit paid to a named beneficiary is generally not taxable income in Canada.
Can I get term life insurance if I smoke or have a health condition?
Usually yes. Tobacco use and many health conditions raise the price rather than prevent coverage. Insurers treat the same condition differently, which is where comparing helps.
What if I stop paying?
The policy ends after a grace period, normally 30 days. Term insurance has no cash value, so nothing is returned.
Can my partner and I be on one policy?
Yes. Joint policies exist, and so do two separate policies bought together at a combined rate. Separate policies give each person their own coverage if circumstances change.
Sources
Written and reviewed by Sandeep Singh Pawar, licensed life insurance agent in Ontario. Last reviewed .