Understanding term life insurance

Term life insurance is the type of insurance most consumer advocates urge people to buy. It’s typically cheaper than other types (at least over shorter periods of time). And it comes with few bells and whistles, ensuring consumers aren’t paying for options they don’t need. The baseline assumption with term life insurance is that you’re not looking for life insurance forever but instead expect to cancel the life insurance at some point in the future.

Term life insurance is characterized by premiums that are level for a period of time. If the premiums are level for 10 years, it’s 10-year term life insurance. If the premiums are level for 20 years, then it’s a 20-year term.

Renewals

At the end of the level term, most term life insurance policies automatically renew. The renewal premiums will be much more expensive than the initial premiums – substantially so. In fact, the premiums on Canadian term life insurance policies are so expensive these days that almost nobody renews their policies. In years past (up to about the early ’90s) it made sense to renew your term policy but with today’s policies, you should be planning on doing something other than renewing at the end of the term. This Globe and Mail article discusses how pricing of these policies has changed so that automatically renewing your term policy is no longer an attractive option.

Requalifying

At the end of the term, you can requalify if you still need insurance. Don’t be fooled by the term ‘requalify’. The only difference between requalifying and buying a new policy (with the associated new medical exam and higher premiums as a result of your older age) is….well there isn’t any different. I guess requalifying assumes that you bought a new policy with the same company instead of shopping around to ensure you’re still getting the best rates. In short, requalification is basically a shell game – if you can requalify, you can buy a new policy anywhere. This feature isn’t often seen in Canada, it’s a hangover from U.S. Products that used to have this available as a policy option.

Conversion

If you purchase a term policy, you should ensure that it has a conversion clause in the policy – accept nothing less. The conversion clause allows you to purchase a permanent life insurance policy without taking a medical exam – and still receive healthy rates.

There’s a reason this is important. When we’re young and healthy, buying term insurance with the intention of canceling it in the future is great. However, for the few that become uninsurable later in life, conversion allows you to change your mind and switch over to a permanent life insurance policy – no matter how insurable you’ve become. It’s insurance for your insurance. Most folks won’t need or want to use this, but if you do become uninsurable, this clause can be the only opportunity for you to continue to get life insurance.

Tip: Some Canadians will purchase term insurance for the cheaper premiums today with the intention of changing to permanent insurance when they’re older. This defers higher premiums until later in life which may be preferable. And the conversion clause guarantees that we can change to a permanent policy later, no matter what our health is like in the future.

Types of term life insurance

There is a broad variety of term life insurance policies available in Canada today. However, there are three types that are the most common – 10-year term, 20-year term, and 30-year term.
Tip: 10-year term and the 20-year term is very competitively priced through most ages. A 30-year term in Canada today is typically only competitively priced for those in their early 30’s and younger. After that time, the 20-year term can be half the premiums of a 30-year term policy.

Typically one should purchase the term that best fits the length of time you want to keep insurance. If you’re planning on keeping the insurance for 20 years, your best bet is likely a 20-year term.
Tip: If you’re trying to save on premiums, always buy a shorter-term instead of buying less life insurance. Having the right amount of insurance and less than the optimal type of insurance is preferable to having the right type and not enough coverage.

Shopping

The term is insurance is relatively straightforward with few differences amongst policies. The best way to get the lowest premiums is to use a broker who shops multiple companies. But be careful – some brokers won’t quote all companies that are available or competitive. Many brokers pool their business to a few insurers and as a result, won’t quote some of the more competitive companies that may be available. Ensure your broker works with 10 or more companies routinely, not just placing 90% of their business with the same three companies.

Policies with idiosyncracies:

As a broker, I am reluctant to publicly mention any specific company as I don’t want to be perceived as favoring any one company. Nevertheless, there are a few companies that have added a bit of spice and polish to their policies that make them more attractive in certain circumstances.

Have a big family?: Unity Life term policies have some additional benefits (these additional benefits are not guaranteed). If a parent has a policy, and both parents should die, then the guardians of their children will receive $900/month per child. Also in the case of both parents dying, the children will receive $6000/year when they go to university. This becomes more attractive the more children you have. These benefits are in addition to the death benefits and are not conditional on both parents being insured nor are they conditional on the amount of insurance. So placing a small $100,000 term policy just on Mom (since female premiums are cheaper than male) will provide access to these additional benefits.

Smoking but going to quit: Rather than locking in a 20-year term policy at smoker rates if you know you’re going to quit soon, purchase a 10-year term policy and then bump up to a 20-year term after you qualify for the nonsmoker rates. Some companies allow you to upgrade from 10-year term to 20-year term as a mini-conversion – RBC, Canada Life, and Equitable Life at a minimum all offer this currently for the first 5 years of their 10-year term policies. Consider the 10-year term at the smoker rates, qualify later for the nonsmoker rates, and then use the guaranteed conversion to flip up to 20-year term at that point. This strategy will likely save you money.

Guarantee your rates when you convert: A loophole in the conversion clause I mentioned above is that the premiums available when you convert are whatever premiums are available at the date in the future that you convert. We don’t know what those rates will be – but we do know that permanent insurance premiums have risen dramatically over the last year and are expected to continue to increase over the next year. If you’re over 45, Empire Life has a 20-year term policy that automatically converts to a permanent life insurance policy in year 21 – and those premiums are guaranteed today. In effect this adds an additional guarantee to the conversion clause – they’re guaranteeing your rates when you convert 20 years in the future. (Empire Life may not have the least expensive policy)