20 year term life insurance (Canada)

20 year term is the most popular life insurance type in Canada, and the prices reflect that popularity. It’s inexpensive and lends itself well to premium comparisons using life insurance quotes.

Definition: 20 year term life insurance is life insurance with a level death benefit and premiums that are level for 20 years. Canadian policies are generally guaranteed in that both the death benefit and the premiums are fully guaranteed for the life of the policy.

At the end of 20 years, the death benefit remains level but the premiums increase substantially. This is called a renewal This process of increasing premiums happens every 20 years until the policy expires (often around age 70-80).

That increase in premiums is so pronounced that while you can technically keep paying premiums, you should expect that you will want to cancel the policy. Effectively, 20 year term policies are suitable for 20 years – if you need coverage for a longer period of time you should purchase a 30 year term or term to age 65.

Term 20 in Canada is frequently used for family financial planning. People in their 30’s and 40’s with mortgages, kids, etc are often looking for life insurance coverage that lasts roughly until close to retirement and the kids are out of the house – and a 20 year term fits that timeframe relatively well.

You should comparison shop term 20 and focus on premiums/costs. Other attributes you should look at are conversion (at what age the conversion option expires) and whether the policy has an exchange option.

Life insurance dividends

Life insurance dividends are a part of a class of life insurance polices known as ‘participating’. They’re participating because dividends are how you participate in the investment performance of the company. These polices are almost always whole life, so for practical purposes dividends are seen on participating whole life policies.

What are dividends? The life insurance company takes your policy and the rest of the block and makes assumptions on investment returns, admin costs, and mortality. At the end of the year they compare their actual performance with expected, and if things are positive they issue a dividend – a share in those over-estimated profits. (Note, this is a huge oversimplification, but it’s the way it’s technically supposed to work, so good enough for understanding the concept). In the end what this means is that if you have a participating policy, ever year you’re expected to receive some amount of money from those profits.

Important, red flag, warning, caveat emptor. Dividends are not guaranteed. Not only are they not guaranteed, they’re subject to vagaries in company management. “It’s Thursday, you’re ugly, this interferes with my bonus payment” are all valid reasons for a life company to not pay dividends. This lack of guarantees is important to appreciate as life insurance advisors have a tendency to over emphasise the lack of guarantees. When I started in life insurance back in 1986, advisors would say things like “the life insurance company has never decreased dividends”. Which was true until it wasn’t. Now that life companies HAVE decreased dividends some advisors will say “no company has ever failed to pay a dividend”. Also true right up until a company does this. Life companies take particular care to stabilise dividends so dividend decreases are possible but perhaps not probable – but just keep it in mind as you evaluate the importance of dividends in your life insurance purchase.

Next, what do you do with this infusion of cash every year? There’s 5 things you can do. You’ll pick one of these 5 choices upfront when you purchase the policy and in most cases that choice is locked in.

  1. Pay in cash. Just like it sounds. They simply issue you a cheque for the amount of the dividend. This would be one of the more rare options.
  2. On deposit. Similiar to 1, the life company will just deposit your dividends into an internal account where it accumulates with a minimal amount of interest. Again, not a common choice.
  3. Paid up additions. More common, and a really interesting choice. Each year your dividend will automatically purchase a small sliver of single premium fully paid up life insurance that gets added to your death benefit – basically your life insurance policy will increase every year. Two interesting results. First, this allows your coverage to automatically increase roughly in line with inflation. Secondly if you should ever become uninsurable this is the only way you’re likely to get more life insurance in the future (because these paid up additions increase your coverage without a medical exam).
  4. Reduce your premium. Your dividends can be used to reduce your premiums. Over time your dividends can (maybe…) get high enough that they equal your premium – at that point the dividends pay your insurance costs. This is called a ‘paid up policy’ because there are no more premiums. See the lack of guarantees above – these policies may not become paid up as quickly as intended, or may become ‘un-paid up’.
  5. Enhanced whole life. This is a fairly complex option. The purpose here is to get more life insurance at a lower price. A whole life policy is combined with term insurance; the dividends pay the term insurance and any leftover purchases paid up additions (as above). The paid up additions eventually replace the term insurance, leaving you with policy that is all whole life. Between the complexity of the interactions, the increasing costs of the term insurance portion, and the lack of guarantees on the dividends, be cautious with these policies – they do not always perform as expected.

Term to 100 (Canada)

Term to 100 insurance is an arguable hybrid of term life insurance and whole life.

Whole life insurance (or permanent) is generally characterized by two attributes – coverage for life, and cash surrender values should cancel the policy. Term life insurance has coverage for a specific duration (less than life) and no cash surrender values.

Term to 100 is a bit of column A, bit of column B. Like whole life, the premiums and the coverage is level for life. Like term life insurance though, there are no cash surrender values. Term 100 is basic – level premiums for life, no cash surrender value.

It is thus suitable for people looking for lifetime coverage, without any enhancements, at the lowest possible cost.

Term 100 has fallen out of favour with life insurance companies, many companies no longer offer term to 100. The problem is that the lack of cash surrender values means consumers don’t cancel their policies – they keep them until they die. This removes the block of consumers who pay premiums for years and then cancel before they die (and thus, no death benefit is paid). Well, this is a problem for the life companies anyway as it means they’re paying more death claims than expected and thus are less profitable.

However there’s available a look-alike product that you can construct from Universal Life (UL) insurance. UL has two cost structures – level, and increasing. If you purchase a UL policy with guaranteed level costs (level COI), and pay the minimum premiums so that no money is put into investments, then you effectively have a term to 100 policy – level premiums guaranteed for life, no cash surrender value.

If you’re shopping for term to 100, you should have your life insurance broker shop both term to 100 and level COI UL to see what premiums are lowest.

10 year term life insurance (Canada)

One of the most popular types of term life insurance in Canada, 10 year term life insurance has premiums that are level for 10 years.

After 10 years, a typical policy would remain in force and active, but with premiums that increase substantially. And so on, every 10 years until the policy expires. However at this point (at ‘renewal’) the premiums increase a lot – to the point where it would be unaffordable. Therefore a 10 year term policy is best for insurance needs that are only good for 10 years.

When should you buy a term 10 life insurance policy? The simple answer is whenever you need insurance for 10 years or less. If you need life insurance for longer than 10 years you should look at a 15 or 20 year term life insurance policy.

Examples of this would be a 50+ year old looking to cover a small mortgage prior to retirement. 10 year term is also commonly used for business life insurance because 10 years is pretty much forever in the business world.

For the most part 10 year term policies are relatively comparable and thus you should focus heavily on the least expensive premiums – though you may want to read best types of term life insurance for some thoughts on things you may want to look at in your term 10.

5 year term life insurance (Canada)

5 year term life insurance is not readily available in Canada any longer. As far as I know, all companies have ceased offering it.

It was originally a popular insurance policy – the goto for term life insurance. That’s because back in the day term life policies renewed at the same premium as someone who’d just taken a medical exam. You’d buy a 5 year term policy at age 30 say, then at age 35 the premiums would increase for another 5 years – but those premiums would be the same as someone who’d just passed a medical exam. Every 5 years your premiums would bump up for your age but still remain competitive.

Unfortunately, eventually the insurance industry changed the way premiums work at renewal. Premiums at renewal are now much higher because they’re assuming they haven’t seen your medical information in years. This led to people seeking longer terms than 5 years (in order to lock in their premiums).

Eventually 10 year term became more and more competitive to the point that 10 year term premiums were competitive or cheaper than 5 year term. At that point companies started to cease offering 5 year term policies. To my knowledge, Sun Life continued to offer 5 year term polices well past other companies but it seems that today even they no longer offer a 5 year term policy.

If you’re looking for 5 year term, your best bet is going to be a 10 year term policy instead.

Best type of term life insurance (Canada)

You want to look at three things when evaluating your choices for term life insurance policies.

First, the duration or the ‘term’. Term life insurance has premiums that are level for a specified and predetermined timeframe – so a 10 year term has premiums level for 10 years; 20 year term has premiums that are level for 20 years, etc. You should select a term that matches closely how long you expect to need life insurance for. If you’re 30 years old and looking to insure your income through to retirement then a 30 year term or term to age 65 would be appropriate.

Secondly you want to look at the options or riders. There’s three that are commonplace, but you want to ensure that they are embedded (these three are generally included at no charge).

  • Renewable – Renewable polices are still inforce (though at a much higher premium) after the initial term. This is important as it gives you a safety net at the end of the term – you can keep the policy for a while instead of it ending abruptly. A non-renewable term policy coverage ends abruptly at the end of the term.
  • Convertible – convertible policies let you exchange the term coverage to a permanent life insurance policy (generally a whole life insurance policy), without medical questions. You should only accept a term policy that has conversion. If you become uninsurable, this option gives you the ability to get life insurance forever, without a medical exam. It’s also commonly used to get a small whole life policy at retirement – simply convert your term to whole life then reduce the coverage amount down to a smaller number like $25K – easy whole life policy with no medical exam.
  • Exchange option – similar to the convertible option, the exchange option lets you exchange your term policy to a longer term policy (from term 10 to term 20, or term 20 to term 30). This option lets you purchase a shorter term policy, at cheaper rates initially, then extend it later by switching to a longer term. Again, no medical exam is required.

Lastly, you should look at the history of the company’s conversion option. When/if you convert from term to whole life insurance (and this is common, as people often want a small whole life policy when they retire) your choices will be whatever the company is offering at that point in the future. Yes, that means that the future choice of insurance to convert to is not guaranteed – not the policy nor the premiums, but it is often assumed that companies that have traditionally had good whole life policies will continue to offer them in the future.

This has become prominent in the last decade. Some companies have exited the whole life/permanent life insurance marketplace. This leaves them without a policy for their clients to convert to. These companies have simply taken their last revision of their whole life/permanent policy, increased the premiums substantially, and offered that as their offering for clients looking to convert. Because the policies are not available in the open market, the premiums are horribly uncompetitive – as much as twice what other companies are offering.