“Life insurance? That’s my favourite thing to talk about,” said no one ever!
Life insurance may not be a popular topic, but it is an important one. Life insurance helps protect what matters to you most — your loved ones. If you pass away, your chosen beneficiaries receive a tax-free cash payment called a death benefit that they can use for whatever they need, such as:
- Replacing the income you would have provided, so they can keep up with the household bills
- Paying off the mortgage so they can stay in the home they love
- Fulfilling your kids’ dream (and yours!) of a post-secondary education
- Covering your funeral expenses so your loved ones don’t have to pay out-of-pocket
- Paying your final income taxes and any other debts; the last thing your loved ones need while they’re grieving is annoying calls from creditors
What is term life insurance?
With term life insurance, coverage is temporary, for a specified “term.” If you have 10-year term life insurance, for example, your coverage lasts 10 years. If you have 20-year term life insurance, you have coverage for 20 years.
The most common terms are 10 and 20 years. Some companies will even let you choose your own term. The longest term you can get is term 100 life insurance, which covers you right up to age 100.
How does it work?
With term insurance, you pay a monthly premium until the end of the term. If you pass away during that period, your beneficiaries receive the death benefit from the policy. Otherwise, your coverage stops at the end of the term. What happens then is up to you. You might:
- Renew your policy for the same amount and same length of time. Note, however, that your premium is likely to change as you get older.
- Purchase a new policy with a different term and and/or amount.
- Decide that permanent life insurance, which provides lifelong coverage and has a cash value that grows over time, would meet your needs better.
- Do nothing because your loved ones no longer need the protection of life insurance.
How you might use term life insurance
You can purchase coverage for yourself or for both you and your partner. One of the most common reasons for purchasing is to provide a secure future for your spouse and children. That’s why this type of coverage can also be called “family term life insurance.” Here are five examples to illustrate how this versatile financial product might help you and your family.
1. Debt-repayment.
Jacinthe is 25 years old and has education debt. She and her partner just got married. She purchases a 20-year term policy so that she can lock in low rates while she is young and healthy. If she dies before she is 45, her debts will be paid off and won’t burden her spouse.
2. Paying off the mortgage.
Priyanka is 32 years old and just recently bought a new house with her husband. They are thinking of having a child in a year or two. She and her husband are equal contributors financially and if anything were to happen to one of them then the household finances would be cut in half. They decide their best choice is a 30-year term policy on both their lives. By the time she and her husband are 62, they figure that their mortgage will be paid off and their kids will be finished school, allowing them to pursue new financial goals.
3. Eldercare.
Kai is an only child. His parents are seniors in their 80s and rely on him for financial support. A 20-year term policy will help ensure that they’ll continue to have the support they need even if Kai passes away.
4. Post-secondary education.
Miguel and Juanita are in their 50s with two children — one is still in high school and the other just starting university. They have paid off their mortgage and have no debt. They opt for a 10-year plan to cover the remainder of their children’s schooling.
5. Final expenses.
Edwina is a 69-year-old whose current insurance expires when she’s 70. She expects to live well into her 90s like her parents and wants a financial cushion for her husband and kids when she passes. She chooses a term 100 life insurance plan to help pay for her funeral and any other expenses.
How much life insurance do you need and for how long?
How do you figure out how much insurance you need and how long you need it for? What’s best for you depends on your personal and financial circumstances. Primarily, you’ll want enough insurance to pay off your debts and support your loved ones for as long as you feel is appropriate. As with most seemingly simple equations, the devil is in the details. The following are some of the factors to take into consideration.
- Your financial assets. Your savings, personal investments, registered plans and so on are a potential source of funds for your beneficiaries. The more you have, the less insurance coverage you may need.
- Your debts. Unfortunately, your debts don’t pass away when you do. In fact, they tend to go up, because they’ll include taxes on your estate as well as whatever you owe on your mortgage, personal loans, credit cards and so on. The higher your debt, the more insurance you may need to preserve the rest of your estate for your loved ones.
- Your dependants. How many people depend on you and how old are they? This is key. If you have young children, you’ll want to make sure there’s enough money to support them until they’re independent. In addition to basics like food and shelter, you may also want to factor in funding for post-secondary education.
- Your salary. If you’re the main earner for your family, you may want enough insurance to replace your income for a number of years.
- Other insurance. You may already have some life insurance through a group benefits plan where you work. While this can be helpful, keep in mind that this coverage usually ends when you leave your job.
- Your budget. With car payments, daycare, rent or mortgage, groceries and everything else, your monthly income goes only so far. If you simply can’t afford as much insurance as you’d like, then buy as much as you can. Some protection for your loved ones is better than none.
Don’t feel like crunching the numbers yourself? We don’t blame you! Fortunately, you don’t have to. Our online Life Insurance calculator makes it easy, and you can even chat with an advisor if you need help.
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Frequently asked questions about family term life insurance
Can I cash out my term life insurance policy?
No. Term life insurance has no cash value. Its only value is the death benefit that gets paid out to your named beneficiaries if you pass away before the end of the term.
How much is term life insurance in Canada?
In Canada, the cost of your premiums depends on your age, sex, health, lifestyle factors (whether you smoke, for example), how long you want the term to last (10, 20, 30 years, etc.) and how much coverage you need (such as $50,000 all the way up to $1 million). Prices can vary from one company to the next, so you may want to compare quotes from several providers to find the best value.
Do term life insurance premiums increase?
No…and yes. Let’s deal with the “no” part first.
Your premium stays the same for the length of the policy’s term. So the 30-year term life insurance cost is the same in month number one as it is in month number 360.
The “yes” part of the answer comes in if you want to renew your coverage. For example, suppose you buy a 10-year term life policy when you’re age 25. When that expires, you decide you need coverage for another 10 years. Surprise, your premium won’t be the same. That’s because 10-year term life insurance rates generally increase with age. You can expect to pay more at age 35 than at age 25.
Can I name anyone I want as beneficiary?
Yes, you can select anyone you want to receive the money from your life insurance. While most people designate their spouse or children, your beneficiary doesn’t have to be related to you. If you name a child under the age of 18, however, the money can’t go to them directly. Instead, it will be paid to a trustee or guardian who will hold it until they turn 18. Note that you can have more than one beneficiary, and it doesn’t have to be a person. You might want to name a charity, for example. If you don’t name a beneficiary, the proceeds from the life insurance policy will pe paid into your estate (where it will be subject to taxes) and distributed according to your will.
Disclaimer:
The information in this article is not to be relied upon as tax, financial, or investment advice for specific situations.
Individual circumstances may vary. You may wish to contact one of Manulife's licensed insurance advisors or your licensed insurance agent if you need advice about your insurance needs.