Is term life insurance right for you?

By Farhana Uddin // Sun Life

Think life insurance isn’t for you? You may want to think again. Whether you’re married, single, childless or a parent, are there people in your life who rely on you? If they could face financial hardship without you, you may want to help protect them with life insurance.

But what about the price for that protection? Generally speaking, there are three basic types of life insurance: Term, permanent (or whole life) and universal life (which is a kind of permanent insurance with an investment component).

Let’s talk about term. If you’re looking for something budget-friendly, term life insurance may appeal to you. That’s because its annual or monthly costs (called premiums) are typically lower to start with than permanent life insurance.

Sounds good, but is term the right fit for you? Here’s what you need to know before you buy:

How does term life insurance work?

Let’s say you want affordable protection to cover a temporary but large financial obligation. That could be a mortgage, a business loan or your child’s education. Buying a term life policy would mean choosing the term that matches the time you need the coverage. That could be five, 10, 20 or more years. It could be your mortgage’s length, your loan’s duration or the number of years your children will need support. During your initial term, your premiums are guaranteed to stay the same.

But what happens when your term expires and you still need insurance? A feature called renewability lets you continue your coverage for another term. The cost will increase due to various factors. These can include your being that much older than you were when you first bought your policy. With this feature, you won’t need to provide new or additional health or medical information. You will, however, still have to contend with the price hike. Term life insurance is flexible, so you can adjust your coverage to suit your changing needs over time. But it doesn’t provide lifetime coverage or build up a cash value the way permanent or universal policies do.

There’s also the death benefit to consider. That’s the amount of money paid or due to be paid when you die. It goes, tax free, to your family or whoever you name as your beneficiary(ies). The death benefit amount remains the same as long as you continue to renew.

Is there a way to minimize term insurance rate increases over time?

Worried about rate increases under a term-life renewal? Most term insurance policies have a something called a “convertibility” feature. That lets you switch to permanent insurance without having to re-qualify by giving new medical information.

How can changing to permanent insurance help? Permanent life insurance comes at a higher price, but the policy stays in effect and the premiums stay the same, no matter your age or health. So, permanent insurance may cost less in the end than renewing your term insurance several times.

The Canadian Life and Health Insurance Association (CLHIA) keeps track of Canadian life and health insurance statistics. According to the latest CLHIA figures, Canadians own $5.5 trillion altogether in life insurance. Of that, 75% is in the form of term insurance. The average Canadian household carries $474,000 in life insurance, in some combination of permanent, term, group and individual. That’s equal to about five times the average household income.

What about life insurance through your employee benefits?

Buying life insurance through your workplace benefits is often cheaper than buying it as an individual. That’s because you get the financial advantages of group rates. However, you need to make sure you’re getting enough protection. Ask yourself whether your group policy will cover your share of your family’s expenses or financial obligations. If you need more, talk to your human resources department about buying more coverage through your employee plan.

Remember, too, that your workplace insurance isn’t a lifelong guarantee. First, it doesn’t go with you if you change employers. Second, it ends when you retire or leave your job. And third, the cost can increase every time you move into a higher age bracket. That’s why you may consider buying individual life insurance that will stay with you regardless of your employment situation. If you feel you need more, you can top it up with group coverage through your employer.

Whatever kind of insurance you choose, you want a solid plan that protects your family and your estate. To do that, you need to understand the different kinds of life insurance coverage and benefits available. Perhaps your needs are simple and you need just one type of insurance. Or your situation may be more complex, and you may need more than one type.

Do you know how much life insurance you might need to protect the people who depend on you?