The Best Types of Life Insurance in Canada

Types of life insurance in Canada

There are several types of life insurance policies. Each is designed with an individual’s needs and budgets in mind. Some types of life insurance coverage provide temporary protection while you’re paying off a mortgage or raising kids. Others offer lifetime coverage that can support estate planning and build cash value over time.

"There’s an elephant in the room when it comes to life insurance. Many Canadians seem to believe they need permanent life insurance, but the reality is that permanent life insurance is a very specialized product that only meets the needs of a very small percentage of the population…" — Andrew Ostro, Co-Founder & CEO of PolicyMe

The most common types of life insurance in Canada are:

• Term life insurance
• Whole life insurance
• Universal life insurance
• Joint life insurance
• Group life insurance

We’ll break down how each type works and who it’s best for below. Let’s get into it.

Term life insurance

Term life insurance is a type of policy that provides you coverage for a fixed period, typically 10 to 40 years. These policies protect temporary financial obligations, like a mortgage or the costs of raising children. If you pass away while the policy is active, your beneficiaries will receive a tax-free lump sum payment known as a "death benefit.”

PolicyMe makes life insurance simple and affordable for Canadians. Find the term life insurance rates you desire just a few clicks and see how you can save up to 20 per cent on your policy.

Key features:

• Coverage length: 1-40 years
• Guaranteed payout if death occurs during the term
• No cash fund
• Typically renewable at the end of the term 
• Many policies are also convertible to permanent coverage (if allowed)
• Two subtypes:
  
  • Level Term (5-40 years): Premiums stay the same for the chosen term length.
  • Yearly Renewable Term (YRT): A one-year policy that automatically renews each year, but increases in price annually as you age. Convenient for short-term needs, but usually more expensive.

Best for: 

• Young families with children
• Homeowners with a mortgage
• People on a budget

How it works:

You select the term length and coverage amounts, then pay fixed premiums for the term. If the insured person passes away during the term, your beneficiaries receive the death benefit. At the end of the term, you can renew, convert to permanent life insurance (check your contract), or let the policy expire.

Term life insurance pros and cons

Whole life insurance

Whole life insurance policies are a type of permanent life insurance policy. It provides coverage for your entire lifetime. Unlike term life insurance policies, they guarantee a payout to your beneficiaries no matter when you pass away. This type of policy also includes a cash value component that grows over time. But these features come at a much higher cost than term life insurance, and for most Canadians, the added expense outweighs the benefits.

Key features:

• Lasts your entire life
• Policy’s cash value grows as you pay your premiums
• Stable premiums

Best for:

• High-income earners, especially those who max out other investment options
• Families using life insurance for estate planning or inheritance reasons

How it works:

These policies generally have higher premiums, but a portion of those payments gets funnelled into a cash value account, which the insurer manages. This fund grows slowly, building steadily until you can withdraw or borrow against it. The death benefit is also guaranteed for your loved ones, no matter when you pass.

Whole life insurance pros and cons

Universal life insurance

Universal life insurance is a type of permanent life insurance with adjustable monthly payments. These policies combine life insurance and tax-advantaged investing. Universal life policies use a portion of your premiums to cover a death benefit and then investing the rest, this approach to life insurance offers more flexibility. 

However, it comes at the cost of complexity and risk. This insurance policy type is generally only a good option if you’re very investment-savvy.

Key features:

• Lifetime coverage
• Flexible premiums 
• You’re in charge of the funds and accounts for your cash value
• Tax-deferred growth, but returns are dependent on your investment performance
• You may have to pay higher premiums to keep coverage active if your investments don’t perform well

Best for:

• High-earners who have already maxed out their RRSPs and TFSAs
• Investment-savvy individuals who want to manage their policy

How it works:

When you pay your premiums, a portion will cover the cost of your insurance, and the rest goes into a cash value account. Unlike with whole life insurance (which is insurer-controlled), you decide how this money gets invested.

If your investments perform well, your cash value will grow, and you may even be able to lower your premiums. If they perform poorly, you’ll need to pay more into the policy to keep it active.

Universal life insurance pros and cons

Group life insurance

Group life insurance policies are generally part of an employee benefits plan. Many people have this type of coverage through their workplaces, and sometimes at no cost for members. Although it is undoubtedly convenient, group life insurance often only gives you basic protective coverage. And you lose it if you leave your job.

Key features:

• Offered through some employers
• Coverage usually equals one to two times your annual salary
• The employer fully or partially pays premiums
• Remains active only while you’re employed
• Payout is tax-free to your beneficiaries

Best for:

• Employees who want low-cost/free coverage as a benefit
• Anyone looking for supplemental coverage, but not as their sole policy
• People who may otherwise struggle to obtain life insurance

How it works:

Generally, your employer will negotiate a group policy with a life insurance provider. As long as you’re employed, the policy covers you. You usually don’t even need to take a medical exam. If you pass while covered, your beneficiaries will receive the death benefit.

If you leave your job, retire, or get laid off, your coverage will end unless you can convert it to an individual policy (this could get pricey).

Group life insurance pros and cons

Joint life insurance

Joint life insurance is a single policy that covers two people, usually spouses or common-law partners. Since you’re only paying for one policy, premiums are generally cheaper than if you were to have two separate plans. 

Joint life insurance pays out only once, with two options as to when: in case one partner passes away or when both partners pass away.

Key features:

• Covers two people
• Typically less expensive than holding two separate policies
• Provides one payout only
• Difficult to change if the couple separates

Best for:

• Couples who want a single payout covering both partners
• Those seeking a simple, one-policy solution

How it works:

You and your partner apply together for a policy with a single monthly premium payment that covers both of your lives. There are some differences to keep in mind:

• With first-to-die, the policy pays out to the surviving policyholder. Coverage then ends.
• With last-to-die, the policy pays out after both policyholders have died. Coverage like this is good for long-term estate planning/inheritance.

Joint life insurance pros and cons

Looking for an alternative to joint life insurance? With PolicyMe, couples can save 10% when they apply for separate term life policies together, and each policy includes $10,000 in free child coverage. 

Mortgage life insurance

Mortgage life insurance is a type of policy that covers the outstanding balance on your mortgage if you pass away. These policies tend to cost significantly more than the usual term life policy for the same or less amount of coverage (depending on what you owe on your house), and it’s strictly for your mortgage. The payout won’t cover any of your other financial obligations or help support your family after passing.

Key features:

• Coverage tied to your mortgage balance
• Payout goes directly to the mortgage lender

Best for:

• Homeowners who may not qualify for traditional life insurance
• People who want the peace of mind that their houses will be paid off regardless of declining health

How it works:

If you pass away, the life insurance company guarantees that the remainder of your mortgage will be paid to your mortgage lender so that your family can stay in the home you bought. But it doesn’t provide your family with any extra funds for living expenses or debts.

Mortgage life insurance pros and cons

Funeral insurance

Funeral insurance, also known as final expense insurance or burial insurance, covers medical bills, burial and any funeral costs that accumulate after someone passes away. It's a form of permanent life insurance, though the payout is usually much less than traditional life insurance policies, as it's only intended to cover certain costs.

Key features:

• Covers funerals, burials, cremations, and any related fees
• Coverage typically ranges from $5,000-$25,000
• Permanent as long as premium payments are consistent

Best for:

• Seniors or people with critical illness who struggle to qualify for life insurance
• People with limited budgets and immediate estate planning needs, but not long-term income replacement

How it works:

You enroll in this policy at a chosen coverage amount that often doesn’t exceed $25,000, and pay premiums regularly. When you pass, the insurer pays a lump sum, tax-free, to your beneficiary, who can use it for funeral expenses or any other related needs.

Funeral insurance pros and cons

Types of insurance by underwriting

When you apply for life insurance, your insurer needs to assess your risk before deciding how much coverage you get and how much it costs. This process is called underwriting. Depending on the policy, underwriting can get pretty detailed (often requiring medical exams and health records), but sometimes it can be quick and straightforward. There are three types to keep in mind: fully underwritten policies, accelerated policies, and no-medical life insurance policies. 

Fully underwritten policies

Traditional, thorough, fully underwritten policies usually require a complete medical exam, detailed health histories, and sometimes even more documentation about your health. The process can take a while before these policies come online, and you’ll have to answer a lot of health questions along the way. That said, usually that means the lowest premiums for healthy applicants.

Accelerated policies

Accelerated policies, or simplified issue policies, are faster, more streamlined, and rely on data analytics to assess your risk. Insurers will typically look into your prescription histories, motor vehicle reports, and do credit checks. It skips the medical exam and can get you a policy approval quickly (between hours and days as opposed to weeks), especially for healthy individuals.

No-medical life insurance

No medical life insurance, also known as simplified life insurance or guaranteed issue life insurance, is ideal for individuals with pre-existing conditions, those engaging in “high risk” activities, or those who cannot undergo a medical exam. While it’s quicker and easier to get approved, these policies usually cost much more and offer a smaller payout.

Types of life insurance, compared

How to choose a life insurance policy

Choosing the right life insurance policy comes down to your age, your health, your financial situation and your long-term goals. Each affects the cost of your premiums and which type of coverage makes the most sense for you. 

1. Age

Your age greatly influences the cost of your life insurance. Some types of policies, like permanent life insurance, become prohibitively expensive the older you become. 

2. Health

Health can have a major impact on how much you'll pay for premiums, or if certain types of policies will insure you at all.

3. Financial situation

If your family carries any debt, consider a life insurance policy that covers those expenses when you pass away.‍

4. Goals

Do you have permanent financial obligations, like a disabled dependent? Are you willing to pay more for a policy with a guaranteed cash value you can access? Your goals will determine how much life insurance you need.

Life insurance isn’t one-size-fits-all. By taking time to compare your options, you can narrow down the type of policy that truly supports your loved one when they need it most.

The bottom line: Term life insurance is the best choice for most Canadians 

In most scenarios, term life insurance is the best type of policy for the average Canadian family. It’s affordable, gives peace of mind and provides coverage for the period of time you need it the most, like when your kids are young or while you’re paying off your mortgage. 

"Buy term and invest the rest. Cover yourself when you need it most, and at the end of your term, you can reassess your coverage needs." — Stephanie Roux, Licensed Life Insurance Advisor

Term life insurance policies might still be your best option, even if you're interested in the cash value component of whole life insurance. The amount you'll save on premiums is invested at your discretion instead of being tied up in your policy.

FAQ: Types of life insurance in Canada

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