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Term Life Insurance

Term life insurance provides financial protection for a specific period of time, known as the term, such as 10, 20, or 30 years. If the insured person dies during that period, the insurer pays a tax-free lump-sum death benefit to the designated beneficiary. This type of insurance is designed to provide affordable coverage for temporary needs, such as replacing income, paying off a mortgage, or supporting dependents until financial independence is achieved.

How It Works

Term life insurance pays a death benefit only if the insured person dies within a specific period of coverage. The length of that coverage is set either as a fixed period, such as a 10- or 20-year term, or until the insured reaches a set age, such as 65. The premiums you pay into the policy stay the same over the chosen term, and when the term is up the policy renews automatically on a yearly basis until its ultimate expiry date unless you cancel it. Term life insurance often does not require a medical exam to qualify, depending on the applicant's age and the coverage amount applied for, and it is available to people between roughly ages 18 and 70. Most term life insurance plans in Canada require the applicant to be a Canadian citizen or resident. These policies do not include cash value, so the policyholder cannot borrow against the policy and will not get any cash value back if the policy is cancelled. The death benefit itself is a one-time, tax-free payment that beneficiaries can use to replace income, provide for dependents, pay funeral expenses, or pay off debts.

Example:

A couple in their 30s in Ontario who just bought their first home with a 25-year mortgage might choose a 25-year term life policy with coverage that matches their mortgage balance plus extra for debts and their children's future education. If one partner dies during the term, the surviving spouse receives a tax-free lump-sum death benefit so the family can stay in the home; if both are still alive when the 25 years end, the coverage simply expires with no payout and no cash value returned.

What to Watch For:

Once the term ends, the coverage ends and beneficiaries do not receive any payment if the insured dies after that point. Term life insurance plans can often be renewed at a higher premium for as long as coverage is required, or converted into permanent life insurance. Review the renewal and conversion options in your contract so you understand how your coverage and premiums may change as your needs evolve.

Related Terms

Misstatement of Age

Misstatement of age occurs when the age of the insured person is recorded incorrectly on an insurance application or policy. Because age is a key factor in determining eligibility, premiums, and benefit amounts, any error - whether accidental or intentional - can affect the terms of coverage. The misstatement may be discovered during underwriting, at the time of a claim, or during a policy review.

Life Insurance

Life insurance is a financial protection product that provides a tax-free lump-sum payment, known as a death benefit, to designated beneficiaries when the insured person dies. It is designed to replace income, pay debts, cover final expenses, or provide financial stability for dependents and loved ones. Life insurance helps ensure that family members can maintain their quality of life and meet ongoing financial obligations even after the loss of the primary earner.

Beneficiary

A beneficiary is the person or entity designated to receive the proceeds or benefits from an insurance policy upon the policyholder’s death or when a covered event occurs. In life insurance, the beneficiary receives the death benefit as a tax-free lump sum. In accidental death and dismemberment (AD&D) insurance, the beneficiary receives payment if the insured person dies as the result of an accident. Beneficiaries can also be designated in certain health or travel plans that include accidental death benefits.

Long-term Disability insurance

Long-term disability (LTD) insurance provides income replacement if you are unable to work for an extended period due to illness or injury. It ensures financial stability by paying a percentage of your regular income, typically between 60 and 85 percent, after you have been disabled for a specific waiting period known as the elimination period. LTD benefits continue until you recover, reach a set benefit end date, or reach retirement age, depending on the terms of the policy.

Effective Date

The effective date is the day your insurance coverage officially begins. From this date forward, you are eligible to receive benefits for covered health, dental, life, or disability expenses under the terms of your policy. The effective date is established once your application has been approved, all requirements are met, and the first premium payment has been received, unless otherwise specified in the policy.

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