The types of life insurance
There are basically two kinds of life insurance: Term and permanent (sometimes referred to as “whole life”). “Term insurance is temporary—it’s like renting,” says Wouters. “You don’t build up any equity.” Lock in your policy for, say, 20 years and the premiums won’t go up. Once you need to renew, the premiums can go up.
The cost covers the average amount of risk for each period being covered, and you can buy it for a 10-, 20- or 30-year period. “Depending on your age, you may be able to renew the coverage for a further period of time at higher rates—much higher at each successive renewal,” says Wouters. “For example, the rates for a 10-year renewable term can go up 2.5 to three times with each renewal. If it’s any reassurance, the insurance company generally guarantees what those rates are going to be up front. If the insurance company’s claims experience is worse, expenses go up, and/or long-term interest rates stay low or drop, your rates are still contractually guaranteed as long as you continue to pay the premiums on time. It doesn’t matter that you may become a worse risk down the road because of health and lifestyle changes either.”
Permanent—or whole life—insurance coverage is just that: permanent. “It provides coverage for as long as you live—provided you pay the premiums—and the cost is generally the same throughout,” says Wouters. “The extra amount you pay in the early years is invested by the insurance company to help pay the cost in the later years, when the actual premiums you’re paying are insufficient to cover the risk.”
Wouters explains that permanent life insurance generally builds up equity in the form of cash value. “If you don’t need the coverage, you can [cancel] the policy for ‘cash surrender value.’ Alternatively, you can use the accumulated cash value to completely pay up that policy for a smaller sum insured. It’s like selling a house and using the equity to downsize to a smaller one with no mortgage and no extra costs or requirements.” Life insurance companies do not invest your money for high returns. Instead, the money is invested in secure bonds.
Factors affecting the cost of life insurance in Canada
Regardless which kind of insurance you buy, the price is based on the net cost of pure insurance. “Specifically, what the risk of dying is at any given time for [individuals in your age group]—that risk goes up with age,” says Wouters. “Then you factor in acquisition and administration costs, including underwriting and servicing the policy.”
The insurance company must also set aside reserves against future claims and invest that money conservatively, making long-term predictions of rates of return. “The higher [your] risk of dying, the higher the premium,” says Wouters. “The higher the costs of underwriting and servicing the policy, the higher the premium. The lower the rates of return on money, the higher the premium.”