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How to choose the best life insurance policy for your family


Before we answer the question, we need to rethink what ‘best’ means in terms of life insurance. At it’s core, all life insurance policies pay the same death benefit - $500,000 of the ‘best’ type of life insurance pays the same as $500,000 of the ‘worst’ type of life insurance when you pass away. And if you remain focused on the death benefit – and almost everyone should, since this is the purpose of this type of insurance – then from the perspective of what you’re buying, all life insurance policies are equally ‘the best’.

So what makes the best life insurance policy, the best?

The primary functional difference between different types of life insurance is the premiums – and in particular, premiums over long periods of time.

And quite simply, the best life insurance is thus the cheapest ‘type’ of life insurance OVER THE TIME THAT YOU NEED THE INSURANCE FOR.

Let me explain further.

Some types of life insurance are cheap now, but more expensive later. Others are more expensive now, but the premiums remain level and thus they become comparatively cheaper later.

Lets look at two fictitious premiums structures.

Year  Premiums Policy 1  Premiums Policy 2
1  25  100
2  30  100
3  50  100
...  ...  ...
8  150  100
9  200  100
10  400  100
So what’s the better policy? Well, if you need insurance say for 3 years, then policy 1 is the ‘better type of life insurance’. It’s far cheaper over three years than policy 2, and since we only need the life insurance for 3 years (and then we would cancel it, since it’s no longer needed) then Policy 1 is far cheaper than policy 2 for the same coverage.

However if you need life insurance for 10+ years, in this example Policy 2 is the better type of life insurance. It’s more expensive than Policy 1 in the first few years, but eventually on a monthly basis the premiums become lower than Policy 1, and eventually the total cost of Policy 2 will be cheaper. Therefore, for longer periods of time, Policy 2 is the better type of life insurance.

Now lets define the currently available types of life insurance in Canada.

Term Life Insurance

Term life insurance has premiums that are level for a predefined period (called the term), but premiums increase dramatically at the end of that term. Some examples would be 10 year term, 20 year term, and 30 year term (there are others). If you need life insurance for about 20 years, then 20 year term would be the least expensive over 20 years. Term 10 will be cheaper in the first 10 years than the term 20, but after that the term 10 will get increasingly more expensive than term 20. Similiarly, term 20 will be cheaper than term 30 (but only over 20 years). 

Permanent Life Insurance

Permanent life insurance at it’s core, has premiums that are level for life. There are two types of permanent life insurance – whole life and universal life. For both of these, there are fully guaranteed level versions, and non-guaranteed versions. For most of us, we should only be looking at the fully guaranteed versions. 

Permanent insurance is more expensive than term life insurance initially, but again, because the premiums are level for life, eventually over longer periods of time, the monthly premiums and the total cost will be less than term life insurance. 

Therefore if you need life insurance forever – until you pass away, then permanent insurance is the better type of life insurance. It’s expected to be cheaper than term life insurance over your lifetime, even though in the initial years the premiums for permanent life insurance will be more expensive.

One other note – when you’re purchasing life insurance, it’s important to focus on the death benefit and premiums structure. For almost everyone, a ‘bad’ type of life insurance is life insurance where the focus is on investments or other non-life insurance related aspects of the policy.