Limited pay whole life insurance is a type of permanent whole life coverage where you pay your premiums for a predetermined, “limited” period, such as 5, 8, 10, 15, 20 years, or up to age 65. When the scheduled limited‑pay period is completed and the policy is paid‑up completely, the coverage is designed to remain in force for life. This differs from traditional life-pay whole life insurance, where premiums are paid every year for as long as the policy is in force. 

This guide explains what limited pay whole life insurance is, how it works, how it differs from traditional plans, and its key features and benefits.

How does limited pay whole life insurance work?

Limited pay whole life insurance lets you pay premiums for a limited period while keeping coverage for life. Once your payment term ends, the policy becomes “paid-up,” meaning no further premiums are required.

Here’s how the process works:

• Select the whole life insurance plan that meets your coverage and benefit needs
• Choose your payment term: Select how long you want to pay premiums (e.g., 5-pay, 10-pay, 15-pay, 20-pay, or pay-to-65), locking in guaranteed level payments for that period
• Apply and complete underwriting: Submit an application and go through underwriting so the insurer can assess your health, risk profile, and final premium rate
• Pay premiums for the selected term: Pay premiums, annually or monthly, only for the chosen limited period
• Premiums build value and coverage: Each payment funds the policy’s cash value and activates the permanent death benefit for your beneficiaries
• Cash value grows over time: As premiums are paid, the cash value increases on a tax-deferred basis if the policy is “exempt” under the Income Tax Act. Non-exempt policies are taxed annually on growth. Participating policies may also receive dividends.
• Access to cash value: Once enough value has accumulated, you can borrow or withdraw from it (subject to policy rules) for retirement income, emergencies, or other needs. Loans and withdrawals may reduce the death benefit and cash value, and may have tax implications
• Policy becomes fully paid-up: When the payment term ends, no further premiums are required for life
• Lifetime protection continues: The policy stays in force for your entire lifetime, and the death benefit is generally paid tax-free to individual beneficiaries. In some corporate or policy loan situations, it may be taxable

Key features and benefits of limited pay whole life insurance

Limited pay whole life offers guaranteed lifelong coverage, premiums that end early, and the potential to build cash value for long‑term goals without paying for life. It’s designed for Canadians who want lifetime coverage without paying premiums forever.

Here are its key features and benefits:

• Short premium payment window: Lifetime protection with a compressed, level premium payment period
• Guaranteed cash value: Builds steadily every year. Growth is generally tax-deferred for exempt policies, while non-exempt policies are taxed annually on the increase
• Dividend accumulation: Participating policies earn dividends that enhance coverage or cash value. Dividends are not guaranteed and depend on company’s performance
• Paid-up additions: Dividends can be used to buy extra insurance for compound growth
• Tax advantages: Exempt policies enjoy tax-deferred cash value growth and generally tax-free death benefits; non-exempt policies are taxed on growth, and some corporate or policy loan situations may affect death benefits

Types of limited pay whole life insurance in Canada

Limited pay whole life insurance comes in several payment structures, with 10-pay and 20-pay being the most common while 5-pay, 8-pay, and pay-to-65 are less commonly offered by insurance providers. Each defines how long you’ll pay premiums before the policy is fully funded. After that, coverage continues for life with no further payments.

5-pay whole life: 

In 5-pay whole life insurance, you pay premiums for just five years. Although less common, it’s a fast, high-commitment option, best for high earners or those focused on estate and business planning who want quick ownership.

8-pay whole life:

8-pay whole life insurance is offered only by a few carriers, it’s a short-term option that offers quick ownership without the intensity of 5-pay. Best suited for business owners or professionals planning to use the policy for long-term wealth transfer.

10-pay whole life:

10-pay whole life insurance is the most commonly offered limited pay, where payments end in 10 years, giving you lifetime coverage and faster cash value growth. It is ideal for those who want a clear end date before retirement.

15-pay whole life:

15-pay whole life insurance balances affordability and early completion, but offered by a few carriers only. It is a good fit for mid-career professionals who want to manage cash flow but still finish payments before their 50s or 60s.

20-pay whole life:

This is one of the most common limited-pay options available; 20-pay whole life insurance spreads premiums over 20 years, keeping annual costs manageable. It is ideal for younger buyers starting long-term coverage early in life.

Pay-to-65 whole life:

In pay-to-65 whole life insurance, premiums continue until age 65, matching your working years. Once you retire, payments stop, but coverage remains for life. This makes it a practical choice for retirement planners.

Example of a limited pay whole life policy: Limited pay whole life insurance works well for those starting later in life. It guarantees lifetime coverage while allowing cash value growth during your life. To see how these payment terms work in practice, let’s look at a real-life example of a 20-pay policy.

• Jack, 35, buys a 20-pay whole life policy with $100,000 coverage
• He pays $1,900 per year for 20 years
• By age 55, the policy is fully paid-up
• Dividends continue and can supplement his retirement income
• Jack keeps guaranteed lifetime coverage without paying any more premiums

As one of the almost 2.5 million Canadians with diabetes (source: Statistics Canada), you may have hit some stumbling blocks or even brick walls on your search for insurance of any kind. Getting life insurance when you are diabetic can be a little less straightforward than for those without it. But, it is possible to obtain life insurance for diabetics, and it may be less expensive than you assumed.

Why does diabetes affect insurance rates?

Diabetes is a disease that affects how your body uses and produces insulin, a hormone produced by your pancreas. There are three types of diabetes: Type-1 diabetes, Type-2 diabetes, gestational diabetes.

Type-1 diabetes

It is also known as insulin-dependent diabetes, is an auto-immune disorder. For Type-1 diabetics, their pancreas no longer produce insulin, a hormone that helps your body convert sugar to the energy you need. You need to administer synthetic insulin to cover for the food you eat

Type-2 diabetes

People with type 2 diabetes produce insulin, but their bodies do not use or recognize it correctly. They can deal with the condition through oral medication or diet. Type-2 diabetes is the most common form of diabetes in Canada, with approximately 90% of diabetics living with Type-2 diabetes.

Gestational diabetes

It is a temporary form of diabetes associated with pregnancy. The body cannot produce an adequate amount of insulin, leading to an increase in the amount of blood sugar. In most cases, gestational diabetes goes away post-pregnancy

So why would diabetes affect life insurance policy premiums? Well, the stress of constantly fluctuating blood sugar levels puts stress on your internal organs, like your heart and kidneys. The added stress means your organs are prone to failure in their older years. Thus, approving your application takes on added risk factors and adds to the cost of life insurance.

More specifically, Type-1 insulin-dependent diabetes is usually diagnosed in childhood and puts a lifetime of stress on one’s body. This is why insurance rates for Type-1 diabetics are higher.

Type 2 diabetes is more prevalent in individuals after the age of 40, and its effects can be quickly remedied by diet; organ stress is not as great of a factor in medical underwriting.

Gestational diabetes does not usually affect insurance rates, as most expecting mothers opt to do any medical underwriting before or after their pregnancy.

Can diabetics get life insurance?

Yes, diabetics in Canada can get life insurance in Canada. Diabetics who are in good health, with consistent medication levels, and who keep their blood sugar levels in control can qualify for standard, medically underwritten life insurance coverage.

In medically underwritten life insurance, the life insurance company will arrange for a blood test and likely request for a physician’s report to evaluate and screen for a pre-existing condition and grant approval for a life insurance policy. This process may provide more a higher death benefit for a lower premium, than no medical life insurance.

Much like anyone with a pre-existing health condition, no medical life insurance is another choice for diabetics. No medical life insurance is a policy that is issued without the insured having to undergo a medical exam. It usually has the added advantage of a simpler and faster issuance process that doesn’t require details for every medical condition one may have.

The two most common types of no medical life insurance are simplified issue and guaranteed issue. Read more about simplified vs guaranteed. 

What are the types of life insurance available to diabetics?

In Canada, diabetics have several life insurance options, though the specifics can vary based on individual health conditions and insurance providers. Here are the primary types of life insurance policies accessible to diabetics:

Term life insurance

Term life provides coverage for a specific period (e.g., 10, 20, 30 years) and is generally more affordable than permanent life insurance.

Term life insurance may have higher premiums for diabetics depending on how well the condition is managed and overall health factors

Permanent life insurance

A permanent life insurance policy includes whole life and universal life insurance. It offers lifetime coverage with an added savings or investment component and has higher premiums than term life insurance. This may also require more stringent medical exams for diabetics

Simplified issue life insurance

Simplified issue life insurance requires no medical exam but only a health questionnaire, designed for individuals with health issues who might have difficulty qualifying for traditional life insurance. This policy typically has higher premiums and lower coverage amounts and is often easier for diabetics with well-managed conditions to obtain

Guaranteed issue life insurance

A guaranteed issue policy involves no medical exams or health questions and guarantees acceptance up to a certain age (e.g., 75 years). It has higher premiums and lower coverage amounts and often includes a waiting period (e.g., 2 years) before the full death benefit is paid out.

This is suitable for diabetics with significant health issues or those who have been declined other types of insurance

Comparing life insurance options for Type 1 and Type 2 diabetes patients

Securing life insurance as a diabetic can be challenging, but options exist for both Type 1 and Type 2 diabetes. The eligibility, cost, and coverage depend on factors like age, disease duration, treatment stability, and overall health. 

While traditional life insurance requires medical exams and detailed health records, no-medical life insurance offers a quicker, hassle-free alternative, but at a higher premium. Understanding the differences in insurance options for Type 1 and Type 2 diabetes can help individuals find the best coverage for their needs.

Best life insurance for type 1 diabetics

The availability of a life insurance policy for people with type 1 diabetes depends on the age of the applicant, duration of the disease, and degree of control. Traditional life insurance companies that require lab results will also seek a doctor’s statement to establish the stability of the treatment and the condition.

In most cases, a life insurance company may apply a rating (higher premium) when approving life insurance for those with type 1 diabetes. No-medical, questionnaire-based options make for an easier and faster process in such cases, albeit they offer life insurance for diabetics at higher premiums.

For no-medical questionnaires, the focus is primarily on the age of the insured, the stability of the medication, and the risk of complications. If you are older, with no change in your insulin dependence in the last 12 months and no associated complications, you can easily get life insurance with no medical exam or obligation to provide medical records.

Best life insurance for type 2 diabetics

People with type 2 diabetes can get life insurance in Canada with the possibility of standard, competitive pricing. Life insurance companies are usually more accommodating when offering life insurance to people with diabetes who do not require insulin injections.

Traditional insurance companies may even consider granting standard regular-health pricing (even more affordable life insurance) to someone who is:

• Above the age of 50
• Controlling their blood glucose levels and providing lab results with A1C levels
• Undergoes regular medical check-ups with a physician or specialist
• Is treated with oral medications that have not been increased in the past 12 months
• Follows a diet
• And has no diabetes diagnosis associated complications

There are also several options with no medical exam for people with diabetes who may not be able to get standard pricing or those that may want easier and faster access to life insurance.

Most no-medical life insurance questionnaires contain a few questions that seek to assess how long you have had type 2 diabetes, whether your medications have changed recently, and whether you have any complications associated with this type of diabetes. Based on simple binary questionnaires, the eligibility of life insurance for diabetics can be established fairly quickly.

Best life insurance companies for diabetics in Canada

There are several companies in Canada that cater to individuals looking for life insurance in Canada. Here are some of the best ones to look out for:

• Canada Life
• Sun Life Assurance Company of Canada
• Manulife
• Desjardins Financial Services
• Industrial Alliance Life Insurance
• Beneva Inc.
• Royal Bank of Canada (RBC)

What factors affect insurance rates for diabetes?

Several factors affect insurance rates for diabetics, as insurers evaluate risk based on how well the condition is managed and its impact on overall health. Here’s a collated list of factors that influence insurance rates:

Age

• Your age when you apply for a policy: Younger applicants generally secure better rates due to lower perceived risk
• Your age when you were diagnosed with diabetes: Earlier diagnosis can lead to higher rates due to longer potential exposure to complications

Type of diabetes

• Type 2 diabetes: More common and generally considered less risky compared to Type 1 diabetes but still affects rates
• Type 1 diabetes: Often associated with higher risk due to its complexity and potential for complications
• Gestational diabetes: Typically resolves after pregnancy; however, if it leads to Type 2 diabetes later, it can affect rates

Severity of your diabetes or blood sugar control

• Well-controlled diabetes with stable blood sugar levels is viewed more favorably by insurers
• Poor control with fluctuating blood sugar levels or complications can increase risk and lead to higher premiums

Other medical conditions

• Additional health issues can increase risk and affect premiums
• A family history of diabetes or related health conditions can influence rates
• Excessive alcohol consumption can impact overall health and increase insurance premiums

Tips to lower life insurance rates for diabetics

Lowering life insurance rates for diabetics will require you to take proactive steps to manage your condition effectively and demonstrate overall good health to insurers. Here are some tips to help reduce premiums:

• Maintain good control of blood sugar levels through regular monitoring and adherence to treatment plans, which shows effective management of diabetes to insurers
• Adopt a healthy lifestyle with a balanced diet and regular exercise, which can help improve overall health and potentially reduce the risk of diabetes-related complications
• Avoid smoking and limit alcohol consumption, as these factors can negatively impact health and lead to higher insurance premiums
• Regularly visit healthcare providers for check-ups and management of diabetes, showing insurers that the condition is being actively monitored and managed
• Keep detailed records of your diabetes management, including medications, lifestyle changes, and doctor visits, to provide evidence of effective control to insurers
• Compare quotes from multiple insurance providers, as different companies may have varying criteria and rates for diabetics
• Work with an insurance expert who specializes in high-risk cases so you can find a policy that suits your specific health conditions

How to get life insurance with diabetes?

Getting life insurance with diabetes can be more challenging, but with the right approach, you can find suitable coverage. Here’s a step-by-step guide to help you:

Gather your medical information

• Collect recent medical records, including blood sugar levels, HbA1c test results, and any other relevant health information
• Prepare a list of all medications you are taking
• Note any lifestyle changes you’ve made, such as diet and exercise routines

Manage your diabetes effectively

• Regularly monitor and maintain your blood sugar levels within the target range
• Follow a balanced diet, exercise regularly, avoid smoking, and limit alcohol consumption
• Visit your healthcare provider regularly for diabetes management and check-ups

Provide accurate information

• Submit accurate and detailed records of your diabetes management, including medications, lifestyle changes, and doctor visits, to show that you are managing your condition well

Apply for insurance

• Complete the application process, which may include a medical exam for some types of insurance
• If a medical exam is required, prepare by fasting if instructed, getting a good night’s sleep, and avoiding strenuous activities beforehand

Review and choose the best policy

• Policy review: Carefully review the terms, conditions, and exclusions of your policy
• Cost vs. coverage: Balance the cost of premiums with the coverage provided to ensure it meets your needs and budget
• Final decision: Choose the policy that offers the best balance of coverage and affordability

Why does timing matter with life insurance for diabetics?

Timing matters when applying for life insurance as a diabetic because your current health status and diabetes management can significantly influence the premiums and coverage options you receive. Here are some reasons why timing is crucial:

• Stable condition: Applying when your diabetes is well-controlled and stable can result in more favorable premiums.  
• Recent health improvements: If you’ve recently made positive changes to your lifestyle, such as losing weight, quitting smoking, or improving your diet and exercise habits, waiting until these changes are reflected in your medical records can lead to better rates
• Medical advancements: If new treatments or medications for diabetes have been effective for you, showing a period of stability and improved health can work in your favor with insurers
• Age considerations: Life insurance generally becomes more expensive as you age, so, applying when you are younger and your diabetes is under control can help lock in lower rates.
• Health monitoring: Regular check-ups and maintaining detailed health records over time can demonstrate a consistent pattern of good diabetes management, which can be appealing to insurers
• Temporary health issues: If you have temporary health issues unrelated to diabetes, waiting until you recover from these conditions can help you avoid higher premiums that might result from a recent illness or medical event
• Gestational diabetes resolution: If you developed gestational diabetes during pregnancy and it has since resolved, waiting until you have a track record of normal blood sugar levels and stable health can improve your chances of obtaining better life insurance rates

Life insurance and diabetes: What can help or hurt your case

When applying for life insurance with diabetes, several factors can influence your application positively or negatively. Understanding these factors can help you navigate the process and potentially improve your chances of securing favorable rates.

What are some questions insurers may ask about your diabetes?

When applying for a policy that requires a health questionnaire or physical exam, insurers will ask about your general health, lifestyle, and family medical history. They will also have specific questions regarding your diabetes, such as:

• What type of diabetes do you have? Understanding whether you have Type 1, Type 2, or gestational diabetes helps insurers assess risk levels
• When were you diagnosed? The age of diagnosis can impact perceived risk, with earlier diagnoses potentially affecting rates
• Do you monitor your glucose levels regularly? Regular monitoring indicates effective management of your condition
• Are you taking insulin, oral medication, or both? If so, provide details on the number of insulin units per day, types of medications, and dosages
• What is your current diet and exercise routine? Your lifestyle choices can affect your overall health and diabetes management
• What is your current A1C level? This provides insight into your long-term blood sugar control
• What has been your average A1C reading over the past year? Consistency in A1C levels is important for assessing diabetes control
• Have you had any other tests related to your diabetes? This includes tests for complications or related conditions
• Who is your primary care doctor and when was your last visit? You may need to provide contact details for your healthcare team, including endocrinologists
• Do you have any diabetes-related complications? This could include high blood pressure, vision impairment, blackout spells, or kidney issues
• Have you been diagnosed with any other serious medical conditions? Conditions like coronary artery disease or kidney disease can affect insurance rates
• Have you ever experienced a diabetic or insulin coma? Such events may impact your risk profile and premiums
• Are you currently on dialysis? Dialysis indicates severe complications and can significantly affect insurance costs
• Have you had any recent hospitalizations or emergency room visits related to your diabetes? Recent health events can influence risk assessment
• Have you made any recent changes to your diabetes medication or treatment plan? Recent changes can affect your current health status and risk profile
• What is your current weight, and have you experienced any significant changes recently? Weight fluctuations can impact diabetes management and overall health
• Have you been advised by your doctor to make any lifestyle changes or undergo additional treatments? Shows ongoing medical advice and treatment adjustments

Frequently asked questions

What is the best type of life insurance for diabetics in Canada? 

The best type of life insurance for diabetics often depends on individual health conditions and needs. Generally, term life insurance may be more affordable, while permanent life insurance offers lifetime coverage and an investment component. Simplified issue and guaranteed issue life insurance policies might also be options for those who prefer not to undergo a medical exam.

Can diabetics get approved for life insurance in Canada? 

Yes, diabetics can get approved for life insurance in Canada. Approval and rates depend on factors such as the type of diabetes, control of blood sugar levels, and overall health. Insurance companies assess these factors to determine eligibility and premiums.

How much does life insurance cost for diabetics in Canada? 

The cost of life insurance for diabetics in Canada varies based on several factors, including the type of diabetes, age, overall health, and the level of coverage required. Premiums may be higher than for individuals without diabetes due to the increased risk associated with the condition.

When is the best time for a diabetic to apply for life insurance in Canada? 

The best time for a diabetic to apply for life insurance is when their diabetes is well-controlled and stable. Applying when you are younger and healthier can also help secure better rates. It is advantageous to apply after recent improvements in diabetes management or overall health.

Do all life insurance companies in Canada offer coverage for diabetics? 

Not all life insurance companies in Canada offer coverage for diabetics. Some insurers specialize in high-risk cases and may provide coverage options tailored to diabetics. It is important to compare policies and work with a broker who can help find insurers willing to offer coverage.

Can diabetics get a life insurance policy if they have been turned down before?

Yes, diabetics can get life insurance if they have been turned down before or denied coverage. Read more about your life insurance options when your application has been declined.

A return of premium (ROP) rider in critical illness insurance is an optional add-on that refunds the premiums you’ve paid if you don’t make a claim during the policy term or under specific conditions, such as surviving the term or passing away.

If you’re considering critical illness insurance, adding an ROP rider can help you feel more secure about your investment. This rider ensures that even if you never need to use the coverage, you’ll still benefit financially.

In this article, we’ll explain how the return of premium rider works and benefits your finances.

How does a return of premium work?

In critical illness insurance, return of premium riders are available usually as an add-on. With this rider, you pay your monthly premiums as usual, and the policy provides coverage for critical illness or disability claims.

However, if no claim is made or under specific conditions, the insurance provider refunds a portion or all of the premiums you’ve paid.

There are three common types of ROP:

• Upon death (Return of premium on death – ROPD): If you pass away while the policy is active, the insurer refunds all eligible premiums to your appointed beneficiary
• At the end of the contract (Return of premium on expiry): If the policy term ends without a claim, the insurer refunds the premiums paid
• On cancellation or surrender (Return of premium on cancellation/surrender): Some insurers offer partial or full premium refunds after a set number of years or at specific ages, like 65 or 75

Each provider has unique rules about how premiums are refunded and under what circumstances. To ensure you choose the right option for your needs, we recommend that you schedule a call with our experienced advisors.

What are the benefits of return of premium riders?

Return of Premium (ROP) riders provide peace of mind by refunding premiums, adding value to your insurance, offering flexible refund options, and reassuring risk-averse policyholders.

A return of premium rider:

• Ensures that you get a refund of premiums if no claim is made
• Turns your policy into a savings tool with either coverage or a payout
• Offers reassurance for those worried about losing their investment
• May offer refunds on expiry, surrender, or death, depending on the rider

What are the disadvantages of return of premium riders?

The disadvantages of return of premium riders are that they come with higher premiums, require long-term commitment, may exclude certain fees from refunds, and could limit potential investment opportunities.

• Higher premium costs: The rider significantly increases your policy premiums
• Long-term commitment: Requires maintaining the policy for the full term to benefit
• Limited returnable premiums: Refundable premiums may exclude certain fees or add-ons
• Opportunity cost: Extra premiums could be invested elsewhere for potentially higher returns

Which critical illness insurance providers offer return of premium riders?

Many Canadian insurance providers such as Beneva, Sun Life, RBC, Industrial Alliance, Desjardins, Manulife, Canada Life, and Empire Life offer return of premium (ROP) riders.

These riders are offered with different options like Return of Premium on Death (ROPD), Return of Premium on Expiry (ROPX), Return of Premium on Cancellation (ROPC), and other flexible refund features.

What is the cost of a return of premium rider in critical illness insurance?

The cost of adding a return of premium (ROP) rider in a basic critical illness policy costing $79.65 per month could be $117.99 per month

A return of premium rider significantly increases your critical illness insurance premiums, typically by 30–50%, depending on the rider type, insurer, and your policy details.

These costs also differ based on the type of return of premium rider:

• Return of premium on death (ROPD): Lower additional cost since it refunds premiums only if the insured passes away during the policy term
• Return of premium on expiry (ROPX): Higher cost as it guarantees a full refund of premiums if no claim is made by the end of the term
• Return of premium on surrender (ROPS): Costs are similar to ROPX but allow partial refunds if the policy is canceled early

Additionally, long-term policies like term-75 or lifetime coverage tend to incur higher premiums for ROP riders due to extended refund commitments.

Is a return of premium on critical illness taxable?

No, the return of premium (ROP) benefit on critical illness insurance is generally not taxable in Canada. When you purchase a critical illness insurance policy, you pay your premiums using after-tax dollars, meaning the money you use to pay for the policy has already been taxed.

Therefore, when you receive a refund of those premiums through an ROP rider whether upon expiry, surrender, or death, it is treated as a return of your personal contributions, not as income.

Comparison of return of premium riders with traditional critical illness insurance

Return of premium riders enhance critical illness policies by offering premium refunds, unlike traditional plans that provide coverage only. Here’s how these differ:

Premium refunds:

• ROP riders: Refund premiums if no claim is made (on expiry, death, or surrender)
• Traditional CI plans: Do not refund premiums regardless of claims

Cost:

• ROP riders: Typically 30–50% more expensive
• Traditional CI plans: More affordable but lack refund benefits

Flexibility:

• ROP riders: Allow refunds under specific conditions (expiry, death, surrender)
• Traditional plans: Offer no such options

Best suited for:

• ROP riders: Ideal for risk-averse individuals seeking financial security
• Traditional plans: Suitable for those focused on lower premiums

How do I get a return of premium coverage?

You can add a return of premium rider to your critical illness insurance policy while purchasing the plan or during eligible upgrade periods.

To get ROP coverage, you need to consult with your insurance provider to explore available rider options. Typically, a return of premium rider is added when purchasing a long-term critical illness policy. The process may involve assessing your eligibility based on age, health, and other criteria.

To qualify for ROP coverage, you must meet specific insurer requirements regarding age, policy type, and health status.

• Age requirements: Most insurers offer ROP riders to individuals aged 18–65
• Policy type: ROP is typically available on long-term critical illness policies, not short-term plans
• Health status: Eligibility may require passing a medical exam or meeting the insurer’s health guidelines
• Consistent premium payments: Some insurers mandate a history of timely premium payments
• Insurer-specific rules: Each provider may have unique conditions for adding ROP, such as coverage amount or policy terms

Getting individual or private life insurance to supplement your group life insurance plan is usually recommended to ensure you have adequate coverage. Almost 39% of life insurance policies in Canada are through group term insurance. With such a large number of Canadians covered through their work, many are under the impression that it’s enough coverage for their family too.

However, group life insurance plans have limitations and restrictions, and offer limited coverage. Read on to know more about group and individual life insurance plans, their advantages and disadvantages, and more.

What is life insurance?

Life insurance is an agreement between you and an insurance company that in the event of your demise, they will pay a lump sum, tax-free death benefit to someone you choose (your beneficiaries). In exchange, you agree to pay a premium to the insurance company. 

There are two main types of life insurance plans that an individual can choose from:

• Term life insurance that lasts for a specific period of time, generally 10, 20, or 30 years
• Permanent life insurance which covers you for your entire life and generates a cash value component. Some policies also pay dividends depending on your plan type

Life insurance can be bought by an individual (personal life insurance) or offered by an employer as part of a group plan. 

What is group life insurance?

A group life insurance is  a contract or an agreement that promises to pay an employee’s dependents a tax-free lump sum amount in the event of their demise. It is offered by an employer to a “group” of people—the employees. A group life insurance policy helps soften the financial impact that comes with losing an earning member of a family. 

Most group life benefits are offered as term life insurance that is renewed annually by the insurance provider. Unlike whole life insurance which covers an individual for their entire lifespan, term life policies provide coverage for a certain “term” or fixed period of time. 

Do I need individual life insurance if I am covered through work?

Yes, supplementing your group life insurance with individual life insurance coverage is highly recommended. Group life insurance plans generally payout up to one or two years of your salary. This may not always be enough for your family after you pass away. 

To ensure your family’s living expenses, your funeral fee, your children’s education costs, and other expenses, are covered, you need to get individual life insurance. When you buy an individual life insurance plan, you also get the option to get a participating whole life insurance policy. This type of policy gives you a cash value component and dividends, both of which can be accessed while you’re alive or after your demise. 

What is the difference between group and individual life insurance?

Group life insurance is offered by an employer to a group of people (the employees), while individual life insurance only covers the primary policyholder. Group life insurance plans offer limited coverage and the plan details are designed based on the employer’s budget and recommendations. Individual life insurance policies are customized to fit the needs of the policyholder. It lets policyholders choose their coverage amount, duration, and add additional riders to their core plan. 

What type of life insurance do employers offer as a group benefit?

Most employee life insurance is term life insurance. Although other types of permanent life insurance are also sometimes offered.

With group term life insurance plans, the death benefit is offered as a flat dollar amount, as a multiple of an employee’s annual salary (such as one or two times your annual salary), or a mix of both.

Do employers pay for group term life insurance?

Most private employers will pay for a substantial, if not the entire, portion of the premiums for group life insurance. The only thing to note: the coverage offered is typically basic. This means there is no customization or riders built in. The cost of additional supplementary coverage is usually paid for by the employee.

What are the benefits of group life insurance?

There are a number of benefits of group life insurance that make it an attractive option for those who are offered it through work or a professional association.

Affordability: An employer often pays for most – if not all – of the life insurance premium so there is very little or no cost to the member of the plan. If you do need to pay a portion of the premiums, they are usually less expensive. This is because the insurance company prices it on the basis of the underlying risk profile of the entire group as a whole rather than as an individual insurance applicant.

Convenience: It’s easy and convenient to sign up with only a small amount of paperwork and no individual underwriting. The payments are usually through payroll deduction, so no worries about policy lapsing because you missed your premium payments.

Limited underwriting: Most group term life contracts do not require any medical exam to be administered to the individual plan members. Members may be automatically or voluntarily enrolled in the overall group life insurance plan. However, an eligible employee may be required to go through medical underwriting, to establish good health in special circumstances such as when seeking an amount higher than the group coverage or when trying to rejoin the plan, after initially declining coverage.

What is the main disadvantage of group life insurance?

The main disadvantage of group life insurance is the one-size-fits all approach that assumes that every member of the group is likely to need the same amount of coverage. This is not always the case and life insurance coverage should be customized to individual needs. 

Other disadvantages of a group life insurance policy are:

Lack of control: Another disadvantage is that the plan sponsors (i.e. the employer or the organization) or even the insurance company can change the plan anytime they choose or even discontinue it altogether. Because you are sharing a plan among others in a group, it cannot be tailored to meet your own unique needs. There may be exclusions for medical conditions that you may have.

Limited portability: Group life insurance is dependent on an individual’s affiliation with the group. Just because one particular job includes insurance, there’s no guarantee that the next one will. If you find yourself in a position where you need to purchase life insurance once you make a career change, your premiums are likely to be much higher by then as you are a little older and more expensive to insure from an underwriting perspective.

Taxation: Lastly, depending on how your employer structured the benefit fees, you might need to pay taxes on the payout.

What happens to my group life insurance coverage if I leave my employer?

Employer-offered life coverage is linked to your employment. This means it covers you and your dependents until your employment period ends—whether you quit or you’re fired by the employer.

Many employer-offered plans include an option to convert the group coverage to an individual policy, upon leaving the employer. However, the cost of conversion from group to individual coverage is significantly higher and most people tend to get new individual coverage at that time. 

Typically, only those individuals who may have pre-existing health conditions, and may find it hard to get individual coverage based on a medical exam, will take advantage of this conversion option.

Does life insurance cover job loss?

No, life insurance does not cover job loss. It pays your beneficiaries a lump sum of money in the event that you, the employee, pass away. Job loss insurance is a separate insurance product. Disability insurance provides income replacement (usually 60-80%) in the event that you are injured or ill and can no longer work. 

Does group life insurance end at retirement?

Yes. Group life insurance is dependent on your continued employment; therefore, at retirement, your group life insurance also expires. However, as mentioned above, you will typically have the ability to convert the group plan into individual coverage, without providing any evidence of good health. The conversion has to be requested within a limited period of time, usually 31 days. The conversion option is much more expensive since no evidence of good health is provided.

Are my dependents covered through employer life insurance?

Sometimes. Most employer-offered life insurance plans will allow an employee to extend coverage to also include their dependents, such as married or common-law spouse and dependent children up to a certain age, such as 21 years. But that’s not always the case, so check your policy documents!

Is group life insurance a taxable benefit?

Yes, employer-paid life insurance is considered a taxable benefit. With group term life insurance paid by the employer in Canada, the premiums appear on your T4 slip and are reported on your tax return as a taxable benefit.