How to Match Your Life Insurance Coverage to Your Changing Needs
- 2 days ago
- 5 min read
Your need for life insurance probably won’t remain the same throughout your life.
When you are raising a family, paying a mortgage and relying on employment income, you may need a substantial amount of coverage. Years later, your mortgage may be smaller, your children may be financially independent and your savings may have grown.
Instead of purchasing one large policy for a single length of time, your coverage can be structured using several term life insurance policies with different coverage amounts and initial term lengths.
Each policy can address a different financial responsibility. For example, one might help protect your family while your children are young, another could align with your mortgage repayment period and a longer policy could provide income protection until retirement.
As those responsibilities change, you can review each policy and decide whether the coverage is still needed. This can help provide greater protection during the years when your family is most financially vulnerable, without assuming that you will need the same amount of insurance forever.
How can different term policies work together?
Term life insurance provides coverage for an initial period, such as 10, 20 or 30 years. Available term lengths vary among Canadian insurers.
By combining policies with different terms, you can arrange for portions of your coverage to be reviewed at different times.
For example, you could use:
Shorter-term coverage for a loan you expect to repay soon
Medium-term coverage while your children remain financially dependent
Longer-term coverage for your mortgage or income-replacement needs
During the early years, all the policies are in place and provide a larger combined death benefit. As each initial term ends, you can review your financial situation and decide whether that portion of the coverage is still required.
Many Canadian term policies renew automatically at higher premiums unless the policyholder takes action. It is therefore important to review each policy before its initial term ends.
Why structure coverage this way?
Different financial responsibilities often have different timelines.
Your mortgage may take 25 years to repay, but your children may need financial support for another 15 years. A car loan could be repaid in five years, while your family might rely on your income until you retire.
Purchasing one large policy for the longest period can provide consistent protection, but it may also leave you paying for more coverage than you expect to need later.
Using several term policies allows each portion of your coverage to be connected to a particular need. As debts decrease, savings grow and dependants become financially independent, your total coverage can be adjusted accordingly.
An example of how it could work
Consider a Canadian family with two young children, a $650,000 mortgage and two incomes supporting the household. The family also wants to protect its children’s future education plans.
After reviewing its needs, the family chooses:
$400,000 of 15-year term insurance for the years when child-care and education needs are highest
$600,000 of 25-year term insurance to help protect the family while the mortgage is being repaid
$500,000 of 30-year term insurance to replace income until close to retirement
This provides $1.5 million of total coverage at the beginning.
When the 15-year policy reaches the end of its initial term, the family can review its situation. If the children are becoming financially independent and that portion of the coverage is no longer required, the policyholder may decide not to renew it.
The remaining $1.1 million of coverage would continue. The other policies could be reviewed in the same way as their initial terms end.
The appropriate coverage amounts and premiums will depend on the family’s financial needs and factors such as the insured person’s age, health, smoking status, occupation and the insurer’s underwriting decision.
Potential benefits
Coverage that reflects your priorities
Each policy can be connected to a specific responsibility, making it easier to understand why you have the coverage and how long you expect to need it.
Potential cost savings
Shorter-term policies generally have lower initial premiums than policies providing the same coverage for a longer guaranteed period.
When a policy is no longer needed and is allowed to lapse or is cancelled, its premiums also stop. This may reduce your total insurance costs over time.
Savings are not guaranteed. The total cost depends on the applicant, the policies selected, the insurers and any applicable policy fees.
More flexibility
You can review each policy separately as your circumstances change instead of treating all your coverage as one block.
More coverage when needs are greatest
This approach can provide a larger total death benefit during the years when you have a mortgage, dependent children and many working years ahead of you.
What should you consider?
Managing several policies is more complicated than managing one. You may have multiple premiums, policy numbers, renewal dates and documents to track. Your beneficiaries or executor should know that each policy exists and where to find the information.
Your needs may also change differently than expected. A mortgage might take longer to repay, a child may remain financially dependent or you may take on new debt. Regular reviews are important to make sure the coverage still reflects your situation.
Buying additional insurance later will normally require new underwriting. Because you will be older—and your health may have changed—the new coverage could be more expensive or unavailable.
Some Canadian term policies include renewal or conversion options. Renewal may allow coverage to continue without new medical underwriting, but the premium can increase significantly. Conversion may allow term coverage to be changed to an eligible permanent policy, subject to the contract’s deadlines and conditions.
Before cancelling or replacing an existing policy, make sure any new coverage you require has been approved and is in force.
It is also important to compare the total cost of several policies with the cost of one larger policy. Administrative or policy fees could reduce the expected savings.
Is this approach right for you?
Combining term policies may be worth considering if you have several financial responsibilities that are expected to end at different times. It can be particularly useful for Canadian families balancing a mortgage, dependent children, education costs and income replacement.
It may be less suitable if you want the simplest possible arrangement or expect your need for coverage to remain relatively stable.
The right structure depends on your family, finances and plans for the future. A licensed Canadian life insurance advisor can help you identify how much coverage you need, how long each need may last and whether one policy or a combination of policies is the better fit.
