What Is a Life Insurance Policy?

Q: What are the main types of life insurance policies?

The main types are: (1) Term life — coverage for a set period (10, 20, or 30 years); (2) Whole life — permanent coverage with cash value and often dividends; (3) Universal life — permanent coverage with flexible premiums and an investment component. Term is the most affordable; whole and universal are used for lifelong protection and estate planning.

Q: What are the key parts of a life insurance policy?

Key parts include: the death benefit (amount paid to beneficiaries), the premium (what you pay), the term length (for term policies), the policy owner and insured, the beneficiaries, and any riders (e.g. waiver of premium, critical illness). The contract also describes conversion rights, exclusions, and renewal terms.

Direct answer: A life insurance policy is a contract between you (the policyholder) and an insurance company. You agree to pay premiums — monthly or annually — and the insurer agrees to pay a death benefit (a lump sum) to your chosen beneficiaries when you die. The policy document spells out the coverage amount, premium, length of coverage, and conditions.

In Canada, life insurance death benefits are generally tax-free to beneficiaries. Policies are regulated at the provincial level, and insurers are members of Assuris, which protects policyholders if an insurer fails.

Key parts of a life insurance policy

Death benefit: The amount paid to your beneficiaries when you die. This is the "coverage amount" (e.g. $500,000).
Premium: What you pay to keep the policy in force. Can be level (same amount for the term) or flexible (e.g. in universal life).
Term length: For term life insurance, the period of coverage (10, 20, or 30 years). After the term, the policy may be renewable at higher rates or expire.
Policy owner and insured: The owner pays premiums and can change beneficiaries; the insured is the person whose life is covered (often the same as the owner).
Beneficiaries: The people or entities who receive the death benefit. You can name primary and contingent beneficiaries.
Riders: Optional add-ons such as waiver of premium (premiums waived if you become disabled), critical illness rider, or child term rider.

For more on how coverage works from start to finish, see how life insurance works.

Types of life insurance policies

The three main types of life insurance policy in Canada are:

Type	Duration	Typical use
Term life	10, 20, or 30 years	Family protection, mortgage, income replacement
Whole life	Lifetime	Estate planning, cash value, legacy
Universal life	Lifetime	Flexible premiums, investment component, business/estate

Term life is the most affordable and is best for most families. Whole life and universal life are permanent and often used for estate planning. For a detailed comparison see term vs whole life insurance and best life insurance policies in Canada.

How does a life insurance policy work?

You apply (with health and lifestyle information, and sometimes a medical exam). The insurer underwrites the application and may offer a policy at a given premium. You pay premiums on schedule; if you stop paying, the policy may lapse. When you die, your beneficiaries submit a claim with the death certificate; the insurer pays the death benefit, usually tax-free. For term policies, if you outlive the term, coverage ends unless you renew or convert to permanent insurance (if the policy allows).

Frequently asked questions