Life insurance 101, how buying a policy actually works
- Coverage amount, term length, and health class are the three levers that set your price.
- You'll go through either a short questionnaire (simplified issue) or a fuller application with underwriting (fully underwritten).
- Most term policies are renewable and convertible, so your choices today aren't permanent.
The short answer
Life insurance works in four steps: you decide how much coverage you need and for how long, you apply and answer health and lifestyle questions, the insurer classifies your risk and gives you a price, and once approved, you pay premiums to keep the policy active. If you die while it's in force, your named beneficiary gets the death benefit, generally tax-free. This article walks through each step in more detail than the 2-minute version.
Step 1: how much coverage
Coverage amount is usually driven by what you're trying to replace or pay off, not a fixed rule. Common ways people land on a number:
- Add up your mortgage balance, other debts, and a few years of income replacement.
- Cover specific costs: remaining mortgage, kids' education, final expenses.
- A common rough guideline some people use is 5 to 10 times annual income, though your actual number should reflect your own debts and dependents, not a formula.
A 35-year-old with a $450,000 mortgage and two kids, for example, might land on $750,000 to $1,000,000 in coverage once income replacement is added to the mortgage payoff.
Step 2: how long (term length)
Term policies are sold in fixed lengths, commonly 10, 20 or 30 years. Pick a length that roughly matches how long the need lasts. If your mortgage has 22 years left, a 20 or 30-year term lines up better than a 10-year one that expires while you still owe money. Longer terms cost more per year but lock in your rate for longer.
Step 3: underwriting, the part that sets your price
This is where the insurer decides your risk class and premium. There are two main paths:
- Simplified issue: a short health questionnaire, no medical exam. Faster, but coverage is capped, often up to $500,000 per insurer.
- Fully underwritten: a full application, and often a paramedical exam with blood work. Slower (days to a few weeks), but usually cheaper for healthy applicants and allows higher coverage.
Step 4: what it costs, in real numbers
Price is driven mostly by age, sex, smoking status and health. As an illustrative example, median standard rates from four fully underwritten Canadian insurers for $500,000 of 20-year term (Alberta, September 2026):
| Age | Non-smoker man | Non-smoker woman |
|---|---|---|
| 30 | ~$29/mo | ~$20/mo |
| 40 | ~$44/mo | ~$33/mo |
| 50 | ~$121/mo | ~$82/mo |
Smokers pay noticeably more, a 35-year-old smoking man on the same policy is often around $84 a month versus $36 for a non-smoker. Shorter terms cost less, longer terms cost more. These are estimates only, your final price depends on underwriting.
What your beneficiary actually receives
If you die while the policy is active, your named beneficiary files a claim with the insurer and, once approved, receives the death benefit as a lump sum, generally tax-free, paid directly to them rather than through your estate. Most policies have a 2-year contestability period, meaning the insurer can review the application for misstatements during that window. After 2 years, a claim can generally only be contested for fraud, which is one reason to always answer application questions honestly.
Renewing and converting
Term policies are typically renewable at the end of the term, though at much higher rates that reflect your age at renewal. Many are also convertible to a permanent policy before a set age, without new medical underwriting, which matters if your health changes and you later want lifelong coverage. Ask about both features before you buy, they vary by insurer.
Common mistakes people make at this stage
A few patterns show up often enough to flag directly:
- Buying based on a round number instead of an actual need. "$250,000 sounds like a lot" isn't a plan, it's a guess. Work from your mortgage balance and income, not a number that feels big.
- Choosing the shortest, cheapest term without checking the timeline. A 10-year term is cheaper today, but if your mortgage has 25 years left, you'll be re-buying coverage at a much older age.
- Skipping the health questionnaire honesty check. Leaving out a diagnosis or a risky activity to get a better rate can put the whole payout at risk if it's discovered within the contestability period.
- Assuming group coverage through work is enough. It's often only 1 to 2 times salary and disappears the day you leave the job.
What to do next
If you're still deciding whether coverage makes sense for your situation, read do I need life insurance?. If you already know you want term coverage and just want to see numbers for your age, get a quote.
FAQ
Can I change my coverage after the policy is in force?
You can usually add a new policy on top, or in some cases convert term coverage to permanent before a set age. You generally can't reduce an existing term policy's amount without cancelling and rebuying, so it's worth getting the amount right at the start.
What disqualifies someone from getting life insurance?
Very few things disqualify you outright. Serious current illness, certain recent diagnoses, or high-risk activities disclosed on a fully underwritten application can lead to a decline, a rating (extra cost), or an exclusion, but most applicants qualify for something, often through a simplified-issue plan if a standard one doesn't work.
Philip Setter has been a licensed life insurance advisor since 2014 and founded Affinity Life in 2020. He's a climber, ice climber and ski tourer based in Calgary.