Why More Canadians Are Buying Shorter, Smaller Life Insurance Policies in 2026 - And the Risk of Being Underinsured

Affordability pressure is pushing Canadians toward smaller, shorter-term life insurance policies in 2026. Here's why that's happening, the underinsurance risk it creates, and how living benefits are stepping in to fill the gap.

A Shift Toward Smaller, Shorter Policies

Industry forecasts for 2026 point to a clear shift in how Canadians are buying life insurance: rising affordability concerns are pushing many toward smaller coverage amounts and shorter policy terms, prioritizing a lower monthly premium over the full coverage amount their family might actually need. It's an understandable response to cost-of-living pressure, but it comes with a real risk that's easy to overlook in the moment of buying a policy.

The Underinsurance Risk

A policy that's smaller or shorter than what your family would actually need is still better than no policy at all - but it can create a false sense of security. If a $200,000 policy is purchased when a family's actual need (debts, income replacement, mortgage, education costs) works out closer to $500,000, the gap only becomes obvious after a death, when it's far too late to fix. A shorter term policy carries a related risk: if it expires while it's still needed, renewing or requalifying at an older age - and likely with a changed health picture - can mean a dramatically higher premium, or in some cases, no longer qualifying for the coverage at all.

Approvals Are Also Taking Longer

Alongside the affordability trend, underwriting and approval processing times have generally lengthened industry-wide in 2026, making securing coverage a more time-consuming process than it used to be. That's a practical reason on its own to start a life insurance application earlier rather than waiting until coverage feels urgently needed - a life event, a health change, or simply life getting busier can turn a straightforward application into a much longer wait.

Living Benefits Are Filling the Gap

At the same time affordability is squeezing traditional life insurance purchases, demand for critical illness and disability insurance - often called "living benefits" because they pay out while you're alive rather than only after death - is accelerating. Many Canadians are recognizing that workplace benefits alone often don't cover a serious illness or injury adequately, and are looking to fill that specific gap even while keeping their core life insurance policy modest.

Working Out What You Actually Need

Rather than picking a coverage amount that simply fits a comfortable premium, a more reliable starting point is the DIME method: add up your outstanding Debt, the Income your family would need replaced (commonly 10 or more years' worth), your remaining Mortgage balance, and your children's future Education costs. The total gives a realistic target - and from there, a term length and premium can be worked out around the coverage that's actually needed, rather than backing into a coverage amount from an arbitrary monthly budget.

• Calculate your real coverage need first (debt + income replacement + mortgage + education), before shopping by premium
• If affordability is a genuine constraint, consider a longer, smaller policy over a shorter, larger one - so it doesn't expire while still needed
• Start your application earlier rather than later, given longer processing times industry-wide in 2026
• Consider adding critical illness or disability coverage even alongside a modest life insurance policy, to cover the "living benefits" gap
• Revisit your coverage amount whenever your debt, income, or family situation changes materially