Top 7 life insurance misconceptions (and our predictions for 2024)
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Jessica Ho
For many Canadians, life insurance may seem like a daunting topic – but it’s important to understand the ins and outs of your coverage so that you can make the best decisions for your loved ones’ financial future. In this article, we break down the most common life insurance misconceptions (plus some predictions we have for the new year).
Key takeaways on life insurance myths and predictions
In this article, we debunk the following life insurance myths for Canadians:
- Life insurance is too expensive
- You don't need life insurance if you're young, single, and healthy
- Employer-provided life insurance is sufficient
- You can't get life insurance with a pre-existing condition
- Joint life insurance is always the best option for couples
- You should always buy term and invest the difference
- Life insurance is only used for after-death
Plus, we provide our predictions for the life insurance industry in 2024:
- Many younger Canadians will delay the purchase of life insurance
- More coverage will be needed due to high costs of living
- Digital processes will make purchasing life insurance easier
Debunking 7 common life insurance misconceptions
Here are a few misconceptions you may have about life insurance, along with the realities that debunk them. For more insight on any one of these topics, be sure to connect with a licensed broker in Canada.
1. Life insurance is too expensive
While life insurance can be expensive, that’s not always the case. Term life policies are generally affordable, especially if you lock in your premium while you’re young and healthy. For instance, a 30-year-old, non-smoking female can pay as little as $230 each year for a $500,000 20-year term policy – that’s about $19 a month to set your loved ones up for a potential worst-case scenario.
Matt Hands, VP of Insurance at Ratehub.ca:
“For many Canadians, a simple 20 to 30-year term life insurance policy is all you’ll need to provide basic protection for your loved ones. These policies can also be flexible with options to renew or convert the coverage if your needs evolve over time.”
2. You don’t need life insurance if you’re young, single, and healthy
Yes, life insurance isn’t for everyone, but again, it’s the cheapest while you’re young and healthy. Locking in a premium early on can be a cost-effective measure for future family planning – especially knowing that your health status can change at any given moment.
Jeffrey Talor, Director of Sales at CanWise Life Insurance Services:
“Life insurance is the most tax-efficient way to transfer wealth. The death benefit can be paid out to your beneficiaries tax-free, and both the death benefit and cash value are also protected from creditors – your creditors can’t force you to surrender your policy for the cash value to repay them.”
Even if you aren’t planning to start a family (or have any dependents for that matter), you can consider life insurance for other reasons. For example, if you have co-signed debts with your parents (e.g. for a mortgage or student loans), life insurance can help cover these obligations in the event of your passing. Alternatively, you may even want to take out a policy with a smaller benefit, just so all your funeral expenses are covered.
3. Your employer-provided life insurance is sufficient
Employer-provided life insurance (also known as group life insurance) typically offers a basic level of coverage – it may be a set amount or tied to a percentage of your salary – which won't account for your specific needs. So while the policy can be a nice-to-have for final expenses, it may not be enough if you have children to provide for or a mortgage that can be passed on. Make sure you calculate how much life insurance you need and supplement your employer's coverage accordingly if needed.
There is also a lack of customization when it comes to employer-provided life insurance. Most group plans are term life policies, so if you want permanent life insurance – or additional add-ons on your policy, such as a child rider – you may need to seek out individual coverage. Last but not least, know that these policies are generally tied to your employment status. If you leave your job for any reason, you may lose your coverage.
Jeffrey Talor, Director of Sales at CanWise Life Insurance Services:
“In most situations, the amount offered by your employer is not enough to cover basic liabilities. Relying on employer-paid life insurance is also a concern if you develop health issues leaving you unable to work and then find it challenging to secure affordable coverage elsewhere.”
4. You can’t get life insurance with a pre-existing condition
While it’s true that having a pre-existing condition can make it difficult to obtain coverage, it’s not impossible to do so. Many companies offer policies, specifically designed for those with pre-existing conditions. This can include guaranteed-issue life insurance where no medical questions or exams will be needed for approval.
Matt Hands, VP of Insurance at Ratehub.ca:
“These policies might have limitations, such as waiting periods, lower coverage limits, and higher premiums – but if you’re in need of coverage, there are available options that can offer a viable solution.”
5. Joint life insurance is the best option for couples
There are a few different types of joint life insurance policies. If you and your partner are both looking for coverage at the same time, a joint-multi life plan can provide two separate death benefits under one insurer for a discounted rate.
However, that’s not the case with joint-first-to-die and joint-last-to-die plans. With joint-first-to-die insurance, a single death benefit is paid when one policyholder passes away. With joint-last-to-die insurance, on the other hand, a single death benefit is paid when both policyholders pass away.
As these policies are typically more affordable than purchasing two separate plans, they can be a great option for certain couples. For example, if both you and your spouse are active contributors to the household income and share similar financial responsibilities, a joint-first-to-die life insurance policy can be a practical solution for income replacement after one person’s death.
Read: Life insurance for young married couples
However, just because you and your partner both need coverage doesn’t mean you should automatically opt for a joint-first-to-die or a joint-last-to-die plan – the coverage needs may differ from person to person. Plus, if one partner has a complicated health history, it can lead to a higher premium overall. In the case of a joint-first-to-die policy, also, the surviving partner may want to purchase their own coverage later on – but it can be difficult to find affordable coverage then. And as separations do happen, it’s not always easy to divide a life insurance plan.
Jeffrey Talor, Director of Sales at CanWise Life Insurance Services:
“It’s important to understand the differences between a joint-multi life plan and joint first or joint last plan. Joint first and joint last insurance may serve some purposes, but it won’t serve all. Be sure to speak to a broker to understand the best option for your specific case.”
6. You should always buy term and invest the difference
Buying term life insurance and investing the difference (the amount saved in premiums when compared to buying permanent life insurance) is a popular financial strategy, but it’s not universally applicable to everyone’s needs.
Term life insurance provides coverage for a specific term, and if the policyholder outlives the term, the coverage ends. So if there is any need for insurance beyond the term (such as for estate planning or leaving a legacy) a permanent life insurance plan may be the better option due to the tax-free payout.
And while self-investing will most likely be market-driven, that’s not the case with whole life insurance – insurance companies can guarantee cash returns, minimizing your overall risk. On the other hand, if you’re especially financially savvy, a universal life insurance policy gives you control of your investments. The gains are also tax-deferred, making it a viable strategy if both your TFSA and RRSP are maxed out.
Keep in mind that everyone’s financial situation is different, so it’s best to speak to an advisor about which strategy is best for you – an advisor can help assess your individual needs, risk tolerance and long-term goals when it comes to life insurance and investing.
7. Life insurance can only be used for after-death
While the main use for a life insurance policy is to secure your loved ones’ financial futures after your death, there are a few ways you can access benefits during your lifetime. Permanent life insurance policies, for one, accumulate a cash value reserve – this is money you can access through withdrawals or loans. This can be helpful in the event of a financial emergency (e.g. paying for medical bills or a home repair), or you may simply want the cash value there to supplement your retirement income.
You can also access cash value if you need to surrender your permanent policy for any reason – this amount (called the cash surrender value) is generally a lump sum amount that includes a portion of the accumulated cash value, minus any fees or outstanding policy loans. While this will leave your beneficiaries without any death benefit, it can provide you with immediate access to a large portion of funds during your lifetime.
Additionally, living benefits products, such as critical illness insurance and disability insurance can offer funds during your lifetime in the event of a health-related emergency. It can be used for various needs, such as replacing your income and paying your medical bills.
Jeffrey Talor, Director of Sales at CanWise Life Insurance Services:
“In my opinion, living benefits are some of the most important products to consider. While death is final, the bills will still keep piling up if you get sick.”
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Ratehub.ca’s life insurance predictions for 2024
Now that we’ve debunked some common misconceptions about life insurance in Canada, let’s take a look at some of our predictions for the new year.
1. The purchase of life insurance will be delayed by many Canadians
A recent report from LIMRA revealed that while 52% of the adult population owns life insurance, it’s not as popular with younger individuals – the American study showed that only 40% of Gen Z and 48% of Millennials had coverage in 2023.
The adoption of coverage has been growing but at a slow pace – in comparison to 2022's numbers of 34% (Gen Z) and 45% (Millennials). The 2023 study also showed that 49% and 47% of these groups respectively recognize the need for life insurance.
So why aren’t more Gen Z and Millennials purchasing coverage? One reason for this could be a delay in taking on responsibilities that are traditionally tied to the need for insurance (such as getting married, owning a home, and having children). Additionally, 30% of Millennials and 27% of Gen Z from the study cited having other financial priorities as one of the reasons for foregoing coverage – which doesn’t come as a surprise in this era of economic uncertainty.
Keep in mind that life insurance is the most affordable while you’re young and healthy. So, taking proactive measures early on can save you money in the long run – hence the second misconception covered in this post.
Matt Hands, VP of Insurance at Ratehub.ca:
“There’s definitely a gap in education for younger Canadians when it comes to life insurance. Learning the basics early on can help pave the way for a secure financial future.”
2. More coverage will be needed to supplement the high cost of living
According to the 2023 Canadian Life & Health Insurance Association Facts Report, the average household held $474,000 in life insurance protection in 2022 – that’s nearly an increase of 3.5% when compared to 2021’s number of $458,000. It’s also approximately five times the amount of a family’s household income.
As the cost of living continues to rise across the country, Canadians will need to opt for more coverage to protect their loved ones sufficiently. It’s simple math – if a death benefit is meant to cover expenses such as a mortgage, tuition, or even just groceries, and the price of these are only increasing, you’re going to need to increase your life insurance too.
Matt Hands, VP of Insurance at Ratehub.ca:
“Choosing a higher death benefit will lead to a higher premium. Everyone’s needs are different, and you don’t want to be overinsured or underinsured, so carefully consider your current and future financial responsibilities when reviewing your life insurance options.”
3. Digital and simplified processes will make purchasing life insurance easier
Purchasing life insurance isn't always a quick and easy process. Other personal insurance products, such as auto insurance, home insurance, and travel insurance, can often be secured online in just a few clicks. With life insurance, however, the extensive underwriting process can include health exams and additional documentation that can lengthen the approval process. It's also quite a long-term commitment, so you'll need to carefully consider your needs to make the most informed decisions possible.
But like many other industries, the Canadian life insurance landscape is constantly evolving with new and optimized digital processes. For instance, one innovative life insurance company, Emma, has created a fully online experience for customers to purchase same-day coverage. Additionally, with Ratehub.ca, you can connect with qualified brokers to compare personalized life insurance quotes from Canada’s top providers with ease.
Jeffrey Talor, Director of Sales at CanWise Life Insurance Services:
“If you get declined by one company because you misinterpret a health-related question online, it can be challenging to get coverage elsewhere since information is shared through the MIB (Medical Information Bureau). Working with a broker, however, ensures there’s an expert available to explain all the nuances of the underwriting process.”
The bottom line
Life insurance may seem like a daunting topic, but it doesn’t need to be. By doing your research ahead of time and staying up to date with industry trends, you can make sure you’re making the best decisions for your financial future.