How life insurance works in Canada

Life insurance provides a financial safety net for your loved ones. Essentially, a life insurance policy is a contract between you and a life insurance company under which you agree to pay regular premiums in order to be eligible to receive a guaranteed tax-free payout, or a death benefit, for your beneficiaries in the event of your death.

Your premiums are calculated by taking into account several factors, including your age, sex, health condition, and lifestyle. The amount also changes depending on how much coverage you need and how much financial support you want to leave behind for your beneficiaries (this can be your family, friends, or anyone that relies on you financially). The death benefit provided can be used to help your beneficiaries deal with outstanding debts, funeral expenses, and daily living costs - helping ease one area of stress during an incredibly difficult time.

There are many other types of life insurance available - understanding how each one works can help you choose the best option for you and your family.

If you are a parent, homeowner, or someone with dependents, purchasing a life insurance policy is essential. After all, if you don’t have life insurance, what will happen to your dependents or your property if you die? 

If you pass away without a life insurance policy in place, anyone relying on your income will be left without a source of financial support or a way to cover the expenses that come alongside a death in the family. And while parents, homeowners, or people with dependents may have a more urgent need for life insurance, it’s actually a good idea for every age group to consider a policy. 

By purchasing life insurance when you’re young, you can often secure lower premiums and lock in coverage before potential health issues arise. In fact, some parents even purchase life insurance policies for their babies to set up a foundation for future coverage. 

Whether it’s to leave a legacy, cover future debts, or simply prepare for the unexpected, life insurance is a key consideration regardless of your stage in life.

If you're looking at buying life insurance, there's a good chance you're feeling a little overwhelmed by the process, and all the choices available. The good news is that there are some solid 'rules of thumb' that should make securing the right amount of coverage a slightly easier process for you.

A few rules of thumb

There's a general rule that five to seven times your annual income should be sufficient for your beneficiaries. However, to be sure, you should take a financial needs analysis. Essentially, this will look at your existing debts, the current financial needs of your survivors—including ongoing assistance, not just at the time of death. There are a few specific factors to consider:

• What is remaining on your mortgage?
• What other loans and outstanding credit do you have?
• What expenses will have to be taken care of, like burial and uninsured medical costs?
• What percentage of your income will your beneficiaries need?
• For how many years will your survivors need financial support?
• Do you need to include specific funds, like an emergency fund, a child-care fund, or an education fund?
• What other assets—stocks, real estate, savings—do you have that could be deducted from the amount you need?

It’s also common for your life insurance needs to shift throughout your life, as you have children and expenses change. A financial needs analysis will keep you on track and should occur every few years to make sure you insurance matches your needs.

If you'd like to learn more check out our article: How much life insurance do I need?

You can buy life insurance in a few different ways:

• Direct underwriters, who work for specific insurance companies.
• Insurance agents, who are independent but only sell the products of one insurance company.
• Insurance brokers, who sell the products of multiple insurance companies.
• Some forms of life insurance are available online.

Because life insurance is such a complicated product, the best approach is to compare quotes from a wide range of life insurance companies. Get started today - with no obligation - to get the best deal for you and your family.

Your life insurance beneficiary is the person or people who will receive the payout from your policy. This is a policy you’ll be paying into for many years, so it’s important to choose the beneficiary wisely and make sure your policy is up-to-date. 

Most people choose their spouse, children, or another close family member. You can also designate more than one beneficiary and decide how much of the benefit each should receive.

Keep in mind that life circumstances change, so it’s a good idea to review and update your beneficiaries over time, especially after major life events like marriage, divorce, or the birth of a child.

In Canada, life insurance is broadly divided into two main types: term life insurance and whole life insurance. Each policy type has its unique features, making them suited for different financial goals and timeframes. 

Here’s a closer look at how each policy type works, along with some pros and cons to help you decide which option is best for you.

Why you should consider term life insurance

Term life insurance provides coverage for a specific period, or “term,” ranging anywhere from 5 to 100 years. You pay regular premiums throughout this term, and if you pass away during this period, your beneficiaries receive a pre-defined payout. 

This type of insurance is often the most affordable option, especially for young people or those looking for temporary coverage during periods when expenses are high. 

Pros of term life insurance:

• It’s affordable: Term life insurance generally has lower premiums than permanent options, making it a popular choice for people on a budget.
• It’s simple: Term life insurance policies are affordable with easy-to-understand terms.
• It’s flexible: With a term life insurance policy, you can select the term length that suits your needs, whether it’s 10, 20, or 50 years.

Cons of term life insurance:

• It’s temporary: Once the term ends, so does your coverage unless you renew or convert it to a permanent policy.
• It has no cash value: Unlike permanent life insurance, term life doesn’t accumulate any cash value you can borrow against or withdraw.
• It gets more expensive as you age: Renewing a term life policy can become expensive as you age or if your health declines.

Term life insurance is a good fit for those seeking affordable, temporary coverage. It offers peace of mind for a set time frame, ideal for anyone who needs coverage during specific life stages.

Why you should consider permanent life insurance

Permanent life insurance, as the name suggests, is designed to last for your entire life, as long as you continue to pay the premiums. It includes a “cash value” component, which grows over time and can help with savings or future investment opportunities. 

Permanent life insurance policies are divided into two main types: whole life and universal life.

• Whole life insurance is a type of permanent life insurance that offers lifetime coverage with fixed premiums and a guaranteed cash value component that grows at a steady rate. Whole life insurance is generally predictable and stable, making it a good choice for those who want guaranteed coverage without surprises.
• Universal life insurance also provides lifetime coverage but offers more flexibility in terms of premium payments and death benefits. The cash value can often be invested, allowing for potential growth, although this can also mean fluctuations. Universal life is ideal for people who want flexibility and don’t mind a bit more complexity and risk.

Pros of permanent life insurance:

• It lasts a lifetime: Permanent policies provide lifelong protection, which can be reassuring for those wanting coverage indefinitely.
• It builds cash value: These policies build cash value that can be accessed during your lifetime, making them part of many people’s investment strategies.
• It has fixed premiums: Many permanent policies offer stable premiums, especially with whole life insurance.

Cons of permanent life insurance:

• It’s more expensive: Permanent life insurance generally costs more than term policies.
• It’s more complex: Permanent policies, particularly universal life, come with more variables and can be harder to understand.
• There could be unanticipated fees: Managing cash value and other features can incur extra fees, which vary by provider.
  
  

How to chose the right policy type

Life insurance in Canada offers a flexible way to protect your loved ones from the financial challenges they may face after you’re gone. From affordable term life coverage to permanent options like whole and universal life insurance, there are coverage options available to suit different needs and stages of life.

In fact, there are multiple forms of policies you can purchase including pre-existing condition insurance, no medical insurance, or guaranteed life coverage.  And while certain people may need life insurance more urgently, every age group should consider it as a way to protect future interests. 

Whatever you choose, a life insurance policy is ultimately about peace of mind—helping your loved ones continue on financially, even when you’re no longer there to support them.