What is life insurance: How life insurance works in Canada

Life insurance's purpose is to protect your loved ones from financial despair should you pass away. Think about your significant other, your children, or your parents – ask yourself how will they cover the cost of living when your income stops coming in? The purpose of life insurance coverage is to put your mind at ease knowing that your depends will be cared for after your death. 

The best time to buy life insurance is when you're young and healthy because it will be at its cheapest. However, you don't really need to get life insurance until you have people who depend on your financially. Often, this can begin when you get married, buy a house, and have children. 

Life insurance comes in many forms, but they typically fall under 2 categories: term life insurance and whole life insurance. 

Term insurance is a product you can buy typically in 5 year terms, often at 20 or 25 years, but you set the timing. You are covered for the critical times when it would be most beneficial. Once the term runs out, you may be able to renew or convert it to a whole life policy. 

A whole life policy covers you for your entire life as long as you keep paying the premiums. Within whole life there is universal life which can also act like an investment vehicle. 

You can buy term or whole life insurance with pre-existing conditions, no medical, or guaranteed coverage. 

Term life insurance is life insurance that only lasts a given term, typically 5, 10, or 20 years.  Your life insurance company will pay a death benefit only if you die within the term, after which the policy lapses. Term life insurance is cheaper than permanent life insurance, and is good when you need coverage for a small amount of time, like the life of a mortgage, or until your kids leave home.

Although there are many variations, there are three basic forms of life insurance: term, permanent, and guaranteed.

Term life insurance can be purchased for a set period of time, and exists to take care of temporary needs like mortgages, business obligations, taking care of small children, and other debt. There are several variations of term life insurance:

Renewable term life insurance: At the end of a set term, your coverage automatically renews. For example, if your coverage expires after five years, you are automatically renewed into another five-year term. Be sure to compare life insurance quotes before your term expires, as your premiums will increase upon renewal.

Convertible term life insurance: This form of term life allows you to convert your term life insurance policy into a permanent life insurance policy. You typically do not have to pass a medical exam to convert to permanent life insurance through this route.

Term to a specified age: This type of term life insurance gives coverage to a given age, typically to between 65 and 100. Term to 100 can also be categorized as a permanent plan.

Permanent life insurance is designed to provide protection for the duration of your life. It’s to cover needs you may have at any point in your life or consistently throughout your life, such as funeral expenses, lifelong dependents, supplementing a survivor’s income, or covering capital gains taxes at death. Unlike term life insurance, you can accumulate investments inside a permanent life insurance policy. It’s a tax-free shelter, similar to an RRSP or TFSA. A portion of your overall premium goes towards investments that grow over the time of your policy, leaving a larger dividend upon your death.

There are several variations of permanent life insurance:

Whole life insurance: If you want consistent coverage for your entire life, this is for you. Your premiums stay the same and you have guaranteed cash value accumulation. The investment portion of a whole life policy is chosen for you by the insurance company.

Universal life insurance: Also called adjustable life insurance, universal life insurance offers more flexibility in payments, payouts, and savings. You can grow or reduce your death benefit, depending on the policy.

Basic permanent life insurance: There is also basic permanent life insurance that lasts the duration of your lifetime but doesn’t have an investment portion. Premiums are lower than other permanent options, making this a simpler lifelong solution.

Guaranteed life insurance is a separate policy that can be issued to people who are middle-aged or older. (The exact age is dependant on the company.) Essentially, this type of insurance is available with no medical questions asked, including no medical exam. The amount can be less than other types of life insurance, but it’s much easier to get, and can last nearly as long as Term to 100.

To determine the details of your policy and premiums, the company will ask you a number of questions. Factors that insurance companies take into consideration include:

• Age: The older you are, the more likely it is that you’ll pass away within your term.
• Gender: Men are more likely to be involved in accidents and tend to live riskier lifestyles, so they’re more expensive to insure.
• Coverage amount: The more coverage you want, the more you’ll pay.
• Smoking: Smokers pay significantly higher rates. Most insurance companies will define you as a smoker if you’ve used tobacco, nicotine replacement products, or marijuana within the last 12 months.
• Health: People who are overweight and people who regularly drink alcohol typically pay more for life insurance.
• Illness: Some chronic illnesses will make it more difficult to get life insurance, and some may prevent you from getting coverage altogether. Your mental health will also be a factor.
• Family History: If you’re genetically predisposed to certain conditions, you could pay more for life insurance.
• Job: Some occupations are considered more dangerous than others and can impact how much you pay for insurance.

There are a few factors companies can’t take into account when setting your rates, including illnesses that develop or are discovered after your policy takes effect.

Yes, you can be denied life insurance. Reasons insurance companies could deny you life insurance include: chronic or terminal illnesses, such as diabetes, multiple sclerosis, HIV/AIDS, cancer, heart disease, stroke, or others; mental illness, including severe depression and addiction; you being older than the maximum enrolment age; your participation in dangerous activities like hang gliding; as well as past convictions of dangerous driving.

If you’re turned down for term or permanent life insurance, you could still qualify for guaranteed life insurance. Be sure to know your policy inside and out, and ask your broker lots of questions. Insurance companies could also refuse to pay the death benefit in certain circumstances for a number of reasons, including:

• Non-payment of premiums
• Providing inaccurate information on your application
• If you die due to your own actions, such as suicide or driving impaired by drugs or alcohol
• If you die while doing a dangerous activity, like skydiving or participating in a riot

You may notice that in your work benefits, life insurance is included. Should you buy life insurance even if your employer is offering it?

Well, employee paid life insurance is a nice perk, but it may not be exactly what you’re looking for. To start, look into your policy and the details within. The most glaring downside to employer-provided life insurance is that you’re only covered as long as you’re employed with the company. If you retire or leave the company, your insurance likely disappears immediately. A company plan is a group plan, meaning the policy is looking at a number of people with different factors than an individual or joint plan. Whereas your own plan only considers your health and age, a group plan considers risk on a broader scale, which could negatively affect you if you’re young and healthy.

Additionally, most employer life insurance only covers one year’s salary and we stated above that you’ll typically want five to seven years to cover all expenses and ongoing costs after your death. Some plans allow you to add on more coverage via a supplemental life insurance agreement, but this could be more expensive than simply having your own plan. Generally, you should consider life insurance through your employer a bonus on top of your current plan.

Although popular life insurance companies in Canada include Sun Life, Manulife, and Great West Life, the best company for yourself will differ according to your own needs. Each provider will offer you a different rate so be sure to compare life insurance quotes with us to select the right company with the best package and price possible.