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Everything You Need to Know About Life Insurance

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Last updated on June 9, 2022 Comments: 9

What Is Life Insurance?

Life insurance is a contract to ensure that those who rely on you for financial support—such as a spouse or children—will receive money upon your death to help them pay for their needs.

That contract, called a life insurance policy, is made with an insurance company for a chosen amount of coverage that will be paid out, tax free, when the policy holder dies. The policy holder must pay a monthly fee, called a premium, to the insurance company for as long as the policy is in place.

The lump-sum life insurance payment that’s issued upon death can be used by surviving family or other beneficiaries for any purpose. These include:

  • Living expenses such as food, rent/mortgage, clothing, utilities, transportation, etc.
  • Funeral costs and estate fees
  • Debt repayments
  • Child care or education costs
  • Charitable gifts
  • Taxes on assets, such as a home, cottage, or non-registered investments

Types of Life Insurance

The two main types of life insurance in Canada are term insurance and permanent insurance. As the names imply, term insurance covers the policy holder for a given period only, while permanent insurance covers the policy holder for life. There are a few options within each category, as explained below.

Term Life Insurance

Term Life Insurance

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A term insurance policy can cover an individual for a specific number of years (say, 10, 15 or 20) or until a given age (e.g. 65). If the policy holder has kept up with the premium payments and dies within that term, the insurance company will pay out the lump sum death benefit. If, however, the policy holder reaches the end of the term, the coverage ends and no payment will be made when he or she eventually dies, unless the policy is renewed for another term.

Term insurance is generally cheaper than permanent insurance, but premiums will increase significantly if renewed. This type of life insurance is often a good choice for younger Canadians who may not have many assets, but also have high living expenses such as a mortgage, car loan, childcare or education costs.

Married couples and mortgage/debt holders have these additional options for term insurance:

  • Joint first-to-die insurance: Both spouses can be insured under one policy for the same amount of coverage, and a single death benefit will be paid out if either spouse dies within the term. This type of policy can be cheaper than insuring each person separately. However, if both spouses die, the beneficiaries will not receive a second death benefit.
  • Creditor insurance: If you have a mortgage or other loan, you may be able to purchase creditor life insurance from the lender that will cover the balance of the debt upon death. This type of insurance is paid to the financial institution, not to your beneficiaries.

Permanent Life Insurance

Permanent Life Insurance

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Permanent insurance provides coverage for life and the premiums are fixed—they do not increase as you age—but are higher than for term insurance. These higher fees make sense considering a lump-sum death benefit payout is guaranteed at some point in the future (so long as the premiums continue to be paid), since everyone dies eventually. This type of insurance is often used for estate planning purposes, to leave children or other beneficiaries a tax-free inheritance.

There are three kinds of permanent life insurance available in Canada:

  • Term 100 is the most basic permanent life insurance, where coverage is guaranteed for life and premiums are fixed and must be paid until age 100.
  • Whole life insurance is similar in coverage but also has a cash value that builds up in the policy over time. You can use this cash value as collateral on a loan or receive it as a payout if you decide to cancel the policy.
  • Universal life insurance is like an investment and life insurance policy combined. The lump-sum death benefit payment depends on how well your investments perform, as does the cash value you would receive if you decide to cancel the policy.

Cost of Life Insurance

There are a number of factors that will determine how much your life insurance will cost. Of course, there are some ways to save money on the cost of your life insurance, like paying annually instead of monthly, but in general, these are the factors that will affect the overall price:

  • Coverage. If you choose a policy that pays out a $1-million death benefit, you will obviously pay higher premiums than for a policy with $100,000 in coverage.
  • Age. Premiums increase with age because the younger you are, the less likely you are to die in the foreseeable future.
  • Gender. Premiums are slightly higher for men than for women.
  • Health. Are you a smoker or do you have any health condition that may impact your longevity? Your life insurance may be affected by smoking or other health issues. You may be required to take a medical exam before your policy takes effect and your premiums will be higher than for an otherwise healthy non-smoker.
  • Policy type. As mentioned above, term insurance is cheaper than permanent insurance.

To determine your level of coverage, look at your expenses and see how much your family or other beneficiaries might need annually if they no longer had your income to rely on.

If, for example, your income covers $3,000 in expenses and savings each month, and you want to maintain the family’s current lifestyle for 20 years, that’s a total of $720,000. You’d also want to include additional coverage for funeral costs and estate fees.

You can use an online life insurance quote calculator to get an idea of what your premiums might be for various types of policies. Using our example above, here’s a comparison of possible monthly premiums for $750,000 in coverage for a 35-year-old non-smoker of average health:

Term LengthMale PremiumFemale Premium
Term (10-year)$32.22$24.26
Term (20-year)$49.30 $36.81
Term (30-year)$89.87$67.59
Term 100$447.53$382.73
Whole life$481.05$417.60

How Much Life Insurance Do I Need?

One of the biggest questions when buying life insurance is: how much do I need? In truth, there’s no perfect number. It will vary from person to person and depends on details like your personal finances and family situation. If you have dependents, you want your policy to be able to replace your income so that they continue to be taken care of. You’ll also want to keep inflation in mind. Even if you don’t have dependents, then consider any outstanding debt you have and how much is needed to cover that.

Oftentimes, it’s recommended to take out about 10 times your annual income in coverage to take care of these things. Another way people calculate how much life insurance they need is by multiplying their salary by how many years they have left until they retire. For example, if you’re 50 years old and earning $60,000 a year, then you’ll need a policy worth $900,000. Again though, life insurance needs vary significantly on a case-by-case basis so that number may be more than you need or perhaps not quite enough.

What to Consider When Purchasing Life Insurance?

As mentioned earlier, figuring out how much life insurance you need can be difficult. There are several factors to consider when purchasing life insurance that can help make your decisions a little easier. Here are a few things to think about:

Debt

Debt is one of the biggest factors you should consider when taking out life insurance. How much do you owe? Do you have a mortgage that needs to be paid off? What about any loans? Most people don’t want these financial burdens taken out of what is left to their family and will factor any debt into their policy.

Dependents/Family

Another huge factor is your family and dependents. Who are you leaving behind and how much do they rely on your income? If you are single and don’t have anyone else to take care of, then this isn’t a concern. However, if you have children, a special needs sibling, or even elderly parents that you help financially, then this is a huge consideration. You want to ensure that your loved ones are taken care of when you are gone.

Age

Age also plays a big role in life insurance and how much you need. When you are younger, you are more likely to need more coverage as you may have young children and a mortgage. But, as you age, you don’t have the same responsibilities. By the time you retire your children should be working adults, capable of taking care of themselves. Chances are that, at this age, you are in a better position financially as well. So you likely don’t need as much coverage.

Assets

Considering your financial assets is basically the opposite of considering debt. Instead of adding on, you may be able to take off. What assets do you have? What is the value? How long will they last when your dependents start to use them? If you have a considerable amount of assets left behind, then you probably don’t need to take out as much on your policy.

Funeral Arrangements

Last but not least, don’t forget about funeral arrangements. Funerals and burials can be incredibly expensive. In Canada, it’s common to spend $5,000-$10,000 on a burial.  If you haven’t already pre-paid for any funeral arrangements, then you probably want to consider these costs when taking out life insurance.

How to Get Life Insurance Quotes

If you know your medical history and how long you require coverage, then you can quickly input the pertinent details into any of the sites below and then compare between a variety of life insurance plans offered by Canada’s most trusted insurers:

 Single & Joint CoverageCompare Quotes ToolAll Provinces?Type of Provider
PolicyMeYesNoNo (all except Quebec and Newfoundland)Direct life insurance provider
PolicyAdvisor.comNoYesNo (Ontario, Alberta, and Manitoba only)Broker - works with 20+ providers
InsuranceHotline.comYesYesYesBroker - works with 25+ providers

PolicyMe

Apply Now

With a free no-obligation 15-minute online application without any complicated paperwork, an instant decision process that doesn’t take weeks, and lots of educational content, PolicyMe is among the most user-friendly providers for purchasing term life insurance. Canadians who are getting life insurance for the first time will appreciate the site’s level of detail, and the quoting and application tool is quite easy to fill out in just five quick steps. Depending on your medical history, you might be approved on the spot or required to submit further information. Either way, PolicyMe will guide you through the process without pressuring you to sign up for expensive policies that you don’t need.

Click here to apply or learn more by reading our complete PolicyMe review.

PolicyAdvisor.com

Apply Now

Working with 25+ of Canada’s largest life insurers, PolicyAdvisor.com offers a number of online policies, with a user-friendly digital experience and a calculation tool to see where you’re underinsured. Use their site to compare life insurance rates in a matter of minutes. If you’re still unsure about what to get, they have licensed insurance brokers you can chat with online, call or email and get guidance. Although only available in Ontario, Alberta, and Manitoba at the moment, they plan to expand their operations and offer quick and simple quotes to users all around Canada.

Click here to apply or learn more by reading our complete PolicyAdvisor.com review.

InsuranceHotline.com

Apply Now

Partnering with many of the best insurers in Canada, InsuranceHotline.com is a premium platform for those who want to narrow down their choice from a huge variety of options. You’ll first enter your personal details on health and family medical history, and then you’ll be offered a list of quotes that meet your specified needs exactly. Select the best one for you and then sit back as an expert gets in touch with you to formalize the details, make sure you have everything required, and set up a medical exam in your area.

Click here to apply or learn more by reading our complete InsuranceHotline.com review.

How to Choose Your Insurer

Life insurance is a serious matter, so you’ll want to do your due diligence in choosing your life insurance provider. There are several considerations you will want to keep in mind while shopping around for a life insurance provider including the following:

  • Reviews and recommendations: Reading reviews is one of the best ways to gauge the quality and level of trust that a business provides. Do keep in mind that, oftentimes, people are more likely to leave a negative review than a positive one but it’s a smart way to start. You can also ask around with friends and family to see who they use and recommend.
  • Make sure you are getting the most from the product: If you are paying for life insurance you want to make sure you are getting solid, strong coverage. With life insurance, it’s also not one size fits all. Your needs might be completely different from your friends’ needs and that’s ok! Take the time to find a product that is right for you and don’t be afraid to ask questions if needed. The best providers will be happy to help you find the best product for you.
  • Compare prices: Pricing is obviously a huge consideration when shopping around for a life insurance provider, so you do want to make sure that what you are getting is competitive to similar packages on the market. Many insurance policies can now be purchased online, making it easy to compare pricing and inclusions. You just need to take the time to do it.
  • Check the company’s financial health: Life insurance is a long-term investment. You are looking at 10, 20, 30+ years so you want to make sure that your company will still stick around. Canadian life insurance companies are heavily regulated and supervised, but do nonetheless make sure that the company you choose is legitimate.

Who Should Get Life Insurance?

Who Should Get Life Insurance?

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Before deciding whether to purchase life insurance, see if you already have coverage as part of your employer’s group benefits plan. Usually such coverage is based on your annual salary — for example, the death benefit could be specified as 1x, 2x, or 3x your annual salary.

If you think that amount is sufficient to cover all funeral and estate fees when you die, and you don’t have any dependents, then you likely don’t need life insurance. If, on the other hand, you don’t have any coverage from work, or you don’t think that the coverage you have will be enough to provide for your family when you die, a term life insurance policy could make a huge difference in the financial futures of those you leave behind.

As for permanent life insurance, it usually comes down to an investment and estate planning decision. Many people over the age of 50, for example, may be interested in permanent insurance to provide tax-free dollars to their heirs. Of course, the longer you wait to purchase life insurance, the more expensive it is, so that must also be taken into account.

A licensed life insurance agent or broker can help you determine what policy might be best for you. Keep in mind, though, that these professionals are usually paid on commission and may have a vested interest in selling you a pricier policy. We advise that you do some comparative research online before automatically signing on the first policy recommended to you by an agent.

Author Bio

Tamar Satov
Tamar Satov is an award-winning journalist specializing in personal finance and parenting. Her work has appeared in Canadian Living, The Globe and Mail, Today’s Parent, Parents Canada, Walmart Live Better and many other consumer magazines and websites. She is the former Managing Editor of CPA Magazine, for Canada’s Chartered Professional Accountants, and contributes to other publications for finance professionals including FORUM, for Canada’s financial advisors. Tamar is also a big proponent of financial literacy and had a long-running popular blog on the topic, sharing advice and anecdotes on her efforts to raise a money-smart kid. She lives debt-free in Toronto, with her husband and son.

Article comments

9 comments
Joe says:

So if I have $100,000 whole life and $35,000 cash value and die how much does my family get?

Aaron Broverman says:

Hi Joe,
If you have a $100,000 policy with $35,000 cash value, your family would only receive the $100,000 death benefit and not the $35,000 cash value that has grown on top of it. This is because the death benefit and the cash value are treated as two separate things by the insurance company and when you die, the cash value is given back to the insurance company. The cash value grows for as long as you have the policy on a tax-deferred basis but it will take several years for it to gain any meaningful value. The only time you will receive the cash value of the policy (minus surrender and policy fees) is when you surrender the policy back to the insurance company while your still alive. In that case, you will get $35,000 minus the death benefit you chose to surrender ($100,000) and the surrender fee (determined by the individual insurance company) You can borrow against the cash value as collateral for as long as the policy is still in force. Generally, I don’t recommend policies with a cash value for older people because even though the cash value is tax deferred, accumulation of interest is slow and is generally eaten by fees and premiums in the initial years. The older you are, the more the cost will likely outweigh the benefit.

Joe says:

Sorry so your saying that if I die the money in my chase value that you say is a savings doesn’t get paid out only the death benefit does? And that my cash value can only be used as a loan otherwise my death benefit decreases? I don’t understand how this is in any way beneficial? You get to keep my savings if I die not my family

Aaron Broverman says:

Hi Joe,
It depends. Some companies offer only a loan value on whole life participating policies and exactly what you describe happens as the cash value becomes a loan to borrow against. However, some policies have a cash surrender value where if you surrender the policy, you get the cash value minus the surrender and policy fees.

Joe says:

If I have whole life insurance and a cash value when I die who gets the cash value?

Aaron Broverman says:

Hi Joe,
The cash value and the death benefit essentially merge when you die and what gets paid out is the death benefit, not the cash value. However, the cash value and the death benefit are linked, so if you tap the cash value to fund a loan, you decrease the death benefit your beneficiaries receive. Conversely, you can convert the cash value to paid-up additions to your whole life policy, which increases the benefit your beneficiaries will receive.

Wilmot Tompkins says:

Do you need life insurance at 65 and debt free?

Aaron Broverman says:

Hi Wilmot,
You may still need life insurance over 65 if you want to cover funeral expenses, help a spouse pay bills or leave some more money to your children. However, with most life insurance options closed to you, I would look for a guaranteed issue policy. Guaranteed issue policies have higher premiums with smaller benefit amounts than non-guaranteed issue policies, but you will qualify for a policy no matter your age or health status, especially if you look for a guaranteed issue policy where no medical evaluation is required.

Filip Ambroziak says:

Fantastic article, I do hope many people read it as life insurance is such an important financial tool.