What is Life Insurance?

Life insurance is an agreement between you, the policyholder, and an insurance company to provide a tax-free sum of money to your loved ones, known as beneficiaries, if you were to pass away. The money they receive is known as a “death benefit” and is meant to help your family out financially if they lose income that they were dependent on.

For this service, you pay a monthly premium to your life insurance provider.

In its simplest form, life insurance is a security blanket for your loved ones. It is there to protect anyone who depends on you financially in the worst-case scenario.

How Does Life Insurance Work?

While it may sound complicated, the structure of a life insurance policy is pretty simple. You pay premiums each month to an insurance company over an agreed period of time. In return, the insurance company promises to give your loved ones a tax-free lump sum cash payment (i.e. the “death benefit”) if you die.

Life insurance benefits are paid out in one full lump sum, which means that your death benefit would be released all at once to the people you select to receive your payout (also known as your beneficiaries). If your policy provides $500,000 of coverage, your beneficiaries will receive $500,000 all at once, tax-free.

This lump sum gives your family the option to use the money however they choose. Some people use it to pay off a mortgage; others use it to continue making rent payments; and in many cases, the money that the beneficiary receives is used to care for children, fund educational expenses and cover day-to-day living costs that your income stream was helping fund.

Types of Life Insurance in Canada

In Canada, there are two different types of life insurance that people shop for: term and permanent life insurance.

Term life insurance is the simplest and most affordable form of life insurance. It pays out a benefit to your beneficiaries only if you die within a specified timeframe, usually 10, 20, or 30 years. This is the best option for 95% of young families.

The alternative to term life is permanent life insurance, the most common type of this being known as whole life. These permanent policies tend to be much more expensive.

But why are these policies so much more? Permanent life insurance guarantees that your beneficiaries will receive a death benefit. You can die young, old, or somewhere in between and your insurance company will still pay out.

What Type of Life Insurance Makes Sense for Me?

Deciding between whole life insurance vs. term life insurance is a common struggle for people beginning to look for life insurance.

For the most part, term life insurance tends to be the right choice for most people looking, despite the fact that it falls under a “set term” and has an expiry date.

Think of it from the perspective of a young family: having life insurance protection for longer than you actually need it may not seem like such a bad thing – after all, what’s the harm in extra protection for your loved ones.

Not necessarily. Why keep paying for something you don’t need? Term life insurance lets you pay for coverage only during the years when it really matters (when your mortgage is at its highest and / or you have young children who need you for financial support). Later in life, you can save that monthly premium and put it towards something else – like enjoying your retirement!

Do I Need Life Insurance?

Life insurance aims to provide a solution for those who are seeking to provide income replacement, a legacy fund, or burial expenses to those who might be left behind. So if someone you love is dependent on you financially, you need life insurance. In its simplest form, life insurance is a security blanket for your loved ones.

Comparison of Types of Life Insurance

Term Life insurance Whole Life Insurance
Low prices ✔️
Choice of policy length ✔️
Never expires ✔️
Rates locked in ✔️ ✔️
Guaranteed death benefit ✔️ ✔️
Accumulates cash value ✔️

Comparison of Types of Life Insurance

Term Life Insurance
Low prices  ✔️
Choice of policy length  ✔️
Never expires
Rates locked in  ✔️
Guaranteed death benefit  ✔️
Accumulates cash value
Term Life Insurance
Low prices
Choice of policy length
Never expires ✔️
Rates locked in  ✔️
Guaranteed death benefit  ✔️
Accumulates cash value ✔️
Traditional Life Insurance

Traditional life insurance is an agreement between you, the policyholder, and an insurance company to provide a tax-free sum of money to your loved ones, known as beneficiaries, if you were to pass away. In this type of agreement you pay a monthly premium to the life insurance provider. It is there to protect anyone who depends on you financially in the worst-case scenario.

Term Life Insurance

Term life insurance is a type of life insurance that covers you for a specific length of time, called a term, and it pays a death benefit only if you die in that term..There are different life insurance term lengths available. 10 or 20 years are the most popular choices, but 25 or 30 years or coverage up to age 65 are also possible. Term insurance is a cost-effective way and flexible to protect your family. Term policies typically offer the lowest monthly premium and are usually the best option if you have a limited budget or a temporary need.

There are four kinds of term policies:
1. Level Term – benefit amount will remain the same for the entire term.
2. Convertible Term – will allow you to convert into a permanent policy, typically without a medical exam. Generally, your will premium increase.

Whole Life Insurance

Whole life insurance (also known as permanent life insurance) covers you for life and there is an investment or cash value component associated with your policy and its lump sum, tax free payment. As you pay into your permanent insurance policy over time, it builds investment value and provides fo a return on your premium. You can cash out the value of your permanent insurance policy to supplement your retirement income or help pay expenses. In some cases, you can borrow against the value of a whole life insurance policy. Or, you can simply leave the life insurance benefit to your loved ones as the beneficiaries, the same as any other type of life insurance. Permanent life insurance plans usually have a higher premium, since you are covered for your entire life.

Universal Life Insurance

Universal life insurance is similar to whole life insurance, except there is a self-directed long-term investment component. Your insurer gives you options for investing the cash value of your policy so it can be considered a way to save for retirement. If you are a savvy investor or mindful of estate planning, you may find that universal life insurance is a more appealing option. That said, universal life insurance plans require more hands-on activity than other life insurance coverage options.

Term-to-100 Insurance Plans

Term-to-100 insurance plans are a whole life insurance policy that doesn’t have a cash-out option, so it only pays upon your death (making it a little cheaper). It offers a bridge between term and whole life insurance. Plus, if you make it to 100 years, you are no longer required to pay premiums and still retain the coverage.

Mortgage Insurance
Mortgage insurance is a type of life insurance which pays your mortgage balance in the event of your death. The beneficiary is the lending institution and not your immediate family. Additionally, the face value will diminish over time in direct proportion to your mortgage balance.

Who Needs Life Insurance?

It may seem like it is, but life insurance isn’t a necessary purchase for everybody.

So how can you tell if you need it? It’s pretty simple – if you have someone who relies on you financially, you’ll want to get a life insurance policy. For example, life insurance is essential if you have a partner, children or aging parents who depend on you for financial support. It could be the difference in your family being able to keep their house and handle day-to-day expenses, versus dealing with a huge financial burden if something were to happen to you.

But not everyone needs life insurance. Remember, we only recommend it for people who have loved ones who depend on them financially. Who wouldn’t need it?

Who Does Not Need Life Insurance?

Anyone who is single with no dependents (i.e. if your death will not have a financial impact on your parents and / or other family members).

Anyone who has managed to build up enough savings to provide the safety net on their own (think older parents whose kids are out of the house and who are close to retirement).

Many people consider buying life insurance for their kids, but this isn’t necessary. Chances are, your young children aren’t contributing finances to the home right now and, therefore, a policy is not necessary.

How Much Does Life Insurance Cost?

Term life insurance only pays out if you die within a specified timeframe that you and your insurance company would agree on. It’s usually 10, 20, or 30 years.

As you can guess, the probability of you filing a claim within that decided on time period (because you die before you turn 65 or before the end of your term) isn’t that high. As a result, you’re not a high risk to your life insurance provider – this means the prices for term life insurance also aren’t that high either! Win win!

What Factors will impact your actual monthly premium?

Coverage amount, or the amount of insurance you would like to be covered for:

If you want to be covered for $1,000,000, it will naturally be more expensive than coverage for $500,000.

Your policy type (term vs. permanent):
As mentioned above, permanent life insurance policies are almost always more expensive.

Your age:
The younger you are, the lower your monthly rate. If you get life insurance early, you can lock in a low premium!

Your smoking status:
As you likely know, there are health concerns associated with smoking. If you’re a smoker, you’re at a higher risk of these health concerns and, therefore, life insurance companies will charge you more to be covered by them.

Your health status:
Having certain health issues can make covering you seem ‘high risk’ to insurance companies.

Driving record & hobbies:
Do you have a handful of speeding tickets? Spend your weekends snowboarding out of helicopters? Risky behaviours will increase your monthly premiums.

When is the Best Time to Get Life Insurance?

There’s no right age or year to get life insurance – it’s not something that you’ll need  to open on your 30th birthday. The best time to get life insurance depends on where you are in life. You’ll want to buy life insurance when you get to the point that you have someone depending on you. For most people, this is when they get married or when they start having kids.

At this point, you might be thinking, “I just got a mortgage and having kids isn’t cheap! How am I supposed to afford life insurance?”

Fortunately, the younger you are, the more affordable your life insurance will probably be. In most cases, it’s smart to lock in a low monthly rate when you’re young because it’ll stay at that price for the entire term of your policy.

How Do I Buy Life Insurance in Canada?

So how do you decide where to start your shopping process?

Think of it this way: if you were trying to pick what car to buy, do you only talk to someone who works at a specific dealership? Probably not. You’d want to get information and prices across different companies, not just one and if you talk to someone who works for that one car dealer, chances are they’re going to try to swing you one way.

You need to apply that same mentality when deciding where to shop for life insurance! You want to go with someone who can help you compare quotes across a variety of insurance companies. Life insurance rates, surprisingly enough, can vary quite a bit across companies (even for the exact same policy), so only getting quotes from a single company can end up being quite costly.

Evaluating a Life Insurance Company

Life insurance is a permanent purchase – you are getting into a contract with a company for 10, 20 years or more, so it is important to find the company that can provide you the best life insurance in Canada for your exact needs! Some of the factors you’ll want to consider include:

Price: How much will your policy cost?

Time: How long does it take to get approved?

Process: Can you do everything online or do you have to make numerous trips to see someone in person?

These are the main factors to look at, but the good news is that every big life insurance company in Canada has a long track record of financial strength.

Being able to answer “what is life insurance” is one thing, but knowing the answers to all the top questions surrounding it will arm you with the information you need to make the most best buying decision. After all, when this decision impacts so many people, you want to go into decisions as informed as possible.