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
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 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
How much you pay for life insurance depends on the following factors:
- 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. If you are a smoker or have any health condition that may impact your longevity (you may be required to take a medical exam before your policy takes effect) 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 Length||Male Premium||Female Premium|
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.
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.
With a free 5-minute “insurance checkup” meant to discover if your insurance needs are being met, a friendly dashboard and lots of educational content, Policyme.com is among the most user-friendly quoting tools. Canadians who are getting life insurance for the first time will appreciate the site’s level of detail, and the quoting tool is quite easy to fill out, with just five fields: date of birth, gender, smoker or non-smoker, coverage amount, and length of policy. As you adjust these fields you can see the quotes from popular insurers change in real time and can apply for the exact quote you want once you’ve found a winner.
Who Should Get Life Insurance?
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.