How does life insurance work in Canada?

13 minute read Published on Jun 7, 2023 by BrokerLink Communications

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As one of the most important types of insurance in Canada, knowing how life insurance works is crucial. That is why we are diving deep into this topic today, with this unofficial guide to life insurance in Canada. By the end of this article, you will have gained a better understanding of what life insurance is, how it works, and the different types of policies available to you.

What is life insurance?

Life insurance is a contractual agreement between a policyholder and an insurance company. The agreement typically states that, in exchange for paying your premium, a tax-free payout, known as a death benefit, will be paid to somebody of your choosing. As the policyholder, you get to decide the amount of money that gets paid out, who it gets paid to, and the term or time frame. Although there are several types of life insurance, which we will outline below, the purpose of any life insurance policy is to provide your chosen beneficiaries with financial support in the event of your passing.

Life insurance coverage

As mentioned, the purpose of life insurance is to help your loved ones cope financially following your death. Therefore, life insurance coverage can be used in a variety of ways, and it is ultimately up to the beneficiary to decide. That said, while the beneficiary gets to decide how the money is used, life insurance payouts are most commonly used to cover expenses related to the policyholder’s death, such as funeral costs, as well as to pay off any of the policyholder’s remaining debts. It can also be used to help the beneficiary maintain the same standard of living as they had when the policyholder was alive. In this regard, it could cover costs like groceries, rent, or bills.

When selecting a life insurance policy, you will need to make sure that you purchase adequate coverage. Each policyholder’s coverage needs will be different and will depend on the expenses they expect to have after they pass. For example, some policyholders, especially if they are younger, might have mortgage dues, student loans, or childcare costs that need to be covered while an older policyholder might only need coverage for burial expenses or smaller outstanding debts. If you are having trouble determining how much life insurance you need, contact BrokerLink today.

A few of the most common expenses that life insurance payouts are used for are as follows:

  • Everyday expenses so the beneficiary can maintain a similar standard of living, e.g. it can pay for groceries, bills, rent, etc.
  • Outstanding debt, e.g. mortgages, lines of credit, credit card bills, business loans, student loans, etc.
  • Childcare costs, such as a child’s future education.
  • Donations to a charity of their choice.
  • Funeral arrangements or burial costs.

A couple of things to note about life insurance payments: First, if you fail to name a beneficiary in your policy, the death benefit will be paid to your estate and your money will be taxed. However, if you name a beneficiary, the death benefit will be tax-free. Find out more about life insurance and taxes by asking a BrokerLink insurance advisor, “Is life insurance taxable in Canada?” Second, there are a few cases in which the life insurance death benefit will not be paid out to the beneficiary. This ranges between insurance providers, but common examples include if the policyholder died by suicide or if they died while engaging in reckless or risky behaviour, such as skydiving.

The different types of life insurance in Canada

The two main types of life insurance in Canada are term life insurance and whole life insurance, also referred to as permanent life insurance. Both types of life insurance have their advantages and their disadvantages. There are also a few other types of life insurance policies to be aware of. We delve into all of them below:

Term life insurance

Term life insurance is the type of life insurance plan that the majority of Canadians have. How it works is like this: If you die, the insurance company will issue a payout. However, they will only do so if you died within the specified “term” of the policy. Term life insurance policies vary in length but most commonly last 10, 20, or 30 years. Policyholders can also choose a time frame that lasts until a specific age as well.

Whole life insurance

Whole or permanent life insurance is a type of life insurance policy that covers you for the entirety of your life. These policies have cash value associated with them and they may even pay dividends based on the profits earned by the insurance provider.

Limited-pay whole life insurance

Limited-pay whole life insurance also covers the policyholder for the entire duration of their life. However, these policies feature condensed payment plans. For example, if you purchase a limited-pay whole life insurance policy with a 30-year term and you pay your insurance premiums over the 30-year period, your insurance is guaranteed for the remainder of your life without you having to make any more premium payments. As you might suspect, limited-pay whole life insurance plans are typically the most expensive type of life insurance offered by insurance companies due to the premiums being front-loaded.

Universal life insurance

Universal life insurance also functions similarly to whole life insurance, except you get to choose where your cash value is invested. This type of policy is best for people with investment knowledge, as if you select your investments wisely, you could end up with a larger return than what is guaranteed from a standard whole life insurance policy. That said, a universal life insurance plan requires monitoring to ensure your investments are going in the right direction. Therefore, you have to be prepared for the added time commitment.

Term to 100 life insurance

Term to 100 life insurance is a type of whole life insurance plan that covers policyholders until they die. The main difference between a typical whole life insurance policy and a term to 100 whole life insurance policy is that with the latter, there is no cash value or investment element. Thus, your premium is likely to be lower. Plus, with these types of policies, if you live to be over 100 years old, you can stop paying premiums and still get covered.

Annual renewable term life insurance

Lastly, annual renewable term life insurance (ART) is a type of short-term life insurance coverage. These types of policies are typically available on a one-year basis and are designed to protect policyholders in a few specific scenarios. Such scenarios might include a person who is between jobs, someone with short-term debt, or someone who is attempting to improve their health before purchasing a longer-term policy. Annual renewable term life insurance policies are usually the least popular of the life insurance policies on this list.

How much is life insurance?

Life insurance costs in Canada vary from person to person, as premiums depend on a wide variety of factors. For example, a life insurance plan for a young, healthy adult will likely be far less than for an elderly person with a history of smoking. In addition, the type of life insurance policy you choose will also impact the cost. As mentioned above, whole life insurance policies tend to be more expensive than term life insurance policies because they cover you for your entire life. Even among term life insurance policies, there are varying costs associated with the different term lengths. A 10-year term policy will likely not be as expensive as a 30-year term policy.

Factors that impact the cost of life insurance in Canada

To better explain how insurance companies calculate the cost of life insurance in Canada, we have put together this list of factors:

  • Age.
  • Life insurance premiums tend to rise as you get older.
  • Smoking status: Smokers should expect to pay more for life insurance due to the fact that they may be at an increased risk of death.
  • Sex: On average, male policyholders tend to have higher life insurance premiums than female policyholders.
  • Health status: A life insurance company will assess your health status to determine your risk. The healthier you are, the lower your life insurance rates will be.
  • Family medical history: Similar to the health status factor, an insurance company will also assess your family’s medical history when calculating your risk. If there is a history of hereditary illnesses, your policy rate could be higher.
  • Your chosen term length: The longer your policy term, the more your policy will cost.
  • Your chosen coverage amount: The death benefit amount you select for your policy also dictates your premium. As you might have guessed, a larger death benefit will lead to a rise in life insurance costs.
  • The type of life insurance policy you select: Whole life insurance policies are usually more expensive than term life insurance policies. Thus, the type of life insurance policy you select will impact the price.

Ultimately, it is the factors listed above, among others, that will be used by an insurance company to determine your life insurance premium. A life insurance premium is the amount of money that a policyholder agrees to pay to the insurance company in exchange for receiving coverage. Generally speaking, the older you are, the longer the length of your term, and the larger the payout or death benefit, the more expensive your life insurance premium will be. Contact BrokerLink to learn more about how Life Insurance works in Canada and how life insurance premiums are calculated.

Do I need life insurance?

If you are debating whether you need life insurance, ask yourself this question, “do the people in my life need life insurance?” In other words, in the event of my death, could the beneficiary or beneficiaries of my choosing use the death benefit payout that would come from a life insurance policy? If you have personal or business debt that will likely be outstanding when you die, then the answer is probably yes. Alternatively, if your beneficiaries are in need of financial help in their own lives, then a life insurance policy may also be a wise choice. Ultimately, purchasing a life insurance policy can ensure the financial security of your family after you are gone. Without such a policy, you and your family may be dependent solely on you being alive and able to generate income.

How much life insurance do I need?

How much life insurance you need will depend on several factors, though experts generally recommend purchasing as much as you can afford. This way, you can leave as much money as possible to your family after you die. To determine how much life insurance you can afford to buy, you will need to assess your current finances along with your family’s current financial needs and what their future needs may be. You should also take into account any debts that may be outstanding in the event of your death, as well as the funeral or burial costs associated with your death. Some policyholders take their annual income and multiply it by ten to determine an ideal life insurance amount. However, this isn’t a hard and fast rule. For advice on how much life insurance you should purchase, contact BrokerLink. A licenced insurance broker can give you their professional opinion on the best coverage limit for you and your loved ones.

Buying life insurance in Canada

Are you ready to purchase a life insurance policy in Canada? Keep reading to learn when the best time to buy life insurance is and what information you need to provide when purchasing a life insurance plan:

When should I buy life insurance?

Life insurance can be purchased at any stage in your life, whether you are a young, healthy, 30-something, or a retiree. Many people choose to buy a life insurance policy when they reach certain milestones, like buying their first home, having a child, or marrying their partner. When such events happen, it can make you re-evaluate your life as there might now be people who depend on your income to maintain their standard of living. Note that life insurance premiums typically get higher as you get older. Therefore, purchasing a life insurance policy at a younger age may actually save you money in the long run.

What information do I need to provide when purchasing life insurance from an insurance company?

When purchasing life insurance from an insurance company, you should be prepared to provide information or documentation relating to the following:

  • Your sex
  • Your age
  • Your home address
  • Whether you are a smoker or a non-smoker
  • Your physical health history (e.g. cancer, diabetes, high blood pressure, etc.)
  • Your mental health history (e.g. anxiety and/or depression, bipolar disorder, etc.)
  • Your family’s medical history
  • How frequently you drink alcohol and at what volume
  • Your drug history
  • Your penchant for extreme activities or sports (e.g. base jumping, skydiving, etc.)
  • The risks associated with your job (if you have a dangerous job)

Based on the information you provide and the answers to the questions you are asked, the insurance company will assign you a risk category and your premium will be calculated accordingly.

One final thing to note is that depending on your age, health, and the amount of coverage you are looking to purchase, an in-person medical examination may be required. Periodic medical exams are often requested by insurance companies when policyholders are purchasing large amounts of coverage.

Life insurance beneficiaries

Anytime you buy life insurance, you will need to name a single beneficiary or multiple beneficiaries. Whoever you name will receive your death benefit after your passing. Thus, it is critical to think carefully about who you wish to name as the beneficiaries of your policy. Please remember that if you do not name a beneficiary, probate can have a major impact on your life insurance benefit. The payout process is likely to be far more complicated and the money might be taxed.

Most people name a family member, such as a spouse or child, as their beneficiary. However, it can be whomever you like - a relative, a close friend, or even a neighbour. There are generally two main types of life insurance beneficiaries: revocable beneficiaries and irrevocable beneficiaries. The former is a beneficiary that can be changed without their consent while the latter is a beneficiary that must consent to and sign off on any changes to the life insurance policy, whether they be coverage changes, beneficiary changes, etc.

Contact BrokerLink to learn more about how life insurance works in Canada

Get in touch with the licenced insurance brokers at BrokerLink to find out more about how life insurance works in Canada. A BrokerLink insurance advisor can give you tips on how to purchase a life insurance policy, who to name as your beneficiary, and which type of policy is right for you. They can also explain what to avoid when buying insurance and give you an example of what an ideal life insurance policy looks like - there are several things that good life insurance policies must contain. To get started today, contact BrokerLink. We can be reached by phone, email, or in person. We can’t wait to speak with you!

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FAQs about how life insurance works

Does life insurance have cash value?

Yes, some life insurance policies have cash value. For instance, whole life insurance policies usually accumulate cash value since the insurance company invests the money collected from your premium.

Is life insurance worth it?

Life insurance is worth it for all types of people. Generally speaking, if you have dependents, such as children or a spouse, life insurance is worthwhile.

Should I name my children as the beneficiaries of my life insurance policy?

It is extremely common for policyholders to make their adult children the beneficiaries of their life insurance policy. That said, in Canada, minor children are not legally allowed to receive the death benefit from a life insurance policy until they are of age. If you want a child under the age of 18 to be your beneficiary, experts recommend creating a trust to manage the funds. Trusts are a type of estate planning tool that can be useful to many people. They can also help you with fitting life insurance within your estate.

How does life insurance work if you do not die?

If you purchase a term life insurance policy and you are still alive at the end of the term you selected, you have a few options. You can choose to let the policy expire, though this would mean that you no longer have life insurance coverage. You can choose to renew, adjusting the term length as you see fit, or you can convert it from a term life insurance policy to a whole life insurance policy, which guarantees you are covered for the duration of your life. If you purchased a return-of-premium term life insurance policy, your insurance company may refund you the amount you paid in premiums once the term is over if you outlive your policy.

How long does it take for a life insurance policy to pay out in Canada?

Once you have submitted all the necessary paperwork, it can take anywhere from a few weeks to a few months to receive your payout. The insurance company may have additional questions before they issue your payment.

Does life insurance pay for suicidal death in Canada?

Typically, life insurance will not pay out for a death by suicide.

How big should my life insurance policy be?

That depends on many factors! Do you have dependants such as children or a spouse? Are you worried about covering funeral costs? Everyone has different needs, so a life insurance policy can be customized to meet your needs. An insurance broker can help you determine how much coverage you should purchase.