Life Insurance

Beginners Guide to Getting Life Insurance in Canada

There’s hardly anyone who will deliberately leave his or her loved ones in financial mess and struggle. A lot of people have struggled to gain their balance, especially after the loss of a dear one or the breadwinner of the family. Hence, there is a need to have a legacy in place and plan for the future – a life insurance contract.

A life insurance policy is one of the most essential, vital, and crucial ventures that you can make to ensure that those who rely on you for financial support are catered in the event of death.

The life insurance payment given to the beneficiaries after the death of the insurance benefit holder can be used for a number of purposes, such as rent, mortgage payment, living expenses, debt repayments, funeral cost, child care education cost, charitable gifts, and more.

What is Life Insurance?

life insurance is an investment contract or policy between an insurance company (insurer) and an insurance policyholder (insured), in which the insurer guarantees the payment a designated or agreed amount to the beneficiaries of the policy upon the death or permanent disability of the insurance policy owner (the insured). Thus, in exchange for the regular payment of premiums by the policyholder, the insurance firm pays a lump sum as agreed in the contract to the person or people chosen as beneficiaries by the insured. This may include the spouse, children, or other family members.

How it Works

As there are different types of life insurance, there are diverse reasons why people sign up for an insurance policy. An insurance policy does not only protect your financial dependents, as it can also be a vital part of your financial strategy in which you can access the money after an agreed period while alive.

Life insurance is one of the ways of taking responsibility and having a good financial plan in case of any eventuality or unprepared circumstances. People get an insurance policy to cushion the effect of death on those who depend on them financially, or to cater to some important expenses, such as mortgages.

An insured individual (policyholder) enters a contract with an insurance company (insurer) to ensure that the insurer will provide an agreed amount of tax-free payments to the beneficiaries after the death of the policyholder. To ensure this, the policyholder is bound to pay a certain amount as premium regularly or periodically. The cost of life insurance for each individual depends on a matter of factors including age, gender, lifestyle, medical history, and more.

Types of Life Insurance in Canada

Term Life Insurance

Term life insurance is an insurance policy in which the insurer pays the beneficiaries a death benefit if the insured individual (policyholder) dies within a specific period or before a certain age. In this type of life insurance, the insurer covers the insured for a specific number of years (such as 10, 15, 20, or 30 years), or until the insured reaches a specific age (such as 65 or 70 years old).

For instance, in a term life insurance policy of 20 years, if the policyholder has kept up with the premium payment and dies within the duration of the policy, the beneficiaries will be paid the tax-free death benefit by the insurance company.

However, if the policyholder (insured) reaches the end of the policy term (in this case 20 years), the coverage on the insured ends and no payment will be made by the insurance company, even if the person eventually dies after the end of the term. Term life insurance policy can be reviewed or converted to permanent life insurance before the end of the policy term.

Term insurance rates are usually affordable within fixed premium all through the policy period. This type of life insurance offers temporary, flexible, and convenient coverage. The only time that your premium may increase is when you renew the policy. Term life insurance is suitable for young Canadians with a high cost of living.

Additional Term Insurance Options

As couples, the following additional options are provided on the term life insurance policy:

Joint First-To-Die Term Insurance

In this category, both spouses are insured under a joint policy and for the same amount of coverage. It has the following features:

  • It gives each partner the same coverage.
  • When the first partner dies within the policy term, a single death benefit will be paid out by the insurer.
  • It is less expensive than insuring for each person.
  • If both spouses die, the beneficiaries will not receive the second death benefit.
  • If one partner dies within the term, the other partner needs to apply for a new insurance policy to continue the insurance coverage.

Single Term Insurance

This category of term insurance provides each partner with their own policy and the coverage amount. Hence, it is usually more expensive than a Joint First-To-Die policy. In the case of divorce, it makes it easy and simple to change the beneficiaries.

Permanent Life Insurance

This type of insurance is more expensive than term insurance but offers long term protection of a lifetime. It also offers a fixed premium with guaranteed tax-free lump sum death benefits that will be paid out to the beneficiaries after the death of the policyholder, provided the insurance policy is active.

The permanent life insurance policy has a cash value and is seen as an investment option. Thus, it can be used as collateral for a loan or an outright policy loan.

Types of Permanent Insurance

In Canada, permanent life insurance has the following types or subcategories:

Term to 100

This category of permanent life insurance is the most basic, which guarantees life coverage. Premiums are fixed and must be paid until the policyholder attains age 100. If the insured makes it to 100 years old, he or she will no longer pay the premium and still retain the insurance coverage.

Universal Life

This type of permanent life insurance combines life insurance and investment accounts, with a withdrawal cash value. As allowed on the insurance policy, the premiums can be increased or decreased. Also, depending on the investment type and the success or otherwise of the chose investment of the policyholder, the death benefit and investment cash value may either increase or decrease.

Whole Life Insurance

This type of permanent life insurance offers lifetime coverage and a fixed premium throughout the duration of the policy. It also has a cash value which can be withdrawn as a payout at the cancellation of the policy or used as collateral on a loan.

Benefits of Life Insurance

  • Life insurance provides a high life risk cover for the policyholder and the beneficiaries.
  • It provides tax-free death benefits that can be used to cover some short term and long term expenses.
  • Compared to other investments, life insurance yields better returns.
  • Some life insurance provides the option of taking a policy loan or using it as collateral.
  • Life insurance provides the insured with financial security and peace of mind, knowing that the beneficiaries or loved ones will be financially taken care of in case of death.
  • Some life insurance policies serve as an avenue to create wealth.
  • Life insurance can help you to save towards future expenses.

Cost of Life Insurance In Canada

Generally, term life insurance of temporary protection is the most affordable type while permanent life insurance of long term protection is usually more expensive. A lot of factors determine how much premium will be paid by the insured on any life insurance policy. These factors include:

Age

Life insurance is more affordable and less expensive for people that are young in age. The insurance premium payable on a policy will increase in proportion with the age of the policyholder because, it is believed that compared to an older person, a younger person is less likely to die in the nearest future.

Coverage

The coverage of an insurance policy will also determine the premium. For instance, an insurance policy that has a CDN$1million death benefit will have a higher premium than CDN $400,000 policy coverage.

Health

The cost of insurance can also increase in relation to the family health history, lifestyle, health condition, or chronic disease that may affect the lifespan of the policyholder.

Gender

Research has shown us that averagely, women live longer than men. Therefore, the cost of insurance for men is sometimes higher than the premiums charged from women.

Occupation

The insurance cost can also be determined by the nature of the occupation of the policyholder. If the job or occupation puts the insured at a higher risk, the cost of life insurance might be higher than the average.

Some Life Insurance Glossary

Beneficiaries

This is the person or entity that is eligible to receive the insurance payout or death benefits.

Death Benefit

This is the amount of money paid to the beneficiary when the policyholder dies as agreed in the life insurance policy.

Insured (policyholder)

This is the individual or persons covered by the life insurance policy.

Insurer

This is the life insurance company.

Lapse

This is the termination of a life insurance policy due to nonpayment of premium as agreed in the policy by the insured.

Policy

This is the life insurance legal contract issued by the insurer to the insured.

Premium

These are periodic payments agreed by the policyholder to pay the life insurance company in order to keep the policy active.

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