No one wants to dwell on the topic of death, but if you have regular financial responsibilities, obtaining a life insurance policy is a must. We don’t know what the future holds, but if your death will cause some hard times for hit your family, it will be much better if there is a life insurance policy to help keep the family finances in order.
While having a life insurance is a good idea, there are a number of options out there. Every life insurance plan will be a little bit different, and some policies have options to add disability insurance that will help pay for a major illness or permanent disability.
It is important to understand the specifics of your life insurance policy, and what is and isn’t covered. Buying a more inexpensive life insurance plan might be tempting, but like anything in life, you get what you pay for.
What is Life Insurance?
At its most basic level, life insurance will pay a death benefit to a person of your choosing when you die. There are conditions that govern how life insurance is paid, and some kinds of death won’t result in a payment to the beneficiary of your life insurance policy.
Like any kind of insurance, the cost of life insurance will rise as the likelihood of death rises.
Some things that can push the cost of life insurance higher are unhealthy habits, like smoking, or older age. If you have a dangerous job, the cost of life insurance may also go up, or your policy may not offer any compensation if you die while working.
Do You Need Life Insurance?
Basically, anyone who has financial dependents will need to carry some sort of life insurance policy. The amount of life insurance that you need will vary based on your income and responsibilities. If you are just starting out in life, and don’t have any kids, you may be able to put off buying life insurance for a while. Otherwise, it is time to add life insurance to your budget.
On the other hand, if you have debts, people that depend on you financially, e.g. spouses, children and even parents, then making sure they stay protected when you’re gone is a good idea
Different Types of Life Insurance
There are two major types of life insurance. Term life insurance will cover your family or loved ones when you die, and only if you die within a set term e.g. 10, 20 or 30 years. Permanent life policies cover you for life, but they cost more and are even harder to analyze, due to all the options they have.
Convertible life insurance is an hybrid of term and permanent life insurance.
Let’s have a look at the the types of life insurance, and learn more about what is available in Canada.
Term Life Insurance
Term life insurance is a straightforward way to make sure your beneficiaries receive a death benefit if you die during the specified term in the contract. They are simple and easy to understand.
Term life insurance will insure a person for a given length of time, for a fixed price. That is, the policy is only valuable if the person who is insured dies, and the policy payments have been made.
The ‘term’ in term life insurance refers to the duration of time that the policy will be in effect. Let’s say a person is 30, and they buy a $250,000 life insurance policy for a 20 year term. The insurance company guarantees to pay the beneficiaries the death benefit if the insured dies before age 50.
Once the person reaches the maximum age of coverage, the insurance policy expires, and the person would need to find some other form of coverage, almost certainly at a much higher premium.
Some insurance policies will let you extend the coverage, sometimes without a new medical tests, but definitely at higher premiums.
Term Life Insurance Benefits
- Easy to understand
- Generally, the cheapest life insurance option
- Will provide coverage for most of the adult life of a person
Term Life Insurance Drawbacks
- The coverage is limited, that is it’s not lifetime coverage
- No investment or cash value. This partly explains why the premiums are comparatively cheaper than whole life plans.
Permanent Life Insurance
Permanent life insurance is also sometimes called Whole life insurance, and as the terms imply, it will provide a death benefit for the life of the person who buys the policy. Whole life insurance policies are also the most complex type, and build-up a cash value over time.
You can borrow against the cash value of the policy, so it could be ideal for retirement income planning.
Giving a specific example of how whole life insurance policies work is difficult, as they can be quite complex in structure.
It is a good idea to consult a tax professional before entering into a whole life insurance agreement, so that you understand the specifics of the policy’s structure, and don’t end up overpaying for the policy.
Whole Life Insurance Benefits
- Offers a long-term life insurance solution
- Can be a good investment and they force you to save
- Generally, builds up value over time
Whole Life Insurance Drawbacks
- Almost always the most expensive option (sometimes as high as 10 times the premium for a term life policy)
- They are inflexible and there are usually penalties if you want to cancel early
- Complicated and difficult to understand
Other types of Permanent Life Insurance
Universal Life Insurance: is another type of permanent life insurance that is very similar to a whole life insurance. The only difference is that you can choose how the investment component of the policy is invested. You don’t have this option with a whole life insurance.
In other words, you can’t just select the policy and forget it. It requires constant monitoring
Term-to-100: a type of whole life insurance but without an investment or cash value. Also, if you live up to 100 years, you’ll continue to enjoy the coverage but stop paying premiums.
Convertible Term Life Insurance
Convertible life insurance is an hybrid life insurance policy. Like term life, it only pays out to a beneficiary if the policyholder dies, but unlike term life, it can be converted to a permanent policy at expiry or at set anniversary of the policy.
The details of a convertible life insurance policy will vary, but they tend to cost a bit more due to the option for lifetime coverage.
One way a convertible life insurance plan could be structured is: a person has a convertible life insurance plan that offers a death benefit of $100,000. If they choose to, they can convert the policy to a permanent plan at expiry or other times set out in the policy agreement.
If the policyholder chooses to use this option, the premium will rise to an amount that is specified in the policy, and they will be able to carry the same amount of coverage for the rest of their natural life. As we stated previously, the specifics of any convertible life insurance policy will vary, and the example given is purely hypothetical.
Renewable Term Life Insurance
This is a type of term life insurance where the policies can be renewed at the end of the term, without the need for another medical examination.
For example, with a 10-year term life insurance with the renewable provision, the insurance policy will automatically renew in year 11 for another 10 years but at a higher premium.
Which One is Right for You?
This depends on individual circumstances, but we can offer some idea on what to take into consideration when making a decision on which type of life insurance to buy.
Term life insurance is probably the best way to get into life insurance, especially if you are young, and need to make sure that your financial dependents are taken care of. The big upside to term life insurance is that you will be able to buy a lot of coverage for a reasonable amount of money, and the term is likely to extend to an age when your financial responsibilities would have reduced.
If you are 30, have been married for a few years, and expecting a child, term life is a good way to buy $100,000 to $1,000,000 worth of coverage for a decent price. Keep in mind that the shorter the term, the lower the premium, so buying a term life policy that expires when you are 45 or 50 may be downright cheap.
As you get older the need for a big insurance payout is much lower, and you may just want to plan to have enough life insurance to cover funeral expenses, as well as a small amount for your family.
How Much Life Insurance Do You Need?
Once again, there is no simple answer to the question of how much life insurance you should buy. If you have financial dependents, then buying a policy that will pay out ten times your annual income isn’t a bad idea.
Some things that your life insurance policy should cover are:
- Any housing debt, like your mortgage
- Funeral expenses
- At least two years of income for your spouse (some plans say 10 years of income is best)
- Other debts (cars/credit cards/etc…)
If you have children, adding some additional life insurance coverage isn’t a bad idea. Again, buying life insurance with a term policy isn’t especially expensive, as long as you buy it with a term that ends at a relatively young age.
How to buy Life insurance in Canada?
One of the good things about the insurance industry today is the sheer number of providers that are available. However, this means your monthly premium can vary widely across the different companies.
In general, there are 3 main options for buying life insurance:
- Through an online insurance broker
- Through local independent insurance brokers in your area
- directly with an insurance provider
Once you decide on the type of life insurance you need, you can start getting quotes from both agents, and directly from companies.
One of the big advantages that independent insurance agents (both online and local) offer is the depth of their industry knowledge, with no specific preference for a single insurance company.
While it is quite easy to go to the website of an insurance company, you will only be getting quotes for products from that company. On the other hand, if you talk to an independent agent, you will be able to gain a wider view of different life insurance options.
One of the best online life insurance broker available to Canadians is PolicyAdvisor.com. In a few minutes, they’ll come up with personalized recommendations after you provide a few information. Also, you’ll be able to compare different plans across various providers.
How much does Life Insurance cost in Canada?
The quote you get depends on several factors.
- Age (of course the older you are, the higher the premiums)
- Coverage amount
- life insurance policy type (term life or permanent)
- health status and history
- smoking habits
- driving records
- hobbies (having rock climbing or flying as a hobby will cost more for example)
These factors have varying impact on the premiums you pay, and unfortunately some of them are not within your control.
How can you reduce your life insurance premiums?
You may be able to get preferred rates through your professional bodies. E.g. Manulife has preferred rates for CPA members in some provinces. So, it is worth checking out
Other ways to reduce how much you pay as life insurance premiums include:
- Shop around for the best rates
- Convert your whole life insurance to term life
- Combine your policy with your spouse’s
- live and stay healthy
- reduce your coverage amount (but be honest about what you really need). It is better for your loved ones to receive less money than none.
Some Frequently Asked Questions about Life Insurance in Canada
I have life insurance coverage at work, do I still need to get more coverage?
Some employers provide life insurance coverage for their employees. Typically, the coverage will be a multiple of your annual salary, for example 2 times your gross salary.
This is a good start but, in most cases, it may not be enough. To decide if you need more coverage, take the following steps
- start with an assessment of what coverage you actually need. You can use the PolicyMe tool above.
- confirm the coverage you have from your employer
- find the difference between the two
- Get the additional coverage you need
How long should the life insurance policy be for?
You should keep a policy open for as long as your death will have an adverse financial impact on your loved ones. Specifically, you should have a coverage until your kids are out of school and financially settled, your mortgage is paid off and you have enough savings or investment.
Who can be a beneficiary?
Pretty much anyone but generally it’s your spouse, kids or a loved one that can take care of your dependents.
Death benefits are tax-free, but the money may be subject to tax if you name your estate as the beneficiary.
Also, the beneficiary should be aged 18 or above. For younger beneficiaries like your kids, you can set up a trust and name it as the beneficiary, then appoint a trusted friend or another family member as the trustee.
Will I need a medical test?
Typically, yes. The insurer will send a nurse to you for all the tests, including a blood test. The advantage of this is that you may not be required to undergo another test if you choose to renew or convert the insurance in the future.
Many insurance companies now underwrite policies without a medical test, especially for lower coverage policies. However, you’ll pay higher and the policy may not be convertible.
A nurse will be sent to take your blood and urine for tests, measure you weight and height and you’ll also have to answer a long list of questions about your medical history and that of your family (to screen for conditions that could be hereditary)
Are there people who don’t need life insurance?
Yes! Not everyone needs a life insurance coverage. Remember, the payout is meant to support your financially dependent loved ones if or when you die. So you don’t need life insurance if
- You’re young or single with no financial dependents
- You have dependents but you’ve managed to amass substantial savings and investments that will support them when you’re gone
What happens to my premiums or benefits if the Insurance company defaults or goes bankrupt?
In other words, is your life insurance insured?
The good news: Yes, you’re protected
Bad news: the protection may not be 100%, depending on your coverage amount.
Similar to the deposit insurance offered by CDIC in Canada, Assuris protects life insurance policyholders in the event that their insurance company fails.
Assuris is a not for profit organization and the list of members can be found on its website. Every life insurance company with a license to sell insurance in Canada is required by law to be a member, and membership can’t be cancelled as long as there are policies in force.
In the event of a failure, your policy will be transferred to another life assurance with at least 85% of your benefits retained. The protection is $200,000 or 85% of the benefits, whichever one is higher. Effectively, you’re covered 100% as long as the total coverage amount across all your policies with that company is $200,000 or below. See illustration below:
|B. 85% of Insurance Coverage||$170,000||$425,000|
|Higher of A or B||$200,000||$425,000|
Unfortunately, the usual advice to spread your savings across different financial institutions to maximize your CDIC protection is not particularly helpful here.
For instance, if you need a coverage of $400,000, it is not advisable to split it into $200,000 policy across 2 different companies. You’ll end up paying way more than having a single policy with one insurer.
Other Things to Consider About Life Insurance
Life insurance isn’t a lot of fun, but if your family or loved ones need it, they will be happy that you had the foresight to plan for a bad situation. We live in a society where moving up the economic ladder sometimes means taking on a large amount of debt, which makes life-insurance a necessity.
Shop around, and take your time when it comes to creating a life insurance plan to care for your family. There are lots of options out there to choose from, and making the right choices now means a strong safety net for your loved ones tomorrow.
Check out this post to learn more about how to start protecting your loved ones with Life Insurance and the top reasons why you need Life Insurance.
Learn more by watching this video from Ben Felix from PWL Capital.