Dying is one of the least exciting things to think about, so it is understandable that many people choose to ignore the need for life insurance.
However, life insurance should be one of the critical elements of many financial plans.
In this post, we’ll cover the types of life insurance available, who needs and doesn’t need it, how much coverage to get, and how to buy life insurance in Canada.
What is Life Insurance
Life insurance can be complicated but in simple terms, it is a type of insurance that pays a benefit if the insured (policyholder) dies during the period specified within the contract.
The contract, or policy, is between the insurance company (insurer) and the insured. In exchange for monthly or annual premiums received from the policyholder, the insurer agrees to pay a lump-sum death benefit to the beneficiaries (the loved ones) named in the contract.
In Canada, the death benefit is tax free to the beneficiaries so they can use it as they please.
Types of Life Insurance in Canada
In general, there are two types of life insurance in Canada.
- Term Life Insurance
- Permanent Life Insurance
The main difference between the two is the period of coverage
Term Life Insurance
Term Life Insurance provides protection over a certain period, also known as term. The term usually varies between 10-30 years. If the policyholder dies during this time, the beneficiaries will receive the death benefit, but no benefits will be paid afterwards.
It is a more flexible and cheaper option than permanent life insurance, and allows you to get protected during the periods you need it most: for example, when you’re just starting a family and with little savings to protect your loved ones if you die, a term life policy will protect them if you were to die suddenly.
Permanent Life Insurance
With permanent life insurance, the protection lasts for your whole life.
In this case, the probability of dying and the benefit going to your beneficiaries is 100%, so obviously the premiums will be much higher. Also, the policy builds up cash value over time, so the premiums you pay can be multiples of a term life insurance.
Whole Life Insurance and Universal Life Insurance are the 2 main types of Permanent Life Insurance.
Who needs Life Insurance?
The short answer is, you need life insurance coverage if your death will result in an economic loss for your loved ones.
One of the biggest misconceptions about Life Insurance is that you need it when you’re most likely to die. Rather, the purpose is to protect your loved ones in those years that your death will have an adverse financial impact on them, beyond just the funeral and medical expenses.
And life insurance is not just for the breadwinner or spouse with the higher income. Many couples underestimate the financial contribution of a lower-earning or stay-at-home partner.
If that partner dies, will there be a cost to pay someone else to do most of the things they did for free? Will you have to pay for cleaning, arrange for extra child-care, need to change your work schedule, or get a job closer to your home with lower pay? These costs may not be obvious, but they need to be considered.
Who doesn’t need Life Insurance?
Remember that life insurance payouts are meant to support financially dependent loved ones 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
- You have dependents but you’re adequately covered by group life insurance provided by your employer (more on this below)
- You’re old, close to retirement or even retired, with no financial dependents.
Buying life insurance when you’re old isn’t advisable because:
- It is more expensive: The older you are, the higher the probability of dying before your policy lapse. This is directly reflected in the cost of the life insurance you will get. That is, the older you are, the more you will pay in premiums.
- You may not need it: As you get closer to retirement, it is expected that you have less debt and significant savings such that, your passing will have a relatively lower financial impact on your family. But of course, this isn’t the case for everyone so you should do an assessment of your own circumstances.
How much Life Insurance Do I need?
The amount of coverage you need depends on your unique personal circumstances and the expected financial needs of your loved ones when you’re gone.
So, the right coverage is the amount that will allow them to maintain their current lifestyle with little to no disruption. You don’t want your family to sell the house to pay down the mortgage, or your partner to take up extra jobs to provide for your kids.
There are different approaches to estimating how much Life Insurance coverage to have.
You could have heard such rules of thumbs like, 2x-10x of your annual gross income should be used as an estimate. But in most cases, they are vague and may under- or overestimate the protection your family would need. In any case, the range may be a good starting point.
Consider 2 people with an annual income of $100,000. The first still has a substantial mortgage on the house, young kids, and a low-earning partner. The second has no debt, kids that are almost done with post-secondary education, significant savings and a partner with a higher income.
Obviously, these 2 individuals’ life insurance needs will be quite different.
Therefore, the right amount of insurance coverage depends on your family’s unique needs. You need to consider your current expenses and what it would look like in the future, for example the additional education expenses when kids are older.
Also, you should factor in your assets (savings and investments) and any liabilities (mortgage, credit card debt etc) you have.
I have life insurance coverage at work, do I still need to get more coverage?
Some employers provide life insurance coverage to 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 if you’re single with no dependents. But, in most cases, it won’t be enough for someone that’s married with children. To decide if you need to get additional coverage through an individual policy, take the following steps
- start with an assessment of the coverage amount you actually need. You can use the PolicyMe tool here.
- confirm the coverage you have from your employer
- find the difference between the two
- Get the additional coverage you need
Which is the best insurance company in Canada?
When it comes to term life insurance, the biggest factor to consider is usually the price; that is the monthly or annual premium you’ll pay.
The insurance companies’ offerings are very similar, and there’s little differentiation in the policies they offer. That’s why you should always shop around for the lowest quotes available for the coverage you need.
What if the Life Insurance company goes bankrupt? Fortunately, similar to CDIC protection for depositors, Assuris protects life insurance policyholders if an insurance company fails. Every life insurance in Canada is required by law to be a member.
In the event of a failure, your policy will be transferred to another life assurance with at least 85% of your benefits retained, or the full death benefits if the coverage is $200,000 or below.
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, but the 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 from 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 deal with an independent agent, you will be able to compare different life insurance options. The good thing is every broker has to offer you the same quote.
For example, you should get the same price for a $1,000,000 term life insurance from Sunlife irrespective of the broker you use.
So, what should you consider when choosing an insurance broker?
- Objective recommendation: this is particularly important if you don’t know the right type of life insurance for your personal circumstance, or how much coverage you should get.
- Quote comparison: You are best served when your broker presents you with quotes from different insurers, and not just the ones they are affiliated or have the best relationship with.
How do you get Life Insurance Quotes?
Online brokers are the quickest and easiest way to get life insurance quotes in Canada. With just your date of birth, gender and smoking status, most websites will be able to provide you with quotes from several insurance companies.
However, applying for the life insurance coverage after getting the quotes can be a pain.
Fortunately, Canadians now have PolicyMe, an online life insurance company that allows you to buy a life insurance policy completely online.
You can get a quick quote using the calculator below. And if you’re not sure of how much you need, you can complete the short questionnaire on their website.
You’ll be presented with a recommended coverage amount, determined based on your unique family circumstances, expenses and existing coverage if any.
Once you are happy with the coverage amount and the quote, you can go ahead to apply for the coverage in as little as 15 minutes.
Some Frequently Asked Questions
Answers to some frequently asked questions. Some of them have been covered in detail above
It is a type of insurance that pays a death benefit if the insured (policyholder) dies during the period specified within the contract. The benefit is paid to the beneficiaries named in the contract.
Short answer: if your death will result in an economic loss for your loved ones, then you need a life insurance coverage.
The amount of coverage you need depends on your unique personal circumstances. It is calculated using your current financial profile (household income and expenses, mortgage and other debts) and expected future needs of your family (paying for kids’ post-secondary education for example)
Anyone without a financially dependent loved one (for example, you’re still young and single), or someone have financially dependent loved ones but you also have significant savings and or investments that will support them financially.
You can get life insurance quotes from your local insurance broker, an online broker (like PolicyAdvisor.com or PolicyMe) or directly from the Insurance companies. The quickest and easiest way is through the online brokers.
A term life insurance policy will be many times cheaper than a comparable permanent life insurance – up to 10x in some cases.
In most cases, you do. The coverage you get from group coverage is typically a low multiple of your annual salary and will not be enough in most cases. Read more about how to check if you need more coverage above.
Life insurance is designed to protect your loved ones financially when you die, not to compensate them for the emotional pain and stress of your passing. No amount, however large, can do that.
So if you’ve been ignoring it and refusing to acknowledge the impact your passing will have on your family, now is the time to take action. Start today, not tomorrow.
To learn more about how Life Insurance works in Canada, check out this detailed guide on Life Insurance.