What is Life Insurance, and How Does it Work? An In-Depth Guide for Canadians

When you pass away, life insurance in Canada provides financial security for your loved ones. It ensures your family is taken care of financially if you die prematurely.

This guide will provide an in-depth overview of life insurance in canada include : how it works, the different types of insurance policies available in Canada, factors determining your premiums, tips for choosing the right policy, and frequently asked questions with life buzz canada – the biggest life insurance newspaper in Canada.

What is Life Insurance?

Life insurance is a contract between you (the policyholder) and a life insurance company in Canada that states the insurer will pay out a lump sum of money (known as a death benefit) to your designated beneficiaries if you pass away during the policy term.

This payout can help cover your family’s living expenses, mortgage, debts, funeral costs, etc. Life insurance aims to safeguard your dependents from financial hardship and provide peace of mind that they will be cared for financially.

Life insurance guarantees that your loved ones will have financial resources available in your absence. It provides peace of mind that your family will be protected financially if the unexpected occurs.

How Does Life Insurance Work In Canada ?

Life insurance policies involve a legal contract between the policyholder and the insurance company.

The insurance company agrees to pay out a tax-free lump sum (a death benefit) to designated beneficiaries if the policyholder dies. In return, the policyholder makes regular premium payments to keep the policy active.

There are a few key roles that make life insurance function:

• The Policyholder: The person purchasing the life insurance policy. They own the contract and are responsible for making the periodic premium payments.
• The Insurance Company: This is the entity that provides financial security by agreeing to pay the death benefit to the beneficiaries upon the policyholder’s demise. Some reputable companies in Canada that offer this service include SunLife, Manulife, and RBC Insurance.
• The Beneficiaries: Individuals or entities designated by the policyholder to receive the death benefit payout. This is commonly a spouse, child(ren), or other dependent(s).
• The Premium Payment is the amount charged by the insurance company for coverage. It is paid weekly, monthly, or annually to keep the policy active.
• When the insured individual passes away, the designated beneficiaries are required to submit the death certificate and policy documents to the insurance company to initiate the claim process.
• Upon approval, the insurer issues the lump-sum tax-free death benefit to the primary beneficiary, providing much-needed financial support during a difficult time. 

Here is an overview of how life insurance works:

• You apply for a specific type and amount of life insurance coverage based on your needs and budget. This involves answering questions about your health, lifestyle, family history, etc.
• The insurance company assesses your application and places you in a risk class based on your age, health, occupation, hobbies, etc. This determines your premium amount.
• If approved, you pay a regular premium to keep your policy active. Premiums are paid monthly, quarterly, annually or as a single lump sum.
• Coverage lasts for a specified period of time, known as the policy term. This can range from 1 year to your entire life.
• If you pass away during the term, your designated beneficiaries receive the death benefit in the form of a tax-free lump sum payment.
• If the policy expires and you are still living, coverage ends unless it automatically renews. Any premiums paid are not refunded.
• If payments stop, the policy may lapse, requiring evidence of insurability to reinstate.

Types of Life Insurance Policies in Canada

There are two main categories of life insurance policies in Canada – term life insurance and permanent life insurance. Within each category, there are several types of policies.

Term Life Insurance

Term life insurance provides coverage for a set period of time, typically ranging from 10 to 30 years. It pays out a death benefit only if you pass away during the term. Term life is the most affordable form of life insurance.

• Renewable Term Life – Renews every year without requiring additional medical evaluation, but premiums increase annually.
• Level Term Life – Locks in a constant premium for the policy term so it does not go up with age. More expensive than renewable term but offers stable rates.
• Decreasing Term Life – Offers a death benefit that decreases over the term. Used to cover a debt that reduces over time like a mortgage.
• Group Term Life – Provided by an employer or association. Offers simplified underwriting, but coverage ends if you leave the group.

Recommended articles about term life insurance: What happens when your term life insurance policy expires in Canada ?

Permanent Life Insurance

Permanent life insurance provides lifelong coverage as long as you pay the premiums. It has an investment component that allows cash value to accumulate tax-deferred. Several types are available:

• Whole Life Insurance – Offers fixed premiums, death benefit and cash value growth over your lifetime.
• Universal Life Insurance  – Allows flexible premiums and adjustable coverage. Cash value earns interest at a variable rate.
• Indexed Universal Life – Similar to universal but cash value growth is tied to a market index like the S&P 500.
• Variable Life – Offers fluctuating premiums, coverage and cash value directly invested in the market. Higher risk and reward.

What Factors Determine Your Life Insurance Premiums in Canada?

Several key factors impact how much your life insurance will cost:

• Age – The biggest factor as rates increase significantly as you get older due to higher mortality risk. Premiums are lowest in your 20s and 30s.
• Health – Poor health, chronic conditions, and family history of illness mean higher premiums or potential denial of coverage.
• Lifestyle – Hazardous hobbies, risky occupations, smoking, drug/alcohol abuse also increase rates.
• Gender – Statistically, women live longer than men, so premiums tend to be lower for women.
• Policy Type – Term life is the most affordable. Permanent coverage and longer terms cost more.
• Policy Amount – The higher the death benefit, the more coverage costs.
• Riders – Additional policy features like disability waivers increase premiums.
• Member of family – Diverse family life insurance options in Canada for each family member such as parents, children, couples,…

Getting quotes from multiple insurers helps find the best rate for your situation. Improving health and lifestyle can reduce costs over time.

How Much Life Insurance Do You Need in Canada?

Determining the right amount of coverage is based on your unique financial obligations and goals:

• Final expenses insurance – At minimum, cover funeral and medical costs which average $12,000 in Canada.
• Debt repayment – Pay off mortgages, loans, credit cards, etc. Make sure your family isn’t burdened.
• Income replacement – Calculate the amount needed to cover your family’s living expenses for a set timeframe.
• College funds – If you have kids, estimate future college costs you want covered.
• Retirement needs – Supplement lost retirement contributions and savings.
• Goals/assets – Fund specific goals like starting a business or protect assets like real estate.

Many financial experts recommend 10–15 times your gross annual household income in total coverage. But do a needs calculation to determine the optimal amount for your situation.

There are many ways to save money on life insurance that not everyone shares. Lifebuzz shares all of its experiences in saving life insurance in Canada costs.

Does my employer-provided group life insurance cover me?

Group life insurance from your employer can provide basic coverage, but experts recommend supplementing with 8-10x your salary in additional individual life insurance. Group plans also end if you change jobs, making portability a concern.

• It becomes much more difficult and expensive to qualify for individual life insurance after being diagnosed with cancer or other serious illnesses. However, coverage is still possible in some cases.
• Some life insurers offer “guaranteed issue” life insurance policies that are available without a medical exam, even to those with pre-existing conditions. This type of insurance is often more expensive and only comes in smaller benefit amounts.
• The type of cancer, stage, treatments received, and time in remission will all impact your eligibility and premiums. Those with early-stage cancers who have been cancer-free for several years have better chances of securing affordable rates.
• If your employer offers this benefit, it may be possible to qualify for simplified issue life insurance through a group plan. Group plans provide more lenient underwriting.
• Looking into accidental death or funeral expenses, life insurance can provide more minor death benefits without medical questions.
• Working with an independent life insurance broker specializing in higher-risk cases can help you find the best options, given your health.
• Improving modifiable risk factors like diet, exercise, stress levels, and smoking habits may help reduce premiums over time after a cancer diagnosis. Maintaining follow-up care is also beneficial.

Tips for Choosing the Right Life Insurance Policy

• Know your needs – Outline your goals, obligations, and timeframe needing coverage. This shapes the policy type, term length, and amount.
• Consider a blend – Term life covers temporary needs inexpensively. Permanent life builds long-term value. Blend both to maximize benefits.
• Compare multiple quotes – Rates for the same coverage often vary greatly between insurers. Shop around for the best deal.
• Lock in when young – Buy term life insurance in your 20s or 30s to get the lowest possible premiums for the longest period.
• Don’t lapse – Make premium payments so your policy doesn’t expire. Lapsed policies can be expensive or impossible to reinstate later in life.
• Review often – Re-evaluate your coverage during major life milestones to ensure your policy still meets your needs.
• Stay healthy – Maintain a healthy lifestyle. Improvements could lower your premiums at renewal time.

Your insurance agent or advisor can help you identify the right solutions. Make sure to choose an optimized policy for your budget and insurance needs.

Frequently Asked Questions About Life Insurance in Canada

Who needs life insurance in Canada?

Life insurance is recommended for anyone with financial dependents – a spouse, children, aging parents, etc. It should provide enough to cover their living expenses, debts, and future needs if you were to pass away unexpectedly.

When should I buy life insurance?

The best time to buy life insurance is when you are young and healthy, as premiums will be lower. If you have a spouse, mortgage, or kids, it is recommended to obtain coverage immediately. Apply early to lock in the most favorable rates for your whole life.

Is life insurance taxable in Canada ?

The life insurance death benefit paid to your beneficiaries is completely tax-free. This makes it advantageous over other assets that may incur taxes, like RRSPs or real estate.

When does my life insurance policy pay out a death benefit?

The insurer will pay out the death benefit of your active life insurance policy if you pass away during the term from any cause, except suicide within the first two years. There are no exclusions for high-risk activities or pre-existing medical conditions.

How is the claim life insurance payment process?

Beneficiaries simply need to submit a certified death certificate and complete some paperwork to file a claim. Most death benefits are paid out in a lump sum within 30 days of submitting documentation. The process is designed to be simple even during an emotional time.

Can I get life insurance after being diagnosed with a disease?

It becomes much harder to obtain life insurance after being diagnosed with a major illness like cancer or heart disease. But some insurers offer guaranteed issue policies to those with pre-existing conditions, usually with higher premiums.

When does life insurance stop being worth it?

Life insurance stops being worth it when you no longer have financial dependents relying on your income. You likely no longer need coverage once kids are independent and debts are paid.

What are the living benefits of life insurance in Canada ?

Some policies provide access to death benefits if diagnosed with a terminal illness. This allows using funds for medical costs before passing away.

What does a life insurance exclusion period mean?

An exclusion period is a waiting period after the policy’s effective date where no death benefit will be paid if you die of suicide or specific illnesses.