Personal Finance » Insurance

What Is Life Insurance? How Life Insurance Works In Canada

Life insurance coverage is a key component of a sound financial plan. Unfortunately, close to 50% of Canadians don’t have life insurance, and most Canadians are considered underinsured. One of the issues is that too many people don’t understand how life insurance works.

In this article, I explain what life insurance is and share the benefits of purchasing coverage for your family. I’ll also cover the various types of life insurance you can buy to help you make a more informed decision.

What Is Life Insurance?

Life insurance is a contract between you and an insurance company. This contract ensures financial security for your loved ones when you’re no longer around. By taking out a life insurance policy, you’re providing peace of mind that your family’s financial needs will be cared for.

During the time your life insurance policy is active, you agree to pay regular premiums to the insurance company. In return, if you were to pass away during the term of the coverage, the insurance company would pay a death benefit to your designated beneficiary.

This tax-free lump sum of money can be used to cover funeral expenses, pay off debts, or support your family’s living expenses.

How Does Life Insurance Work?

There are two main types of life insurance products: term life insurance and permanent life insurance. A term life insurance policy provides coverage for a specific period, usually ranging from 5 to 30 years. If you pass away during this term, the death benefit will be paid out to your beneficiary.

On the other hand, permanent life insurance, such as whole life or universal life, provides coverage for your entire life. You’ll continue to pay premiums, and the policy will pay a death benefit whenever you pass away.

Term life insurance is the better option for most people because the premiums are far lower, especially when you are young. And because the amount of life insurance coverage you need should decrease as you age, term insurance allows you to only pay for the coverage you need.

Either way, you need to consider your personal needs and financial goals when choosing a life insurance policy. Research various insurance companies and seek professional advice to find the perfect fit for you.

Benefits Of Life Insurance

Life insurance provides peace of mind and financial security for your loved ones in the event of your passing, but it has other advantages too. Let’s take a closer look at the many benefits of life insurance coverage.

1. It provides financial security for Your family. If you have a life insurance policy, you’re securing financial support for your family in the future. The death benefit, which is a tax-free lump sum of money paid by the insurance company to your chosen beneficiaries, helps cover expenses such as debts, funeral costs, and ongoing living expenses.

2. Flexibility in Policy Options. There are life insurance coverage options available to suit just about any situation. For starters, you have the choice between term life insurance, which offers coverage for a specific period, and permanent life insurance, which provides coverage for your entire life. Some policies include a savings component through participating in whole life or universal life insurance policies.

3. Protecting Your Assets. Life insurance can also protect your assets, such as your home or business, by ensuring your mortgage or loans are paid off in your absence, maintaining your family’s standard of living.

4. Tax Benefits. Life insurance policies offer several tax benefits. Since the death benefit is tax-free, your beneficiaries will receive the full payout without worrying about taxes. Certain types of life insurance, such as participating whole life insurance, can help you build wealth with tax-deferred growth.

5. Long-term Savings and Investments. Some life insurance policies also include a savings component, which allows you to accumulate cash value over time. This cash value can be withdrawn or borrowed against, providing you with funds when you need them the most.

Different Types Of Life Insurance

Term Life Insurance

Term life insurance provides coverage for a specific period (term), such as 10, 20, or 30 years. If you pass away during the term, your beneficiaries receive a tax-free, lump-sum death benefit. Term life insurance is the most affordable type of insurance and is ideal if you need coverage for a specific period or to provide coverage for a specific financial goal.

Term to 100 Life Insurance

Term to 100 life insurance is a type of permanent life insurance that covers you until the age of 100. It lasts much longer than term insurance, and your premiums generally stay the same throughout the entire policy. If you pass away before turning 100, your beneficiaries receive the death benefit. Note that this policy does not have a cash value component.

Whole Life Insurance

Whole life insurance is a type of permanent life insurance that provides coverage for your entire life as long as you continue to pay the premiums. It also has a cash value component that grows over time and can be accessed while you’re still alive. This type of policy is designed for those looking for lifelong coverage and a savings element.

Universal Life Insurance

Universal life insurance is yet another type of permanent life insurance that combines a death benefit with an investment component. You can adjust the premium payments and death benefit within specific limits, and your investment component grows tax-deferred. This policy offers more flexibility and is suitable for those who want more control over their policy’s investment and coverage.

Annual Renewable Term Life Insurance (ART)

Annual Renewable Term life insurance is a type of term life insurance that allows you to renew your policy annually without providing new health information. Your premiums increase each year based on your age. This type of insurance is ideal for those who need short-term coverage and want the option to renew without the hassle of requalification.

No Medical Life Insurance

No medical insurance is a type of life insurance policy that doesn’t require medical exams or extensive health questionnaires to qualify. This policy is ideal for those who have pre-existing health conditions or face difficulties getting traditional life insurance. Keep in mind that premiums for no medical insurance tend to be higher than other types of life insurance due to the increased risk.

Mortgage Protection

Mortgage protection insurance is a decreasing term life insurance designed to pay off your remaining mortgage balance if you pass away. The death benefit decreases over time as your mortgage balance decreases, ensuring that your mortgage is covered. This type of insurance is ideal for homeowners looking to secure their mortgage and protect their family’s financial stability.

How Much Does Life Insurance Cost?

Cost is a major consideration when purchasing life insurance, and the cost varies depending on several factors, such as the type of policy, age, gender, health, and smoking status. Premium payments are usually required monthly, quarterly, or annually.

Another factor to consider is the coverage amount, with higher coverage amounts typically resulting in higher premium payments.

It’s important to understand that your personal risk factors have a significant impact on life insurance costs. If you’re a smoker, have existing health conditions, or work in a high-risk occupation, insurers may charge higher premium payments to cover the increased risk.

Is Life Insurance Worth It?

Is life insurance worth the cost? The answer is a resounding yes, with one caveat. Life insurance is well worth the cost as long as you have purchased the right type of coverage for your situation and at the right price. For example, permanent life insurance policies are unsuitable for most people due to their high cost. Term policies are more affordable and don’t require a lifetime commitment.

That’s not to say that permanent life insurance isn’t right for some people, which is why you should always consult with an insurance professional before you make a final decision.


Who requires life insurance?

Unless you are financially independent enough that you are able to self-insure, you should have life insurance coverage whether you are single or married, young or old. But not everyone believes they need life insurance.

For example, I’ve met people who believe life insurance is a waste of money because they don’t have a spouse or children to leave money to. However, you may have a spouse or children, or both, at some point in the future, which is why it’s a good idea to consider purchasing a term life insurance policy now while you are young and healthy.

If you own enough assets for your family to maintain their current standard of living after you’re gone, then you may not need to purchase life insurance. Otherwise, I strongly recommend it. 

What happens to term life insurance when it expires?

In most cases, you’ll have some options when your term life insurance policy expires. If you no longer need insurance coverage, you can allow it to lapse. Your premiums will cease, and you will no longer have the coverage. Most insurers will allow you to extend the policy for another term.

If you’ve maintained your current policy in good standing, your approval should be automatic, but your premiums will increase for the new term, as you are now older than you were when you originally took out the policy. Your insurance company may also allow you to convert your term life insurance policy to a permanent life policy.

Should couples get life insurance?

In most cases, it makes sense for both spouses to purchase life insurance coverage. However, the amount of coverage each person needs may vary. For example, if one spouse relies heavily on the income of the other spouse, the high-income earner should purchase more insurance coverage.

If they pass away, the lower-income earning spouse would be protected as the death benefit would serve as a form of income replacement. Other factors should be considered, including the number of children, the mortgage amount, and the status of other assets.

Should I get life insurance for my children?

Opinions will vary on this subject, but I believe it’s important to purchase a minimal amount of term insurance for each of your children. No one wants to consider the possibility that they may outlive their kids, but unforeseen circumstances do occur from time to time.

By purchasing enough coverage to pay for funeral costs and other final expenses, you can avoid an added financial burden during what would be a challenging time. Because the risk of premature death in children is so low, insurance premiums are very cheap.

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