How Does Life Insurance Work in Canada?

In this article, you’ll find life insurance advice, as well as the life insurance basics and details on most of the different types of life insurance policies in Canada. So, if you’re looking for an answer to the question of “How does life insurance work?”, read on.

What is life insurance for?

Simply put, your life insurance policy forms an agreement between you and your chosen life insurance provider. Their side of the agreement is this: they will pay out a death benefit if you die. Your side of the agreement is you will pay them a small amount of money at regular intervals — your insurance premium.

In this decision, you also both form an agreement on the amount of cash you will pay, and at which intervals you will pay it, as well as the payout amount.

What can I use life insurance for?

After you die, your life insurance’s death benefit will be paid out to whichever person or entity you designate. This person is referred to as your beneficiary.

People often plan for their death benefit lump sum to go to their family to help with bills, tuition, the cost of living, or other financial needs their family may have. A person’s death benefit can even be used to pay off business loans, lines of credit, mortgages, or other debts. This lump sum can also be used to cover funeral costs. What’s more, your death benefit lump sum is tax-free.

You could also name an organization as your life insurance’s beneficiary, like a charity, or your college. If this is what you opt for, your life insurance’s death benefit will be given to the organization as a tax-free gift.

However, if you do not choose a beneficiary, your life insurance death benefit’s lump sum will simply be paid out to your estate, which may cause it to end up getting taxed.

What is the typical price of life insurance?

Did you know that there are several factors that help to determine the cost of your life insurance?

But for a young and healthy adult, the cost of a 20-year-term life insurance policy is fairly low. In fact, your monthly insurance rates could be around equal to the cost of an extra large pizza!

For example, if you are an average 30-year-old, non-smoking female who lives in Ontario, a 20-year $500000 death benefit would cost you only $24 a month! If you go for a lower death benefit, the term price would be even lower.

The upshot of all this is that a personalized life insurance policy that fully suits your personal budget and needs should and is available out there at a great price.

Do I even need life insurance?

So, when do people know that they need life insurance? How can you tell when it’s the right time? Well, there are various reasons why a person might find it a good idea to get life insurance.

One reason for getting life insurance is to help your family out with finances. With a death benefit, you can help them clear out both business-related or personal debts. If you get life insurance, you can also supply your family with a replacement for your income.

Life insurance is also simply a financially responsible thing to do. A life insurance policy is an alternative income source to invest in, that allows you to secure assets for the future of your family. Without life insurance, the only asset you may have is you, alive and earning your income.

There are some things that you must want to ensure that your family can have even if you and your income are gone. Perhaps you’d like them to get college tuition, or a mortgage-free home. But without the extra income-generating investment that is life insurance, even the simpler things like your family’s clothing, food, or Netflix subscription are in jeopardy!

Of course, there are some people out there who could probably do just fine without life insurance; young, single, childless, wealthy and debt-free people. However, nowadays there are hardly any people like this!

What kind of coverage do I need?

As a general rule of thumb, it’s a good idea to get as much life insurance coverage as you need, that you can afford.

The best way to figure out which type of life insurance policy is right for you is to first of all put together a budget of your family’s present financial needs and future financial needs, as well as the debts and liabilities you currently have, and the costs that will be associated with your death. Once you have a general idea of these figures, you’ll have a much better idea of the type of coverage you are looking for.

How many different types of life insurance does Canada have?

Firstly, there are the two main types of insurance that you have likely already heard of — permanent life insurance (also known as whole life insurance) and term life insurance.

With whole or permanent life insurance, you and your family get complete coverage for the entirety of your life. It is the more reliable type of insurance coverage, in that your premiums will stay at the same price throughout the policy, never going up or down. It is also more pricey, though, with inherently steeper premiums than most other types of policies.

Whereas term life insurance is more straightforward. Your provider will still pay out if you die, but only if you die within the period of time referred to as a term. It is far more affordable though, compared to whole life insurance.

Ever heard of corporate-owned life insurance?

What about ultra-high net worth Canadians? Surely such people have no use for traditional insurance?

It’s true that most such Canadians are self-insured because of their assets. So, what type of insurance suits such wealthy people?

Well, corporate-owned life insurance can be a good solution. Corporate-owned life insurance is a tax-effective way for a wealthy individual to accumulate passive wealth within a company, access the wealth tax-free, and move the wealth tax-free to their surviving beneficiaries. Check out wealthinsurance.com for more on this.

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