What is life insurance?
Life insurance is important, but it's also complex. Here, we break down life insurance in simple words so anyone can understand.
Matt Hands, Business Director, Insurance
Life insurance is a contractual agreement between you and your insurance provider. In exchange for monthly or annual payments, your insurance company will pay a lump sum, or a death benefit, to those that rely on you financially after you die. The two most common types of life insurance are term life insurance and whole life insurance.
Depending on your plan, you’ll pay a certain amount of money, also known as a premium, to your insurance company on a monthly or annual basis. This amount is calculated case-to-case by taking into account several factors, including your age, sex, health condition, and lifestyle. Your premium also changes depending on how much coverage you want to leave for your beneficiaries (this can be your family, friends, or anyone that relies on you financially). After you die, your beneficiaries will receive the agreed-upon lump sum as a death benefit. They can use this money on their own terms to support their lifestyle financially or pay off any remaining debt.
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If you're looking at buying life insurance, there's a good chance you're feeling a little overwhelmed by the process, and all the choices available. I felt the same way when I first got coverage! The good news is that there are some good 'rules of thumb' that I've learned in my time working in the life insurance industry. Read through them and it should make securing the right amount of coverage a slightly easier process for you.
A few rules of thumb
There's a general rule that five to seven times your annual income should be sufficient for your beneficiaries. However, to be sure, you should take a financial needs analysis. Essentially, this will look at your existing debts, the current financial needs of your survivors—including ongoing assistance, not just at the time of death. There are many specific factors to consider:
- What is remaining on your mortgage?
- What other loans and outstanding credit do you have?
- What expenses will have to be taken care of, like burial and uninsured medical costs?
- What percentage of your income will your beneficiaries need?
- For how many years will your survivors need financial support?
- Do you need to include specific funds, like an emergency fund, a child-care fund, or an education fund?
- What other assets—stocks, real estate, savings—do you have that could be deducted from the amount you need?
It’s also common for your life insurance needs to shift throughout your life, as you have children and expenses change. A financial needs analysis will keep you on track and should occur every few years to make sure you insurance matches your needs. We have an dedicated article on this topic on our blog, if you'd like to learn more: How much life insurance do I need?
How to buy life insurance
You can buy life insurance in a few different ways:
- Direct underwriters, who work for specific insurance companies.
- Insurance agents, who are independent but only sell the products of one insurance company.
- Insurance brokers, who sell the products of multiple insurance companies.
- Some forms of life insurance are available online.
Because life insurance is such a complicated product, the best approach is to get a wide range of quotes from a wide range of life insurance companies. We can help you compare life insurance quotes in just minutes, and put you in touch with an agent if you need to speak to one. Get started today - with no obligation - to get the best deal for you and your family.
Ratehub.ca is not affiliated or otherwise associated with Hub International Canada.
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If you got this far, you know one thing - life insurance is complex! To get the right policy, you need to do a lot of comparison work. Get multiple quotes today to save yourself time and effort.compare quotes today
Matt started his professional career at CARPROOF where he honed his marketing and analytical skills for over 3 years. Matt then took his wealth of experience to Ratehub.ca’s Toronto offices, working with insurance providers, agents, and brokers to grow and expand the Insurance business unit. He is a thought leader in the community and a valuable insurance resource to respected publications like the Globe & Mail, Toronto Star, Huffington Post, Yahoo News, and 680 news radio in Toronto.
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