How life insurance works in Canada

Life insurance provides a financial safety net for your loved ones. A life insurance policy is a contract between you and a life insurance company under which you agree to pay regular premiums in order to be eligible to receive a guaranteed tax-free payout, or a death benefit, for your beneficiaries in the event of your death.

Your premiums are calculated by taking into account several factors, including your age, sex, health condition, and lifestyle. The amount also changes depending on how much coverage you need and how much financial support you want to leave behind for your beneficiaries (this can be your family, friends, or anyone who relies on you financially). The death benefit provided can help your beneficiaries cover outstanding debts, funeral expenses, mortgage payments, education fees, and daily living costs, helping ease one area of stress during an incredibly difficult time.

There are many other types of life insurance available in Canada. Understanding how each one works can help you choose the best option for you and your family.

All Canadians will benefit from having a life insurance policy. This is especially true if you are a parent, homeowner, or someone with financial dependents. After all, if you don’t have life insurance, what will happen to your loved ones or your property when you die? If you pass away without a life insurance policy in place, anyone relying on your income will be left without a source of financial support or a way to cover the expenses that come alongside a death in the family. 

That said, it’s a good idea for every age group to consider a policy. By purchasing life insurance when you’re young and healthy, you can often secure lower premiums and lock in affordable coverage before potential health issues arise that could make insurance more expensive. In fact, delaying the purchase of a policy can cost you more, as premiums increase about 8% per year you age. Even if you don’t have dependents, it’s worthwhile to have living benefits in place as financial backup if you get ill or injured and are unable to work. 

Life insurance for Canadians, whether to leave a legacy, cover debts, funeral costs, or simply prepare for the unexpected, is a key consideration at any stage in life.

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. The good news is that there are some solid 'rules of thumb' that should make securing the right amount of coverage a slightly easier process for you.

A rule of thumb: The DIME Method

The DIME method is a general guideline that helps estimate how much life insurance you need. It calculates the sum of your existing debts, income, mortgage payments, and education costs. It’s a good idea to have enough to cover the sum and more. However, it’s always best to do a total financial needs analysis to determine how much coverage is sufficient. Here are a few factors to ask yourself: 

• 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 your insurance matches your needs. So, don’t worry if your coverage needs change, you can always buy more coverage via a separate policy, or even potentially increase your coverage amount on your existing policy. Keep in mind, changes to your policy will impact your annual premiums (e.g. cost will rise) and your ability to increase coverage will depend on the type of policy you have, your insurer, your age and your current health status.

You can buy life insurance in a few different ways:

• Digital platforms that you can use to compare quotes and purchase policies online (e.g. PolicyMe).
• Direct underwriters, who work for specific insurance companies (e.g. North Cover Insurance).
• Insurance agents, who are independent but only sell the products of one insurance company (e.g. SunLife Advisors).
• Insurance brokers, who sell the products of multiple insurance companies (e.g. Ratehub’s very own brokerage - Canwise Insurance Services).

The important part of purchasing life insurance is to do your research, compare the market and evaluate the cost of life insurance, which varies based on factors such as your age, health status, coverage amount and lifestyle. Since life insurance is such a complicated product, the best approach for buying a policy is to start by comparing life insurance quotes from a range of providers to help understand what the cost of a policy could be. 

From there, it's best to speak with an expert who will work to craft a policy that best fits your needs. They will be able to answer all your questions and make the purchasing process a more pleasant experience - instilling you with more confidence in your decision to purchase a policy.

Your life insurance beneficiary is the person or people who will receive the payout from your policy. This is a policy you’ll be paying into for many years, so it’s important to choose the beneficiary wisely and make sure your policy is up-to-date. 

Most people choose their spouse, children, or another close family member. You can also designate more than one beneficiary and decide how much of the benefit each should receive.

Keep in mind that life circumstances change, so it’s a good idea to review, update or change your beneficiaries over time, especially after major life events like marriage, divorce, or the birth of a child. 

In Canada, life insurance is broadly divided into two main types: term life insurance and whole life insurance. Each policy type has its unique features, making them suited for different financial goals and timeframes. 

Here’s a closer look at how each policy type works, along with some pros and cons to help you decide which option is best for you.

Why you should consider term life insurance

Term life insurance provides coverage for a specific period, or “term,” ranging anywhere from 5 to 100 years. You pay regular premiums throughout this term, and if you pass away during this period, your beneficiaries receive a pre-defined payout. 

This type of insurance is often the most affordable option, especially for young people or those looking for temporary coverage during periods when expenses are high. 

Term life insurance is a good fit for those seeking affordable, temporary coverage. It offers peace of mind for a set time frame, ideal for anyone who needs coverage during specific life stages.

Why you should consider permanent life insurance

Permanent life insurance, as the name suggests, is designed to last for your entire life, as long as you continue to pay the premiums. It includes a “cash value” component, which grows over time and can help with savings or future investment opportunities. 

Permanent life insurance policies are divided into two main types: whole life and universal life.

• Whole life insurance is a type of permanent life insurance that offers lifetime coverage with fixed premiums and a guaranteed cash value component that grows at a steady rate. Whole life insurance is generally predictable and stable, making it a good choice for those who want guaranteed coverage without surprises.
• Universal life insurance also provides lifetime coverage but offers more flexibility in terms of premium payments and death benefits. The cash value can often be invested, allowing for potential growth, although this can also mean fluctuations. Universal life is ideal for people who want flexibility and don’t mind a bit more complexity and risk.

Life insurance in Canada offers a flexible way to protect your loved ones from the financial challenges they may face after you’re gone. From affordable term life coverage to permanent options like whole and universal life insurance, there are coverage options available to suit different needs and stages of life.

In fact, there are multiple forms of policies you can purchase, including pre-existing condition insurance, no medical insurance, or guaranteed life coverage. While certain people may need life insurance more urgently than others, every age group should consider it as a way to protect future interests. 

Whatever policy type you choose, life insurance is ultimately about peace of mind and helping your loved ones continue on financially, even when you’re no longer there to support them.