No one likes to think about death, but it is a fact of life. Even if you are young and healthy, something could happen that would leave your loved ones without the financial security you wanted to provide for them. That’s where life insurance comes in.
One in every four Canadians does not have life insurance and is unlikely to purchase any insurance because they do not understand how life insurance works and why they need it.
Life insurance can help ensure that your loved ones are taken care of financially if something happens to you. But how does life insurance work, and what should you look for when buying a policy? How much coverage do you need? What type of policy is right for you? How much will it cost? Which life insurance company offers the best rates?
In this post, I’ll discuss how does life insurance work and help you understand why getting life insurance coverage should be at the top of your priority.
How Does Life Insurance Work in Canada?
Most people know that life insurance exists, but few understand how it actually works.
Life insurance is a contract between you and an insurance company in which the insurance company agrees to pay your designated beneficiary a specified sum upon your death.
You pay premiums to the insurance company, usually monthly, and the company uses this money to build a cash value account.
If something should happen to you, the death benefit is paid out to your beneficiary, and the policy terminates. If you live beyond the policy’s term, you can either surrender the policy for its cash value or continue paying premiums to keep it in force.
Life insurance works by transferring the financial risk of your untimely death from you to the insurance company. In exchange for assuming this risk, the insurance company charges premiums.
The size of the premium is determined by several factors, including your age and health status, the death benefit amount, and the type of life insurance policy.
Generally speaking, the younger and healthier you are, the lower your life insurance premiums. This is because there is a greater chance that you will live to see the policy’s term mature. Conversely, you will likely pay higher premiums if you are older or in poor health because there is a greater chance of dying during the policy term.
Further, the death benefit is the amount of money your beneficiary will receive upon your death. This amount is typically determined by your age, health, and life expectancy. The insurance company will also consider the policy’s type and length when determining the death benefit amount.
Like most things in life, life insurance has pros and cons. On the plus side, life insurance can provide financial security for your loved ones in the event of an untimely death. It can also be used as a tool for estate planning, as the death benefit can be used to pay off debts or taxes. On the downside, life insurance can be expensive and is not always necessary. Ultimately, whether or not life insurance is right for you depends on your circumstances.
Working with an experienced life insurance advisor who can help you select the right policy for your needs is important.
What Are The Different Types of Life insurance?
There are two major types of life insurance: Term and whole. Both are subdivided into other smaller types.
Term life insurance provides coverage for a specified term. This could be 10, 15, or 20 years, or until you reach a certain age. Term life insurance is good for working Canadians to cover temporary financial needs, like debt repayment, educational expenses for your children, or mortgage protection.
Whole life insurance provides coverage for your entire lifetime unless you cancel your policy. Whole life insurance is best if you want insurance for estate-planning purposes, like retirement. It offers level premiums throughout your policy lifetime and a cash value component that grows cash tax-deferred. The subtypes include universal, term-to-100, participating, and non-participating whole life insurance.
How Do Life Insurance Payouts Work?
Life insurance pays out a death benefit to your designated beneficiary when you die. Your beneficiary files a death claim by completing the necessary forms and attaching a copy of your death certificate.
The insurance company reviews this claim and releases the death benefits. Usually, your beneficiary can choose to receive the death benefits in different ways.
They can receive it in a lump sum (at once), as a fixed amount (monthly or yearly), lifetime income (guaranteed payout till you die), or interest income (leave the death benefits with the insurer and receive interest on it).
How Does Life Insurance Work If You Don’t Die Before The End Of Your Policy?
If your policy ends while you are still alive, all your premiums will be gone forever unless you purchase a whole life insurance policy.
Unlike whole life insurance, which lasts your entire lifetime, term life insurance policies have an end date. However, most insurance companies offer the option to convert to a permanent one or renew the policy for another term.
What Information Do Insurance Companies Collect?
Life insurance companies like Manulife ask mandatory questions to collect information during the underwriting process.
They ask about your age, gender, location, health status, family medical history, and whether you smoke.
No insurer wants you to die untimely, so they ensure you are healthy before insuring you. They offer lower insurance rates if you are young and in good health.
They may also ask about your mental health history, how much you drink, your drug history, your job and how dangerous it is, and your passion and hobbies. Some insurers may require a medical exam.
Based on this information, your insurer will place you in a risk category and offer premiums accordingly.
Final Thoughts on How Does Life Insurance Work
Like most people, you probably have many questions about life insurance. How does it work? What are the different types? Is it worth it?
I have answered some of the most common questions about life insurance policies in this article. This will give you a better understanding of how does life insurance work and whether or not it’s right for you.
By understanding how life insurance works and what to look for when purchasing a policy, you can feel confident that you are making the best decision for yourself and your loved ones.
Hi, I'm Adeola Adegoke. I am a licensed Insurance Broker in Manitoba, and I hold a master’s degree in Mathematical Sciences (with a major in Financial Modeling) from the African Institute for Mathematical Sciences (AIMS), Tanzania.
Also, I have a second master's degree in Statistics from the University of Regina, and I am currently pursuing my Ph.D. in Statistics at the University of Manitoba.
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