Life is a journey filled with unpredictable moments, both delightful and challenging. While we celebrate our joys and successes, it’s crucial to be prepared for unforeseen events that can impact our family’s financial stability.
Life insurance may not be the most exciting topic, but it’s a vital component of any sound financial plan. If you’re like many others who have questions about life insurance and feel unsure where to begin, you’re at the right place.
In this blog post, we aim to simplify the complexities of life insurance. Our goal is to provide you with a clear understanding of what it is and why it should matter to you.
Whether you’re new to the concept of life insurance or seeking to enhance your knowledge, we will discuss everything you need to know life insurance and assist you in making informed decisions to secure your future.
What is Life Insurance?
Life insurance is a financial agreement offering your loved ones a vital safety net. Here’s how it works: in exchange for regular premium payments, the insurance company guarantees a tax-free lump sum, known as the death benefit, to be paid to your chosen beneficiaries upon your passing.
This financial tool is highly customizable. You and the insurance company agree on the death benefit amount and the premium payments, which can be as flexible as monthly or annually. Additionally, you can tailor your policy with add-ons called riders, ensuring your coverage fits your specific needs.
The primary purpose of life insurance is to provide for your dependents when you’re no longer there to support them. Your beneficiaries can use the death benefit in various ways, whether it’s covering living expenses, paying off debts and mortgages, or simply having the financial freedom to grieve and adapt.
Common Life Insurance Terminologies
Here are some of the most common life insurance terms you should familiarize yourself with, as they will be used throughout this blog post:
- The Policyholder: This is the person who owns the policy. In most cases, the policyholder and the insured individual are the same.
- Cash Value: Many permanent life insurance policies include a savings component called cash value. Policyholders can either withdraw or borrow against this cash value. It’s important to note that term life insurance policies do not offer this feature.
- The Insurer: This is the insurance company providing the coverage.
- Death Benefit: This refers to the amount of money the insurer will pay out to the policy’s beneficiaries when the insured individual dies.
- Beneficiary: Beneficiaries are the individuals entitled to receive the benefits from the insurance policy.
- Policy Length: This denotes the duration of the life insurance policy, encompassing the time from the policy’s commencement to its expiration date.
- The Insured: The person whose life is covered by the insurance policy.
- Premium: The premium is the sum of money paid to the insurer for maintaining life insurance coverage.
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Types of Life Insurance
Life insurance in Canada can be categorized into two primary policy types: term life insurance and whole life insurance. These are the most commonly used forms of life insurance.
Beyond these main life insurance options, there are additional policy types, each designed for specific use cases. These include universal life insurance, participating life insurance, mortgage life insurance, and Term-to-100 insurance.
What is Term Life Insurance?
Term life insurance is a life insurance policy offering coverage for a specified number of years, typically 10, 15, 20, 25, or 30 years. You can also set the coverage to last until a specific age, like 65 or 80.
If you were to pass away during the policy term (before the end of the specified policy duration), your beneficiaries would receive a tax-free lump sum payment that you determined when you initially purchased the policy. Your loved ones can use this death benefit to replace lost income, pay off debts, cover living expenses, or fund education.
What makes term life insurance particularly appealing is its affordability, making it a popular choice for individuals and families seeking basic life insurance coverage.
Unlike other forms of life insurance, term life policies do not accumulate cash value. Since the coverage is for a limited period and lacks a savings component, it is considerably cheaper than other types of life insurance.
What is Whole Life Insurance?
Whole life insurance, often called permanent life insurance, is a policy designed to provide lifelong coverage. Unlike term life insurance, which offers coverage for specific timeframes, whole life insurance remains in effect for your entire life as long as you keep up with the premium payments.
One distinctive feature of whole life insurance is cash value accumulation over time. A portion of your premiums is directed into a cash value account, which grows at a guaranteed rate. This cash value can serve various purposes, including supplementing retirement income, paying off a mortgage, or covering unexpected expenses.
Whole life insurance policies come with level premiums, meaning your premium amount remains constant throughout the policy’s life. This offers predictability for long-term financial planning. While the monthly premiums for whole life insurance are typically higher than those for term life insurance, the assurance of a guaranteed death benefit as long as premiums are paid as agreed is a notable advantage.
Moreover, whole life insurance is often valued for its role in estate planning, providing tax advantages and liquidity to cover estate taxes and other expenses. It’s a valuable choice for those seeking lifelong coverage and the potential for cash value growth.
What is Universal Life Insurance?
Universal life insurance, a form of permanent life insurance, shares similarities with whole life insurance but introduces unique features that make it a flexible financial tool. Like whole life insurance, it provides your beneficiaries lifelong coverage and a tax-free death benefit while accumulating cash value with potential tax-free gains.
However, the differentiating aspects of universal life insurance include the ability to direct the investment of your policy’s cash value. The insurance company guarantees a minimum cash value growth rate, but the cash value can increase if the insurer’s investment portfolio performs well.
You also can adjust premium payments within certain limits, providing room for financial adaptability. Moreover, the death benefit in universal life insurance can be adjustable, aligning it with your evolving needs. This type of insurance is well-suited for those seeking lifelong coverage with the added benefit of customization.
What is Term-to-100 Life Insurance?
Term-to-100 life insurance, often called T100, is a distinctive form of permanent life insurance. Despite the term in its name, T100 provides lifetime coverage and features-level premiums that remain consistent until age 100.
Upon reaching the centennial mark, your premium payments cease, but the coverage endures. What sets T100 apart from traditional whole life insurance is the absence of a cash value component. While whole-life policies accumulate cash value over time, T100 remains focused on the fundamental task of providing a reliable death benefit.
This simplicity results in generally more affordable premiums, making it an attractive option for individuals seeking straightforward permanent coverage. It offers a bridge between term and whole life insurance, and if you make it to 100 years, you are no longer required to pay premiums while retaining the coverage.
This feature, coupled with its utilization in estate planning for covering final expenses and leaving a tax-free inheritance for beneficiaries, positions T100 as an accessible and dependable choice for those seeking long-term financial security and estate preservation.
What is Participating Life Insurance
Participating whole life insurance is a type of permanent life insurance that offers policyholders the opportunity to participate in the financial performance of the insurance company.
These policies provide a guaranteed death benefit, ensuring that a predetermined sum is paid to beneficiaries upon the insured’s passing. They also come with a cash value component that accumulates over time, with part of the premiums going into a cash value account.
What sets participating life insurance apart is the potential for policyholders to receive dividends from the insurance company. These dividends can be received as cash, used to lower premiums, or reinvested to grow the cash value.
Premiums remain fixed throughout the policy’s duration, offering lifetime coverage, and policyholders can enjoy tax benefits as the cash value grows tax-deferred. However, the performance of participating policies is linked to the financial strength and profitability of the insurer, influencing the amount of dividends policyholders receive.
Term Vs Whole Life Insurance
In general, term life insurance is a more cost-effective option when you are young and have substantial but temporary needs, such as raising children or paying off your mortgage.
On the other hand, whole-life insurance policies offer coverage for your entire life as long as you continue paying your premiums. These policies are well-suited for estate planning and covering final expenses. This table shows some of the differences between term and whole life insurance policies:
Term Life Insurance
Whole Life Insurance
Temporary coverage for a fixed period of time
Guaranteed lifelong coverage
Benefits will be received only at policyholder’s death
Benefits may be received during the lifetime as dividends or loans
Best suited for temporary needs (mortgage, children’s education, lifestyle protection)
Best suited for permanent needs (estate planning, retirement income, final expenses)
Death benefit is fixed when policy is purchased and doesn’t change
Death benefit may increase with dividends
Loans/withdrawals cannot be taken against the policy
Policy loans can be taken and dividends may be withdrawn
Offers death benefit but does not build any cash value
Offers death benefit and access to a growing cash value
Is Life Insurance Worth It?
Determining the value of life insurance requires a thoughtful assessment of your unique financial situation. If you have dependents who rely on your income, such as a spouse, children, or ageing parents, life insurance can provide essential financial security.
It’s a safety net to ensure that, in the event of your passing, your family won’t bear the financial burden of outstanding debts, including mortgages and loans, or the costs associated with end-of-life expenses.
Life insurance is a fundamental consideration whether you’re single, in a relationship, a parent, or a business owner. It’s particularly crucial if someone’s quality of life depends on your income. The need for life insurance arises from significant life events, such as buying a home or starting a family, but it extends to anyone who wants to protect their loved ones from the financial challenges that may follow their passing.
Additionally, life insurance can serve as a means of leaving a financial legacy to your loved ones or supporting a preferred charity. It’s important to remember that life insurance is not for you; it’s for the people you care about.
To make an informed decision, ask yourself if someone depends on your ability to provide financially. If you answer yes, then life insurance is likely a valuable consideration.
Consulting an insurance professional can help you determine the right type and amount of coverage based on your specific needs, ensuring that it becomes a significant financial tool for securing your family’s future.
Who Needs Life Insurance?
Typically, life insurance is a critical consideration for individuals with dependents, such as spouses, children, or ageing parents, as it guarantees their financial well-being in the event of the policyholder’s passing.
But life insurance is not limited to specific life stages; it’s equally relevant for anyone undergoing significant life events like buying a home, starting a family, or taking on financial responsibilities. Whether you are single or a business owner, life insurance provides a vital safety net if someone’s quality of life is tied to your income. It also serves those who want to protect their family from the financial burden of outstanding debts like mortgages and loans and the expenses associated with end-of-life arrangements.
Life insurance is a valuable tool for anyone who prioritizes the financial security and welfare of their loved ones and seeks to leave a lasting financial legacy or support a charitable cause.
Here are some examples of people who may need life insurance:
- Parents with minor children
- Parents with special-needs adult children
- Families who can’t afford burial and funeral expenses
- Businesses with key employees
- Married pensioners
- Adults who own property together
- Seniors who want to leave money to adult children who provide their care
- Stay-at-home spouses
- Wealthy families who expect to owe estate taxes
- Young adults whose parents incurred private student loan debt or cosigned a loan for them
- Children or young adults who want to lock in low rates
- Those with preexisting conditions
What Does Life Insurance Cover?
Life insurance typically covers a wide range of causes of death, including natural death. In most cases, if you have a life insurance policy and pass away due to natural causes such as illness or old age, your beneficiaries will receive the death benefit.
This financial payout can help them cover expenses like funeral costs, outstanding debts, and mortgages and provide financial security for the future.
However, it’s important to note that specific terms and conditions can vary between insurance policies and providers, so it’s crucial to carefully review your policy to understand the exact terms and any potential exclusions.
Additionally, there may be a waiting period at the beginning of the policy during which coverage for natural death may be limited or excluded. Therefore, it’s essential to be well-informed about the terms and limitations of your particular life insurance policy.
Benefits of Life Insurance
Life insurance offers numerous valuable benefits. It provides financial security to your loved ones, ensuring they won’t face immediate expenses like funeral costs and outstanding debts in the event of your passing.
It is a crucial income replacement tool, particularly if your family depends on your earnings. Covering major expenses like mortgages and college tuition is recommended, avoiding the need for surviving family members to take out loans.
In the realm of estate planning, life insurance is invaluable for covering estate taxes and preserving your assets for heirs. Life insurance payouts are typically tax-free, adding an extra layer of financial security.
Certain policies also accumulate a cash value that can be accessed for various financial needs. Beyond these practical advantages, life insurance offers peace of mind, safeguarding your family’s financial future
How Much is Life Insurance in Canada?
A life insurance premium is the payment that is made to your insurer to maintain your coverage. Premiums can be paid in various frequencies – annually, semi-annually, quarterly, or monthly – offering flexibility to cater to policyholders’ diverse needs and preferences. Failing to pay your premiums punctually puts your coverage at risk.
The cost of life insurance is determined by various factors, which can be categorized into two main groups: personal and policy-related factors.
- Age: Your age significantly impacts the insurance cost. Younger individuals typically pay lower premiums as they are less likely to pass away during coverage.
- Smoking Status: Smokers generally face higher insurance costs due to the increased risk associated with tobacco use. In contrast, non-smokers enjoy more affordable premiums.
- Gender: Gender plays a role in premium rates, with women typically paying less than men. This is based on the statistical difference in life expectancy.
- Health: Insurance providers assess your health to determine your risk level. Pre-existing health issues can lead to higher premiums, and severe conditions may even result in coverage denial.
- Family Medical History: Hereditary illnesses in your family can also affect your premiums, as insurers consider the added risk.
- Occupation and lifestyle: You can expect to pay higher premiums if your job or hobbies involve higher risk, such as extreme sports or hazardous work.
- Type of Insurance: Your chosen insurance influences the cost. Term life insurance, which provides coverage for a specific period, is generally more affordable. In contrast, permanent life insurance, which has no expiration date, comes at a higher cost.
- Term Length: The duration of coverage also affects premiums. Longer-term policies are more expensive than shorter-term ones, assuming all other factors are equal.
- Coverage Amount: The death benefit amount you select directly impacts your premiums. A higher coverage amount leads to increased costs.
How Much Life Insurance Do I Need?
Determining the appropriate amount of life insurance may not be straightforward, but striking the right balance is essential. You want to ensure it covers outstanding debts and living expenses for your loved ones, but you also don’t want to overcommit and pay excessive premiums while you’re alive.
A common guideline is to aim for 8-10 times your annual income as your death benefit. However, for a more precise calculation, you can consider other factors.
Start by accounting for your outstanding debts, such as car loans, mortgages, credit cards, and lines of credit. These obligations will still exist in the unfortunate event of your passing.
Next, assess your family’s living expenses to maintain their quality of life without your income. Consider your children’s future educational needs, whether it’s higher education or specialized training. Additionally, plan for end-of-life expenses, which can be significant, including funeral services and burials.
Finally, consider other unique allocations, like charitable donations or ensuring your pets are cared for. By considering these factors, you can determine the right amount of coverage to provide financial security for your loved ones without paying unnecessary premiums.
How To Get Life Insurance in Canada
Navigating the world of life insurance can be a complex and often intimidating task. However, it’s a crucial step in securing your family’s financial future. Here, we break down the process into three straightforward steps to help you make informed decisions.
Step 1: Calculate Your Coverage Needs
Begin by thinking about the expenses your loved ones would face if something were to happen to you. This includes things like mortgages, tuition, outstanding debts, and funeral costs. Additionally, consider the importance of income replacement, especially if your family depends on it. Luckily, there are convenient online tools to help you determine the lump sum required to cover these expenses.
Step 2: Prepare Your Application
Life insurance applications may seem daunting, but they typically ask for personal and family medical histories and beneficiary information. In some cases, you may need to undergo a medical examination. It’s crucial to be honest about any preexisting medical conditions and disclose any history of moving violations, DUIs, or adventurous hobbies like auto racing or skydiving. Consider factors like age, gender, smoking status, health status, lifestyle, and family medical history, because they will be required during your application.
Additionally, you’ll need to provide standard forms of identification, so ensure that you have your documents ready.
Step 3: Compare Quotes
Once you’ve gathered all the necessary information, it’s time to gather multiple life insurance quotes from different providers. Prices can vary significantly from one company to another, so it’s essential to put in the effort to find the best combination of policy, company reputation, and premium cost. Remember, life insurance is something you may be paying for over decades, and finding the right policy can lead to substantial long-term savings.
Best Life Insurance Companies in Canada
These top life insurance companies in Canada offer a diverse range of products and services to address the unique needs of customers.
However, choosing the best company depends on individual preferences, budget, and specific life insurance requirements. So, ensure that you shop around for the best rates before deciding.
1. Canada Life
Canada Life is a highly reputable life insurance provider in Canada, offering an extensive array of financial products and services. They provide term life insurance, whole life insurance, and universal life insurance, ensuring that they have options to meet various customer needs. What sets Canada Life apart is its long history of financial stability and an unwavering commitment to excellent customer service, making it a trusted choice for individuals seeking reliable life insurance solutions.
Manulife, a leading financial services company in Canada, stands out for its comprehensive financial solutions, including life insurance. Their offerings include term life insurance, whole life insurance, and critical illness insurance, designed to protect loved ones and secure financial futures. Manulife’s reputation is built on innovation and its commitment to making life insurance accessible and understandable, with flexible policies tailored to various budgets and needs.
3. Sun Life
Sun Life, a well-established financial institution in Canada, provides a wide range of financial services, including life insurance. Their life insurance options consist of term life insurance, permanent life insurance, and various additional coverage choices. Sun Life excels in offering customizable life insurance policies, allowing customers to design plans that align with their specific goals and circumstances.
4. Industrial Alliance
Industrial Alliance, part of the iA Financial Group, is a prominent Canadian insurance and wealth management company. Their life insurance offerings encompass term life insurance, universal life insurance, and whole life insurance, providing clients with the flexibility to select the coverage that suits them best. What sets Industrial Alliance apart is its reputation for competitive rates and robust insurance products, making it a top choice for those searching for affordable and comprehensive life insurance.
Beneva, a relatively new entrant in the Canadian life insurance market, has gained attention for its innovative insurance solutions. They specialize in simplified issue term life insurance, streamlining the application process and offering more accessible coverage. Beneva’s strength lies in its simplified underwriting process and affordable premiums, making it an attractive choice for individuals who seek straightforward and hassle-free life insurance options.
6. Equitable Life
Equitable Life, a mutual life insurance company, is dedicated to providing personalized service and tailored insurance solutions. Their offerings encompass term life insurance, whole life insurance, and critical illness insurance, with a focus on safeguarding the well-being of their policyholders. Equitable Life is known for its commitment to policyholder interests and financial strength, positioning it as a top choice for individuals seeking trustworthy life insurance.
7. Empire Life
Empire Life, a Canadian life insurance company, offers a wide range of financial and insurance products. They provide term life insurance, permanent life insurance, and living benefits insurance to help secure the financial future of their clients. Empire Life is distinguished by its competitive pricing, strong investment options, and a range of insurance products suitable for different stages of life.
Foresters Financial, a fraternal organization, focuses on providing life insurance, retirement, and investment solutions. Their life insurance offerings include term life insurance, whole life insurance, and final expense insurance, aimed at helping families secure their financial future. What sets Foresters apart is their commitment to member benefits and community involvement, making them an appealing choice for those who want to support a social cause while securing their family’s financial stability.
ivari, a Canadian life insurance company, offers various insurance and wealth management products. They provide term life insurance, universal life insurance, and critical illness insurance, all designed to cater to unique financial needs. ivari is recognized for its user-friendly policies, competitive premiums, and the ability to customize coverage to suit individual circumstances.
Policyme is a rising star in the Canadian life insurance market, offering innovative and accessible insurance solutions. They specialize in simplified issue-term life insurance, making the application process quick and straightforward. Policyme’s commitment to simplicity and affordability has made it an attractive choice for individuals looking for hassle-free life insurance. With a focus on customer convenience and competitive premiums, Policyme is gaining recognition as a valuable option for those who seek efficient and cost-effective life insurance coverage.
Policyme’s emergence in the Canadian life insurance landscape offers a fresh and simplified approach to obtaining essential life insurance coverage, making it a notable addition to the list of the best life insurance companies in Canada.
Final Thoughts on Life Insurance
Life insurance is not just a financial safeguard but a promise of security and peace of mind for you and your loved ones. It’s a crucial step in your journey towards securing your family’s future and ensuring they’re well taken care of, even when you’re not there.
Don’t wait; explore the diverse life insurance options available and find the coverage that suits your unique needs and circumstances. Life insurance is an investment in your family’s well-being, and we encourage you to take that first step today.
Reach out to an insurance expert, get informed, and make a decision that will provide you and your family with a safety net for years to come.
FAQS on Life Insurance
Is life insurance taxable in Canada?
In Canada, life insurance is generally not subject to income tax. When a policyholder passes away, the death benefit paid out to the beneficiary is typically received tax-free. Additionally, any investment gains within a life insurance policy, such as those in a whole life or universal life insurance policy, grow tax-deferred until they are withdrawn.
I am covered through work, do I still need life insurance?
Very often, the answer is yes. There are several reasons why your group coverage may fall short: it might not adequately cover your specific needs, it may not be portable, and you might have limited control over the policy provided to you.
Individual term life insurance, on the other hand, offers greater flexibility and protects in ways that group life insurance cannot.
Can I get a life insurance policy without undergoing medical exams?
Yes, securing an insurance policy in Canada without requiring a medical exam is possible. Many individuals find the idea of visiting a crowded laboratory for medical tests or welcoming an unfamiliar individual into their home for an exam uncomfortable. Fortunately, numerous life insurance coverage options are available that do not necessitate a medical examination or bloodwork.
What is a rider in insurance?
A rider in insurance is an additional provision or amendment to an existing insurance policy. It’s like a customizable add-on that allows policyholders to tailor their coverage to meet specific needs. Riders can expand or limit the scope of the policy, often providing extra benefits or adjustments to the terms and conditions.
What are insurance earnings?
Insurance earnings refer to the profits and financial gains that insurance companies accrue through their various insurance policies and investments. These earnings are derived from the premiums collected from policyholders, which are the payments made for insurance coverage. Insurance companies invest these premiums in various assets, such as stocks and bonds, with the aim of generating returns.
I already have mortgage insurance. Do I need term life insurance?
The debate between mortgage and life insurance is common, and it’s crucial to make the right choice. Opting for a term life insurance policy to safeguard your mortgage is frequently the preferred option for Canadians. It offers several advantages over mortgage insurance, also known as mortgage life insurance.
Do single parents need life insurance?
All individuals with dependents or loved ones should consider life insurance. Single parents, in particular, are responsible for their children’s upbringing and protection, making life insurance and financial security even more essential.
Can I insure my loved ones, like a spouse, parents, or children?
Yes, you can purchase insurance for your loved ones, but this should always be done with their full knowledge and consent. The only exception to this rule would be for children below the legal age of consent, where you are their legal guardian.
Can I get an insurance policy, even if I have health problems?
Health problems don’t necessarily prevent individuals from obtaining life insurance, but they are likely to impact the cost of premiums. Depending on the specific health condition, the time of diagnosis, and its current impact on your well-being, there are available coverage choices and life insurance companies that offer policies customized to your unique circumstances.
What is underwriting in insurance?
Underwriting in insurance is the process by which insurance companies assess and evaluate the risks associated with providing coverage to an individual or entity. It’s a crucial step in determining the terms, conditions, and pricing of an insurance policy. During underwriting, insurers analyze various factors, such as the applicant’s age, health, occupation, lifestyle, and the type of coverage requested.
Can you borrow against your life insurance?
Yes, you can borrow against your life insurance policy, depending on the type of policy you have. Whole life and universal life insurance policies often accumulate cash value over time. You can access this cash value by taking out a loan from your policy. These loans typically have low interest rates and don’t require a credit check because you’re essentially borrowing from yourself.