How Does Life Insurance Work in Canada?
What is life insurance?
Overview: Life insurance can be a powerful tool for financial agency. With life insurance, you can provide your family with financial security and meet post-life goals such as paying off a mortgage, putting your kids through school, or supporting a fledgling business.
The nitty-gritty: Life insurance is a legal agreement between you and the life insurance company of your choice. In exchange for regular payments called premiums, your insurer agrees to make a one-time, tax-free payment known as a death benefit to the people of your choosing if you die.
Often, the person who buys life insurance (the policyholder) and the person whose death will trigger a death benefit (the insured) are one and the same. For example, Brian can either buy a life insurance policy for himself—making him the policyholder and the insured—or his father (with his permission, of course).
All of these details, and their terms and conditions, are collected in a master document known as a life insurance policy.
From a young couple who just bought their first house, to seniors looking to cover funeral expenses, life insurance is worth it for anyone who has expenses to take care of after they’re gone.
How does life insurance work?
In order to buy life insurance, you must first submit an application to a life insurance company. A company agent reviews your application, requests further details as necessary, and issues a life insurance policy if the company approves.
Traditionally, the process of buying life insurance could take 4 weeks or more as you wait for follow-up questions, the company’s decision, and the arrival of your paperwork. Nowadays, PolicyMe has shortened the process of buying life insurance to just 15-25 minutes:
* Selected applicants may be required to undergo an in-home medical exam at their convenience.
After you buy your life insurance policy
Every insurance policy sold in Canada comes with a minimum 10-day free look period during which you can review your policy and cancel it with a full refund.
After that, your job is to keep making premium payments so your life insurance policy doesn’t lapse. PolicyMe and other insurers provide a 30-day grace period on late payments to make it easier to keep your policy active and in force.
If you need to make any changes to your life insurance, you can contact your life insurance provider. Otherwise, if you pass away while your policy is in force, your loved ones must file a life insurance claim within the deadline to receive the death benefit. A claim usually involves submitting a death certificate, a copy of the life insurance policy, and a claim form.
How much does life insurance cost?
Life insurance costs in Canada range from $30/month for term life insurance in your 30s, to $300+/month for whole life insurance in your golden years.
To give you a sense of what you might pay, here are sample life insurance rates by age and gender. Since premiums are influenced by factors like age, gender, and health, understanding these can help you recognize whether a quote is fair or overpriced. The rates below assume non-smokers, $500,000 in coverage, and a 20-year term policy:
What you can do to make life insurance more affordable
There are 5 factors that can raise the cost of life insurance:
Conversely, you can find more affordable life insurance by:
Not every point is within your control. The cost of life insurance varies by age, gender, health, pre-existing conditions, and family medical history. What you can do is request life insurance quotes from multiple life insurance companies, as rates vary by provider.
Everything you need to know about life insurance
Whether you jump into buying life insurance feet-first or take your time to do some research, you’re going to run into the same 5 questions:
- How much life insurance do I need?
- Should I buy term or permanent life insurance?
- Should I apply for fully-underwritten, no medical, or guaranteed issue life insurance?
- Do I need life insurance riders?
- Who should I name as my beneficiary?
In this guide, we’ll walk you through the most important decisions you need to make regarding life insurance.
1. How much life insurance do I need?
Your life insurance coverage determines the size of your policy’s death benefit, ie. how much money you leave behind. Unlike specialty products such as mortgage insurance or funeral insurance, a life insurance payout can be used for almost anything, including:
- Covering final expenses
- Donating to charity
- Establishing a trust
- Funding children’s education
- Paying off a business loan
- Paying off a mortgage
- Paying off debts
- Providing financial support to your loved ones by replacing your lost income
How much coverage you need depends entirely on your post-life goals. The basic formula involves adding up the total cost of your goals and subtracting the sum of your existing coverage, assets, and savings… or using a shortcut like a life insurance calculator.
2. Should I buy term or permanent life insurance?
There are two different types of life insurance: term life insurance and permanent life insurance, which is divided further into whole life and universal life insurance. The biggest difference between “term and perm” is how long they last.
Term life insurance tends to be the better fit for most Canadians because it’s cheaper, simpler and lasts as long as your financial commitments.
Although it’s marketed as a security blanket, permanent life insurance seldom performs as well as traditional investment instruments like a TFSA or RRSP. By the time it pays out, your dependents will likely have become independents and you’ll have spent your whole life paying for an unnecessarily high amount of coverage.
Here’s a side-by-side comparison of term, whole, and universal life insurance:
Read more about term versus whole life insurance and term versus universal life insurance
3. Should I apply for fully-underwritten, no medical, or guaranteed issue life insurance?
All life insurance applications require basic information such as your name, date of birth, and home address. Some ask additional questions about your smoking status, medical history, family medical history, occupation and hobbies as part of the underwriting process.
Underwriting is the process of assessing the insured’s risk of dying (and thus the likelihood of the insurance company making a payout). Think of it as a spectrum from the most to least thorough screening: at one end is fully-underwritten life insurance, at the other is guaranteed issue life insurance, and in the middle is no medical life insurance (also known as simplified life insurance).
Every Canadian can benefit from applying for fully-underwritten life insurance first, even if they have pre-existing medical conditions such as diabetes or heart disease. Only 4% of life insurance applicants in Canada are denied coverage.
4. Do I need life insurance riders?
Life insurance riders are optional add-ons used to customize life insurance policies. You can purchase additional coverage for other people, specific situations, or even a partial refund if you decide to cancel your policy later.
Popular life insurance riders include:
- Accelerated death benefit rider: Access all or part of your policy’s death benefit when you receive a terminal illness diagnosis.
- Child life insurance: Get life insurance coverage for your children at a low price.
- Critical illness: Access all or a part of your policy’s death benefit if you’re diagnosed with a covered critical illness.
- Return of premiums: Receive a portion of the premiums paid if you live to the end of your life insurance policy.
- Spouse life insurance: Get life insurance coverage for a partner at a promotional price.
- Waiver of premiums: Pay no premiums, but keep your life insurance policy, if a disability prevents you from working.
Every PolicyMe life insurance plan includes $10,000 of coverage per child (aged six months to 18 years) at no extra cost.
5. Who should I name as my beneficiary?
A life insurance beneficiary is a party you designate to receive all or a portion of your life insurance payout. Beneficiaries can be partners, estates, organizations or children.
If your chosen beneficiary is a minor, you must choose an administrator or trustee to file a life insurance claim on their behalf and hold the money until they come of age. When the young beneficiary reaches the age of majority in their province or territory, they can claim the money.
Beneficiaries can be primary and first in line to receive a payout, or contingent (and only eligible for a payout if a primary beneficiary passes away).
You can also make them revocable, in which case you can change the beneficiaries of your life insurance policy at will without consulting them. Irrevocable beneficiaries are just that; making any changes to your policy may require their permission.
When will life insurance not pay out?
The overwhelming majority of life insurance policies payout upon the death of the insured person within their policy term. However, the five most common reasons life insurance won't pay out are:
- Exclusions. Death by suicide (within the first two years of the policy), excluded risky activities (like auto racing).
- Fraud. Misstating or misrepresenting any information on a life insurance application gives the insurer grounds to deny a claim.
- Inattention. Not naming a beneficiary, forgetting to update your beneficiaries, or neglecting to tell your loved ones about your life insurance policy can all lead to claims being denied—or never being made in the first place!
- Lapse. Neglecting to pay your life insurance premiums will cause your policy to lapse and become inactive.
To make sure your life insurance will pay out, always tell the truth on your life insurance application, pay your premiums, keep your policy up-to-date, and share the details and paperwork with your loved ones.
Who has the best life insurance?
The best life insurance in Canada depends on your needs and preferences, but we can give you a few places to start.
PolicyMe’s customer reviews are some of the highest in the life insurance market. Offering affordable term life insurance, critical health insurance, and health and dental insurance, the tech-savvy company provides $10B in coverage in force across Canada.
SunLife and Manulife are two of the biggest players, but we like Beneva’s commitment to customer service and convenient online model. For more, check out our overview of the biggest life insurance providers in Canada, and a library of reviews stretching from American Income to UV Life Insurance.
Our take on life insurance
A fully-underwritten, term life insurance policy with few insurance riders is the simplest and most affordable option for most Canadians. It addresses the temporary financial concerns most of us face and doesn’t require complex management—plus, it often requires lower premiums!
Offering tons of customizability and options, whole and universal life insurance products are best suited to investment-savvy Canadians with a high net worth. Because it requires a lot of effort to manage, permanent life insurance is only worth it if you need to provide for estate fees or you’ve maxed out every other investment option possible.
FAQ: How does life insurance work?
Our mission is to empower Canadians to make informed financial decisions. To achieve this, we have an expert editorial team that includes licensed insurance advisors and financial planners. We prioritize the best interests of Canadian families and won't endorse any product, company or financial strategy that we believe isn't suitable. Our educational guides are crafted by in-house experts, like licensed life insurance advisors. Before publication, we subject our research and advice to scrutiny and comprehensive revisions for accuracy and completeness.
Our mission is to empower Canadians to make informed financial decisions. To achieve this, we have an expert editorial team that includes licensed insurance advisors and financial planners. We prioritize the best interests of Canadian families and won't endorse any product, company or financial strategy that we believe isn't suitable. Our educational guides are crafted by in-house experts, like licensed life insurance advisors. Before publication, we subject our research and advice to scrutiny and comprehensive revisions for accuracy and completeness.