How Does Life Insurance Work in Canada?

What is life insurance?

Life insurance is a tool that can help you provide financial support to your family, even after you pass away. 

What is it? 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 while the policy is active.

Who is it for? The person who buys life insurance (the policyholder) and the person whose death will trigger the death benefit (the insured) are one and the same—unless you buy a policy for someone else, with their permission.

How does life insurance work?

To buy life insurance, you must apply, get approved, and then pay your premium to activate the policy. Your policy stays in force as long as you keep paying premiums—and it will pay out a death benefit if you pass away while the policy is active.

Step 1: Submit an application to a life insurance company. You will select a coverage level and submit personal information about yourself.*

Step 2: Wait to get approved. A company agent will review your application via underwriting. They may request further details as necessary before approving you and offering you a life insurance policy. This used to take 4 weeks, but PolicyMe has shortened the process of buying life insurance to just 15-25 minutes.

Step 3: Review and pay premiums. Once you review the policy, you will fill out the final paperwork to select your beneficiaries. Then, make your first premium payments to activate the policy.

Step 4: If you die, your beneficiary files a claim. Your loved one can file a claim to inform the company that you have passed away. If all is in order and your policy is active, the insurer will pay out a tax-free lump sum directly to the beneficiary you named. Then, coverage ceases.

^{* Selected applicants may be required to undergo an in-home medical exam at their convenience.}

PolicyMe vs. traditional life insurance companies

After you buy your life insurance policy

10-day free look: 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. 

30-day grace period: 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. Otherwise, your life insurance policy could lapse.

Filing a claim: If the policyholder passes away, loved ones must file a claim promptly. 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

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.

Ask yourself these questions before you buy life insurance

Whether you’re ready right now or you plan to do some research, you need to consider these 5 questions:

1. How much life insurance do I need?
2. Should I buy term or permanent life insurance?
3. Should I apply for fully-underwritten, no medical, or guaranteed issue life insurance?
4. Do I need life insurance riders?
5. Who should I name as my beneficiary?

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Here’s how to think through the most important decisions you need to make regarding life insurance.

1. How much life insurance do I need?

The average coverage amount for a term policy is $500,000 in Canada, but yours might be different. How much coverage you need depends entirely on your post-life financial planning goals.

Answer: Add up your financial goals and subtract existing savings to find your number for financial security—or use a life insurance calculator. Remember, life insurance payouts can be used for almost anything, from lost income replacement and funeral costs to charitable donations and children’s tuition.

2. Should I buy term or permanent life insurance?

Term is best for most people, but there are two different types of life insurance (term and permanent). The biggest difference between “term and perm” is how long they last. Term is best for most Canadians’ insurance needs. Permanent coverage is complicated, costly, and unnecessary unless you have a lifelong dependent family member or complex estate planning needs.

^{Read more about term versus whole life insurance}

3. Should I apply for fully-underwritten, no medical, or guaranteed issue life insurance?

Underwriting is the risk assessment process that companies use to assign you a rate, and fully underwritten policies tend to get the lowest rates for healthy applicants.

All life insurance applications require basic information such as your name, date of birth, and home address—but some will ask you additional health questions about your medical history and hobbies.

• More health questions = fully-underwritten.
• Less health questions = simplified issue or no medical.
• No health questions = guaranteed issue.

Fully underwritten policies are cheapest for the average person. Guaranteed policies are very expensive because insurers can’t ask any health questions, so they must assume you are high risk.

Answer: 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?

You don’t need life insurance riders, but they’re an optional way to customize your policy. Every company offers a unique list, but here are some common life insurance riders in Canada:

• Child or spouse life insurance: Get life insurance coverage for your child or spouse at a low price.
• Accelerated death benefit rider: Access all or part of your policy’s death benefit when you receive a terminal illness diagnosis.
• 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.
• Waiver of premiums: Pay no premiums, but keep your life insurance policy, if a disability prevents you from working.

Note: 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?

Named beneficiaries can be partners, estates, organizations or children. This is who you want to receive all or a portion of your life insurance payout. 

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• You can name multiple parties, or primary and contingent beneficiaries.
• Beneficiaries can be revocable or irrevocable (must give permission to change).
• Minors cannot directly receive payouts, so you must name a trustee or administrator.
• Permanent life insurance policy and whole life policy beneficiaries should be a trustee.

Examples: how life insurance works in real life

Here are two quick examples of how different Canadian families might use life insurance.

Olivia (35) and Jonas (38): Married, one child, renters

• Jonas has a $500,000 policy to cover his higher income
• Olivia has a $250,000 policy to cover her contributions as a stay-at-home parent
• Each pays $30 per month
• Each names their spouse as beneficiary, with a trustee as contingent for their minor child
• Term length (20 years) matches a date when the child will become financially independent

→ If one parent passes away, the other parent receives the payout tax-free. If both parents pass away at the same time via accidental death, the minor child will receive $750,000 when they come of age.

Ava (24) and Carson (27): Married, no kids, condo owners

• Each person has their own $250,000 policy
• Each pays $25 per month
• Each names their spouse as beneficiary
• Term length (25 years) matches the mortgage amortization period

→ If one partner passes away, the other will receive $250k to help cover the condo mortgage, final expenses, or future childcare expenses, if they decide to have children.

Who has the best life insurance in Canada?

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.

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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 life insurance works