Life insurance is a financial tool used to ensure your family's stability if you pass away.
When you get a life insurance policy, it works as a contract between you and the life insurance company.
In this article, we break down how life insurance works in Canada, from the monthly costs, naming your beneficiaries, making a claim, etc.
Life insurance works by giving the people who rely on your income a one-time, tax-free payout after your passing. Usually this payment is directed to your immediate family members to help provide them with financial stability.
You buy coverage based on the amount you'd like for a payout and you make monthly payments (called premiums) to keep your policy active.
Life insurance premiums tend to be consistent across Canada; the costs don't vary wildly if you compare similar policies.
PolicyMe does offer some of the lowest rates in Canada; we use technology to streamline the application process and we pass along the savings to you.
Same quality policy you'd expect anywhere else, lower price.
Applying for life insurance is one thing, but how does it work for your loved ones that would benefit from your policy?
When you buy your plan, you select the individuals who will receive the payout if you pass away. Like your partner or your kids.
Some people balk at the cost of life insurance; after all, your family will only get a payout if you die within your policy term.
But insurance is meant for peace of mind, providing you with a plan to protect your family should the worst-case scenario happen. Jump to section: “How does my beneficiary make a claim for a death benefit?” below!
Having this kind of security comes at a cost. But the good news is, it can be an affordable one.
Thinking about getting life insurance? It's easier than you might think – here’s a breakdown of the process of getting life insurance. Your life insurance decision is either an approval or denial.
Let’s be real: no one enjoys applying for life insurance. That’s why we’ve simplified the process. Still have questions? Learn more about getting a life insurance quote.
The basics of life insurance are actually quite simple.
Select a life insurance policy based on your family's financial needs. Consider how long you'll need the coverage and how much coverage you need before deciding.
In the event that you pass away during the term, your named beneficiaries can make a claim on your life insurance policy. They'll receive funds equal to the coverage you've purchased on your policy within a few weeks. The death benefit is tax-free.
They can use this money to cover their daily expenses, pay off any remaining debts (like the mortgage or a car loan), cover your medical or funeral costs, or even save it for their future financial goals. Jump to section: “What can a life insurance claim be used for?" below!
Find out how much your life insurance policy would cost by getting a no-commitment, no-strings-attached quote below.
If you're a life insurance novice, here's a list of frequently used terms on the topic to help you make sense of the explainers you find online – like this one.
There are two main categories of life insurance: term or permanent life insurance. In permanent life insurance, there are also two sub-types: whole and universal life insurance.
Here's what they are and why you might choose one over the other.
If you're not sure whether you need life insurance, you're not alone.
Here are some real-life scenarios to help you determine whether it's a good idea for you to purchase coverage to protect your family.
Yes. As parents of a new baby and a wife who works part-time, his family relies on his income to cover their daily expenses.
Maybe. Ana provides child care for the couple's young children. If Ana were to pass away, Jon would need to pay for daycare and before and after school care for the kids – potentially a major expense. But if Jon can cover these costs comfortably or have family members that can step in to help, life insurance may not be necessary for Ana.
Yes. Both Ming and Tanvir's salaries are required to pay the mortgage and other housing costs. Life insurance would help Tanvir pay the bills if Ming were to pass away.
Probably not. His kids have moved out, so he no longer has financial dependents, and he doesn't have any significant debts.
Yes. Dean has taken out a few business loans to start up his salon. Life insurance can help Ben cover these debts if he passes away.
Recommended reading: Life Insurance for Couples: Best Options for Canadians.
Life insurance might be worth it for you, and it might not. But if you fall into one of the categories below, it’s worth taking a look at your finances and obligations to consider whether it’d be best to purchase coverage.
The money for life insurance payouts come from clients’ monthly premium payments. A life insurance company will pool these funds and invest them to have enough money for claim payouts.
Funds can also be drawn from any expired, cancelled or unclaimed plans the company holds. Since most people outlive their life insurance plans, there's generally a healthy pool of money to pay any beneficiaries that end up making a claim.
Life insurance companies make a profit from premium payments and surrendered plans from former clients. This money is then invested, allowing the company to grow profits over a period of time.
The money from these inactive policies pay for administration and overhead costs of operation. This is standard for all insurance providers, including PolicyMe.
If you’ve wondered how life insurance works if you don’t pass away, it depends on the type of policy you’ve chosen. You're likely to outlive your coverage with term insurance. If you do so, the life insurance provider will keep the money you've paid into your plan.
But if you have a permanent policy, these don’t expire, so your family will receive a payout when you eventually pass away.
This may make it seem like a permanent policy is the way to go. After all, you won't "lose" any of the money you've paid. But their premiums can be very high (10-15x more than term) and you have to commit to paying them for your lifetime.
So for most Canadians, it makes more sense to opt for the affordability of a term plan. It’s like paying for a roadside assistance plan. Most months you won’t need it at all. But you’ll be glad to have it if your car breaks down.
Life insurance works through your employer a little differently. Your work may offer a type of policy through your benefits called “group life insurance”. A group life policy usually provides coverage as a multiple of your annual income.
This means that if you pass away, your beneficiaries will receive an amount equal to 1 to 3 times your yearly pay, depending on the policy terms.
While it's a nice perk to have, this type of insurance is usually not enough to cover your remaining debts, obligations and your family's day-to-day expenses.
For full coverage, you'll likely need to purchase your own life insurance policy, outside of work.
Money from a life insurance claim can be used on anything! Your beneficiary can direct the funds from a life insurance claim on whatever they might need the money for.
Some common uses include:
An unexpected passing can be deeply shocking for the remaining family members. A life insurance payout helps ensure they'll have time to grieve and adjust without worrying about money.
The steps your beneficiary must take to make a claim for a death benefit is fairly straightforward. During this challenging time, the reps at your life insurance company will be available to help guide them through the process.
For starters, when you purchase a life insurance policy, you'll need to decide who will receive your death benefit if you pass.
If you choose more than one person, your life insurance company will divide the money between them, according to the percentages you’ve requested.
This is how they would make a claim.
Life insurance is not a scam, it's a financial product designed to protect your family in the case of your passing. But when choosing a life insurance provider, make sure it's backed by a reputable company for reliable service and smooth payouts.
For example, PolicyMe is backed by Canadian Premier, a major player in the life insurance industry.
An aside: make sure your premiums are not prohibitively high. While it’s not a scam, many life insurance advisors are commissioned. This means it’s in their own best interest to sell you an expensive product that you don’t necessarily need, like permanent or universal life insurance.
Non-commissioned advisors, like the team at PolicyMe, are upfront in terms of finding a plan that works best for you. Generally, term policies offer adequate coverage for your needs at an affordable cost.
Recommended reading: Best Life Insurance Companies in 2023 (Rated + Reviewed).
Find out (in minutes!) how much it’ll cost to protect your family with a term policy.
How much money you get from life insurance depends on the amount of coverage you’ve chosen. Your beneficiary can receive a payout under $100,000 all the way up to $5 million or even more. It’s up to the policy owner to choose the amount of coverage they need (that’s you!).
That being said, according to a recent report published by the Canadian Life and Health Insurance Association (CLHIA), the average Canadian has life insurance coverage of about $440,000.
If the beneficiary is deceased, then the recipient of the life insurance payout depends on the time of their passing. If your beneficiary dies before you, the payout will go to your estate. But if the beneficiary passes away shortly after you do (before they’ve had a chance to receive the payout), the money will go to their estate.
If you would prefer to control exactly who receives your payout, you can get around this issue by adding a contingent beneficiary or two—individuals that are designated to receive the funds if your primary beneficiary has passed.
Some life insurance policies can work as an investment. Some permanent or universal life plans have an investment component. Essentially, a portion of your premiums are directed towards an investment portion of the policy.
Depending on the rules of your plan, you can access these funds during the life of your policy.
It may seem like a good deal, but premiums for permanent and universal plans tend to be so high that you’re likely better off purchasing a cheaper term life policy and investing the difference. You’ll have more agency in how you invest this money and you won’t be subject to any policy rules in terms of how much and when you can withdraw your funds.
No, life insurance is not a waste of money for those who need coverage. If you have unpaid debts, financial obligations, and dependents that rely on you to support them, then life insurance is a necessity to ensure that they are protected if you unexpectedly pass away.
It also gives you peace of mind, knowing that they will have the funds needed for their day-to-day expenses and their future. But if you don’t need life insurance, then you should direct your funds elsewhere, towards things that you do need.