What Is Life Insurance in Canada: How Does it Work? (2022)

Verified by Tobin Tuff, Certified Life Insurance Advisor

What is life insurance? Life insurance is an agreement between the policy owner and a life insurance provider. The policy owner (you) agrees to pay a monthly premium to the insurer. In return, the life insurance company promises to issue your beneficiaries a tax-free payment, known as a death benefit, if you pass away during the policy term.

Read on for more about how life insurance works, its purpose, its benefits, who needs life insurance, types of life insurance and the cost of life insurance premiums.

Life insurance meaning: what is life insurance in Canada?

Life insurance is a security blanket for your loved ones. It protects anyone who depends on you financially in the worst-case scenario.

Life insurance is an agreement between you (the policyholder) and your insurance provider. In return for paying premiums to the insurer, they'll provide your loved ones, known as life insurance beneficiaries, with a tax-free payment if you pass away.

Insurers call the money they receive a “death benefit" and it helps your family out financially if they lose the income they depended on.

For this protection, you pay premiums to your provider on a regular schedule. Your premiums pay for the cost of life insurance coverage and allow the insurer to take on the risk of covering you.

What is the purpose of life insurance?

The purpose of life insurance is to create a safety net for your loved ones if you are no longer around to provide for them. It can help replace your income and help support young children, pay the mortgage, and even help put them through college.

Money can never replace the loss of someone we love, but it can help your family live the life you'd planned for them. You may want to cover the mortgage balance so your family never has to worry about a safe place to live or ensuring your kids can go to school without worrying about money.

With the right policy, you can ensure you protect your dependents from financial hardship. Life insurance is an affordable way to secure their future.

2021-2022 Canadians and Money survey found that 44 per cent of Canadians don't have life insurance; 40 per cent of them say because it's too expensive.

But, life insurance is more affordable than people think. For example, a 20-year term life policy is about five times cheaper than a whole life policy (more on the difference later).

What is life insurance for?

Understanding what's the point of life insurance will help understand why life insurance is important. Life insurance is for your family in the event of your passing. It generally provides them the financial support they need to cover day-to-day living expenses after your passing. But, your family can also use the proceeds from your life insurance how they deem fit, including:

  • Paying off outstanding debt 
  • Paying off a mortgage 
  • Sending children to college 
  • Paying burial expenses 
  • Taking care of off medical bills 
  • Donating to charity 
  • Handling estate taxes

What are the benefits of life insurance?

Understanding what is life insurance is essential, but you must also understand what does life insurance cover in Canada and its key benefits. Life insurance is a crucial element in your financial plan. It can help make your family more secure and also comes with other benefits you should know.

 The five benefits of life insurance are: 

  1. Provides financial security and peace of mind and can supplement other retirement planning and savings. 
  1. Death benefits, or the funds that go to your beneficiaries, are tax-free in their hands, meaning they won't pay taxes on the money they receive. 
  1. The death benefits help dependents cover living expenses so they can stay in their home, pay bills, and avoid financial hardship. 
  1. Life insurance can cover final expenses incurred when you pass away, so these costs are not a burden to your family. 
  1. Some policies include coverage for chronic or terminal illnesses.

Who needs life insurance?

Why is life insurance important for you? You need life insurance if you have somebody who relies on your financially. 

Having a policy is essential if you have:

  • A partner (married or common-law). 
  • Young children. 
  • Aging parents who depend on you for financial support. 
  • Large debts, such as a mortgage, credit card debt, line of credit, or business loan. 

It may seem like it is, but life insurance isn't necessary for everybody. 

So how do you tell if you need it? It's pretty simple – if you have somebody who relies on you financially, you'll want to get a life insurance policy. 

Parents with young children should have life insurance to help ensure their care and well-being until adulthood. 

What would happen to your family if you were to pass away today? Could your partner support the family on one income? Cover childcare costs, keep your home, and save for their education? Life insurance steps in when you aren't able to be there to care for those you love. 

At what age should you get life insurance? 

There is no hard-set age when you should or should not get life insurance. But, when you do need it, it's best to enroll in a life insurance policy as early as possible. Generally, the younger you are when you enroll in a policy, the lower your premiums are for the policy's duration. 

As a rule of thumb, you should get life insurance as soon as you begin accumulating debt or when someone depends on you financially, such as a child, spouse, or aging relative. This ensures you've covered your financial obligations and your family and loved ones have the financial support they need to continue living.

Who doesn't need life insurance?

Generally, those who have no one relying on them financially will not need life insurance. But there are other reasons someone may not need a policy.

Who wouldn't need it? 

  1. Anyone single with no dependents: For example, if your death will not have a financial impact on your parents or other family members, you likely don't need it. 
  1. Anyone with a large safety net of resources: Someone who's built enough savings to provide a safety net may not need life insurance. Think of older parents whose kids are out of the house and are close to retirement. 
  1. Children and other dependents: Many people consider putting a policy in place for their kids, but this isn't necessary. Your children or other dependents likely aren't contributing finances to the home, so a policy isn't required. 

At PolicyMe, we deliver honest, uncomplicated life insurance advice, meaning letting you know if you don't need it at all. Take our quiz to get your personalized life insurance recommendation.

Real-life example: Mae in Calgary, Alberta

Mae is a 43-year-old bakeshop owner living in Calgary, Alberta. She's married with two kids and wants to protect her family if she passes away.

Between stacking triple-layered cakes and managing her pre-teens' moods of the day, Mae has explored life insurance as a financial safety net for her family.

Mother and daughter hugging with eyes closed for article titled What Is Life Insurance

Mae doesn't have life insurance, but she knows she'll need it for about 10 years to cover her bakeshop's business loans. 

She realizes why life insurance is so important and decides on a 10-year term life insurance policy, at which point, at which point she will no longer need a policy, as her loan will be covered and her kids will be off to university (already!).

What affects your life insurance premiums?

Insurers base the cost of life insurance premiums on several factors that affect the insurance company's likelihood and timing of paying out your policy. They'll use this information to determine your life expectancy, risk factors, and insurance costs. 

These factors include:

  • Age 
  • Health and health history 
  • Gender 
  • Lifestyle and hobbies 
  • Family medical history 
  • Occupation 
  • Smoking 

The type of policy you choose, the amount of coverage, and how long the policy protects you will also affect the amount you pay. 

How can beneficiaries use life insurance claims? 

Beneficiaries can use the death benefit to cover anything they deem necessary after you pass away. 

For example, your family could use the benefit to pay living expenses until your children reach adulthood, to pay off a mortgage to ensure your family can stay in their home, or save the money for your children's education. They could also use it to cover expenses for other dependents you care for, funeral expenses, or pay off debt. 

When is the best time to get life insurance? 

There's no right age or year to get life insurance. It's not something that you'll need to open on your 30th birthday. The best time to get life insurance depends on where you are in life. It's time to start looking when you have somebody depending on you. 

Since the pandemic began, there has been a 50 per cent uptick in Canadians purchasing or considering life insurance. 

For most people, this is when they get married or start having kids. 

If you have children, you are responsible for their care until they are grown and able to care for themselves. Parents know this means paying for childcare, food, clothing, household bills, extracurricular activities, and college savings. These costs could be crippling to a partner left to care for the family alone. 

Life insurance lifts that burden, allowing families to carry on and know the death benefit will cover their major expenses. 

You might think, “I just got a mortgage, and having kids isn't cheap! How am I supposed to afford another expense?" You are not alone, half of parents who don't have life insurance say they haven't bought it because it is too expensive. 

Fortunately, the younger you are, the more affordable your policy will be. In most cases, it's smart to lock in a low monthly rate when you're young because it'll stay at that price for the entire term of your policy.

What types of life insurance are available?

 In Canada, there are two types of life insurance people shop for, term and permanent life insurance. 

  1. Term life insurance: Term insurance is the simplest and most affordable form of life insurance because it only pays out a benefit to your beneficiaries if you pass away within a specified timeframe. The timeframe is usually 10, 20, or 30 years, depending on your term length. 

Term insurance in Canada is the best option for 95% of young families because their need is very high when the children are young. When people depend on your income for survival and well-being, you need significantly more coverage than you may need later in life. 

As children reach adulthood and become independent, the insurance you need to cover them will likely decrease. You may also need less coverage if your costs decrease because you paid off your mortgage or reached another milestone.

  1. Permanent life insurance: The alternative to term life is permanent life insurance. The most common type of permanent life insurance is whole life. Another less common type is universal life insurance. Unfortunately, these permanent insurance policies tend to be much more expensive -- hundreds of dollars per month more expensive. 

But why do these policies cost so much more? Permanent life insurance policies guarantee that your beneficiaries will receive a death benefit. You can pass away young, old, or somewhere between; your insurance company will still pay out on a permanent policy. 

Furthermore, many policyholders don't realize that brokers typically receive 5-10x more commission by selling permanent coverage instead of term coverage.

Chart breaking down the main types of life insurance for article titled What is LIfe Insurance

What type of life insurance makes sense for me?

In the life insurance sector, companies generally offer two types of insurance, whole life and term life. Deciding between whole and term life insurance is a common struggle for people seeking coverage. 

Term life insurance products are usually the right choice for people looking for a policy, even though it falls under a set term and has an expiry date. 

Think of it from the perspective of a young family. Having life insurance protection for longer than you need may not seem like such a bad thing. After all, what's the harm in extra protection for your loved ones? 

Right? 

Not necessarily. Why keep paying for something you don't need? Term life insurance products let you pay for coverage only during the years when it matters. For example, when your mortgage is at its highest balance and you have young kids depending on you. 

Later in life, you can save that monthly policy premium and put it towards something else, such as enjoying your retirement.

How long do you pay for life insurance? 

The amount of time you'll have to pay your life insurance premiums varies by policy. If you opt for a term life policy, you typically make payments monthly, quarterly, or annually for the length of the term, such as 12, 20, or 30 years. 

If you buy a whole life policy, you'll typically pay monthly, annually, or quarterly until you pass away. But, some insurers may give you the options to pay for only a set number of years or until you reach a specific age. These payment plans will include significantly higher premiums, as the insurer expects you to pay for a shorter period. 

There are also single-premium life insurance options that require only one upfront payment. This payment covers your cash value account for the rest of your life.

Term life insurance Whole life insurance
Low prices
Choice of policy length
Never expires
Rates locked in
Guaranteed death benefit
Accumulates cash value

How much life insurance do you need?

Term life insurance only pays out if you pass away within a specified timeframe that you and your insurance company agree on. It's usually 10, 20, or 30 years. 

As you can guess, your probability of filing a claim within that chosen period isn't that high. 

As a result, you're not a high risk to your provider, meaning term life insurance product prices aren't very high either. This is a win for both you and the insurer. 

A 20-year, $500,000 term insurance policy costs around $35/month for someone in their 30s. For many people, that's enough to protect their families if something happened to them. 

If you're uncertain how much coverage your family needs, you can consult a financial advisor for life insurance advice. 

Cost of term vs. whole life insurance explained 

Let's compare the costs of a term policy versus whole life insurance. 

$250,000 20-year term life insurance $250,000 whole life insurance
Male, aged 30 $18/month $135/month
Female, aged 30 $15/month $121/month
Male, aged 40 $28/month $204/month
Female, aged 40 $22/month $178/month
Male, aged 50 $72/month $327/month
Female, aged 50 $51/month $279/month

How are life insurance premiums calculated?

While the samples above can give you an idea of what to expect, life insurance providers will offer personalized quotes. Here are factors that will impact your actual monthly premium payments:

  • Coverage amount, or the amount of insurance you want coverage for: If you want $1,000,000 in coverage, it will be more expensive than $500,000. 
  • Your policy type, for example, term vs. permanent: As mentioned above, permanent policies are almost always more expensive. 
  • Your age: The younger you are, the lower your monthly rate. You can lock in a low premium if you get your policy early. 
  • Gender: Women tend to live longer than men, so their premium payments are usually lower due to longer life expectancy. 
  • Your smoking status: As you likely know, smoking has health concerns. If you're a smoker, you're at a higher risk of these health concerns, so companies will charge you more for coverage. 
  • Your health status: Certain health issues can make covering you seem ‘high risk' to insurance companies. 
  • Driving record and hobbies: Do you have a handful of speeding tickets? Spend your weekends snowboarding out of helicopters? Risky behaviours like these will increase your monthly premiums. 

The insurer will weigh these factors to determine your final price. However, most younger people wouldn't see a change from their initial quote. 

Life insurance riders and policy changes 

You can customize your life insurance policy to your needs through riders, though the availability of these riders is up to individual insurers. 

Riders will come with an extra premium or a fee to exercise it. You should discuss riders and their fees with your insurance provider. 

Some examples of riders and the coverage they offer:

  • Accidental death benefits rider 
  • Disability income rider 
  • Waiver of premiums rider 
  • Guaranteed insurability rider 
  • Long-term care rider 

When you consider getting into a 20-year or longer contract with a company, finding a company that can provide you with the best life insurance in Canada for your needs is even more important.

Some of the factors you'll want to consider include:

  • Price: How much will your policy cost? 
  • Time: How long does it take to get approved? 
  • Process: Can you do everything online, or do you have to make many trips to see somebody in person? 

Answering “what is life insurance" is one thing, but knowing the answers to all the top questions surrounding it will arm you with the information you need to make the best buying decision. 

Why most Canadians need term life insurance 

Term life insurance offers affordable coverage for a specific period, giving you significant benefits. 

First, you can adjust your coverage later in life when your needs change. For instance, purchasing more coverage when your kids are very young, then opting for a lower benefit when your kids are grown and you've paid off your mortgage. 

Second, payment affordability means you can buy more coverage to protect your loved ones. A larger death benefit could offer much-needed protection against financial hardship you can't plan for. 

Considerations before buying life insurance 

Buying life insurance is a big decision and one that will affect your family long term. So, consider options and ask lots of questions to feel confident in your decision. 

Here are a few things to consider before purchasing a life insurance policy: 

  1. Assess your insurance needs: To figure out how much life insurance you need. Ask yourself: Who depends on your income every month? Your partner, any children, dependent adult children, or aging parents might all qualify. What do you need to cover to offer them security should you pass away? Living expenses, childcare if your partner works full-time, a mortgage, college tuition, care of aging parents? 
  1. Decide how long you need coverage: How much would it cost to cover their expenses until these obligations are met? For example, until your children turn 18? How many years remain before you pay off your mortgage? 
  1. Compare policies and coverage amounts: Your potential insurer should discuss different options, the premiums for each, and what type of coverage and death benefit each offers. 
  1. Decide what premiums you can afford to pay: Have a realistic look at your budget to make sure you can afford the premiums. While life insurance is important, it's crucial to only discuss options you can afford so your policy never lapses. 
  1. Ask what is and isn't covered by your policy: This is a time to read the fine print and ask questions of your potential insurer. What does the policy include and what exclude? Discuss different scenarios and ask what would happen in each. 
  1. Who will be the beneficiary or beneficiaries? 

The beneficiary is the person who will receive the proceeds from your life insurance policy. You can name a single beneficiary or multiple beneficiaries. 

Qualifying for life insurance 

Life insurance is integral to your financial planning, and you shouldn't disregard it even if you're worried about qualifying for coverage. Even if an insurer has denied you coverage in the past, you still should do what you can to get this in place.

Many insurance providers and a broad range of policies are available, meaning almost anyone can find a policy they can afford that will protect their loved ones if they pass away. 

Compare policy quotes 

When comparing life insurance quotes, you'll want to clearly understand certain factors. 

Look at each policy quote to be sure you understand:

  • What type of life insurance policy is it 
  • What's included in the policy 
  • The cost of the premiums 
  • What the coverage includes 
  • The amount of the death benefit your beneficiary or beneficiaries would receive 

The right type of policy for you will depend on your goals, financial obligations, and how many people rely on your income. You can work with an advisor to assess your needs and consider the resources you already have to cover your obligations. 

Once you establish the best policy type for your family, compare quotes and ensure you understand how they are similar and different. 

Determine how much you need

When deciding how much coverage you need, you'll need to consider who depends on your income and what financial obligations the death benefit must cover for them to be financially secure. 

Your life insurance needs could include:

  • Debt repayment 
  • Income replacement 
  • Childcare and other expenses until children reach 18 
  • Care for other dependents such as dependent adult children or aging parents 
  • College tuition 
  • Funeral and burial expenses 

Other considerations could include funds you have saved in different accounts or investments that might help offset the above expenses. If you have substantial savings that could cover part of these needs, you may be able to adjust your life insurance coverage accordingly. 

Prepare your application 

When it's time to apply for a policy, you'll need to fill out an application with pertinent information about your insurance needs and personal information that will help the insurer determine your risk levels. 

The information you'll need to provide on your life insurance application may include:

  • The amount of coverage you're applying for. 
  • The length of time you'll need insurance. For example, if you choose term insurance, you'll likely choose a 10, 20, or 30-year period. 
  • Personal information, including your date of birth, gender, marital status, health information and history, and family medical history.
  • Your occupation and where you live ( PolicyMe provides life insurance in Alberta , Ontario, B.C. and 8 other Canadian provinces and territories).
  • Your desired beneficiary or beneficiaries.
  • How you'd like to pay your premiums. For example, you may be able to choose annual, monthly, or other payment options. 
  • If you have other active life insurance policies. 
  • Lifestyle factors, hobbies, habits, or activities that could make you a high-risk applicant. 
  • If you need any riders on your policy to customize your coverage. 

At PolicyMe, we believe in honest, uncomplicated term life insurance. We'll provide you with recommendations focusing on your family's best interest so you can feel equipped and confident you're making the right financial decisions for your family.

In summary: Life insurance is key to your family's financial security 

What is life insurance? It is one of the most important steps toward financial protection for your family now and in the future. Setting up life insurance can be easy and affordable, offering peace of mind to you and those who depend on you. Protecting these plans is all part of caring for them, now and in the future. 

FAQ: What is life insurance?

What is basic life insurance? 

Basic life insurance is an employer-sponsored program that offers employees a fixed-benefit life insurance policy where the benefit is based on that employee's salary. For example, the employer may offer a basic policy with a death benefit that's $50,000 or three times the employee's salary, whichever is higher. 

Employers generally offer these policies for free or low cost. Some also offer base coverage for free, then extra coverage up to a certain multiple of the employee's salary for a cost. The employer generally deducts the premiums from the employee's paycheck, like health insurance. 

These policies can be term or whole-life plans, depending on what the employer chooses to offer. 

What is a life insurance beneficiary? 

A life insurance beneficiary is who will collect the death benefit after your passing, but there is more than one beneficiary type. 

The primary beneficiary is the person you choose as the primary recipient of your life insurance payout. You can also choose multiple primary beneficiaries and designate a percentage of the life insurance payout to each. 

The contingent life insurance beneficiary is the person or people you name to receive the life insurance payout if the primary beneficiary passes away or cannot be found. Like the primary beneficiary, you can name more than one contingent beneficiary and split the death benefit as you see fit. 

You can also list beneficiaries as revocable or irrevocable. You can change a revokable beneficiary at any time without their consent. If you list an irrevocable beneficiary, you must get the current beneficiary's content before you can remove them as the beneficiary. 

You can choose any beneficiary you like, including:

  • Parent 
  • Spouse 
  • Child 
  • Partner 
  • Friend 
  • Charity 
  • Business 

How does a beneficiary make a claim? 

When claiming life insurance benefits, a beneficiary must submit documentation to the life insurance company so the insurer can process the claim and pay out the death benefit. A beneficiary can make a claim at any time, providing the policy was active at the time of the policy owner's passing. However, doing so as early as possible will give you peace of mind sooner. 

The documentation the insurer needs will typically include a death certificate, the life insurance policy, and a claim form. The beneficiary will also need to provide identification to prove who they are. 

The insurer will review your claim and respond within a time limit with a claim approval, delay, or rejection. They may also ask for more information to help process your claim correctly. 

What is a life insurance premium? 

When searching for a life insurance policy that fits your budget, the life insurance premium will play a critical role. This premium is the payment you make in exchange for your life insurance coverage. Life insurance providers have varying payment options, including annually, quarterly, or monthly. Some may offer only one payment option, whereas others offer two or all three.

Helene Fleischer

About the Author

What to read next