What is Life Insurance? Everything You Need to Know

You’ve been trying to get on top of your family’s finances and you recently heard about life insurance, but you don’t really know where to start. You may already have home and auto insurance, but when it comes to life insurance, you find yourself asking: What is it? And can I afford another payment each month?

Getting life insurance to protect your family in the event of your passing may not be fun to think about. After all, nobody wants to plan for that. That said, it’s important to have a financial safety net in place, and a life insurance policy is just that.

We’ll answer every question you may have in this article, so finding the right policy is as easy as possible. Let's dive in. 

What is life insurance?

In its simplest form, it's a security blanket for your loved ones. It’s there to protect 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 beneficiaries, with a tax-free payment if you pass away.

The money they receive is known as a “death benefit" and is meant to help your family out financially if they lose the income they were dependent 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?

You might be wondering: is life insurance worth it for me and my family? Life insurance creates 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. But only 33 per cent of parents with children under the age of 18 have term life insurance.

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 your dependents are taken care of and protected from financial hardship. Life insurance is an affordable way to secure their future.

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

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

Learn more: read reviews and compare Canada's best life insurance companies.

5 benefits of life insurance

Life insurance is a crucial element in your overall 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.

2. 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. 

3. Living expenses for dependents are covered so they can stay in their home, pay bills, and be protected from financial hardship.

4. Life insurance can cover final expenses incurred when you pass away, so these costs are not a burden to your family.

5. Some policies include coverage for chronic or terminal illnesses, offering additional protection.

Learn more about what life insurance covers in Canada.

Who needs life insurance?

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.
  • Ageing 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 a necessary purchase 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. 

Families with young children should have life insurance to help ensure their care and well-being are protected until they reach 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. 

Candian musician Tyler Shaw and his baby lay on a blanket for article titled What Is Life Insurance
Canadian musician and new dad Tyler Shaw recently took a step in protecting his family with life insurance through PolicyMe. (© @tylershawmusic, 2021)

Who doesn't need life insurance?

But not everyone needs life insurance. Remember, we only recommend it for people who have loved ones who depend on them financially. 

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.

2. Anyone with a substantial safety net of resources

Someone who has managed to build up enough savings to provide the safety net on their own may not need life insurance. Think of older parents whose kids are out of the house and who are pretty close to retirement.

3. Children and other dependents

Many people consider putting a policy in place for their kids, but this isn’t necessary. Chances are, your children or other dependents aren’t contributing finances to the home right now, and therefore a policy isn’t required. 

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

How does life insurance work?

Life insurance is an agreement between you and an insurer that you’ll pay your premiums throughout the term of your policy. Depending on the type of insurance you’re considering and how much you pay, this may be for a defined period of time or lifetime coverage.

Then, when you pass away, the insurer will pay out your death benefit to the beneficiaries you’ve chosen to receive it, as long as your policy was active at the time of your passing.

After you pass away, your beneficiaries file a death claim with the insurance company, triggering the payout. Typically, beneficiaries must submit a death certificate, insurance policy document, and a claim form.

It’s a vital element in financial planning because it can make all the difference to keeping your family secure over the long term.

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 make sure her family is protected if the unlikely happens. 

Between stacking triple-layered cakes and managing her pre-teens’ moods-of-the-day, Mae has managed to make the time to look a little more into life insurance as a way to provide a financial safety net for her family.

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

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

She 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?

The cost of life insurance premiums will be set based on several factors that affect the likelihood and timing of the insurance company having to pay out your policy. They’ll be using this information to determine your life expectancy, risk factors, and the cost of insuring you.

These factors include: 

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

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

How can life insurance claims be used?

The proceeds of a life insurance claim are called the death benefit and can be used to cover anything your dependents need 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 the money could be saved for your children’s education. It could be used to cover expenses for other dependents you care for, to cover 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% uptick in the number of Canadians purchasing or considering life insurance.

However, for most people, this is when they get married or when they 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 their major expenses are covered. 

At this point, you might be thinking, “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 (50%) 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.

Types of life insurance

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

1. Term life insurance

Term life insurance is the simplest and most affordable form of life insurance because it pays out a benefit to your beneficiaries only 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 require later in life. 

As children reach adulthood and become independent, the amount of insurance you need to cover them will likely decrease. As well, if your costs go down because you’ve paid off your mortgage or reached another milestone, this could also affect what you need.

2. Permanent life insurance

The alternative to term life is permanent life insurance. The most common type of this is known as whole life, while another, less common, type is universal life insurance. Unfortunately, these permanent insurance policies tend to be much more expensive; in fact, hundreds of dollars a 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 in between, and 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?

Deciding between whole life insurance and term life insurance is a common struggle for people beginning to look for life insurance.

For the most part, term life insurance tends to be the right choice for most 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 actually need it for may not seem like such a bad thing. After all, what's the harm in extra protection for your loved ones?


Not necessarily. Why keep paying for something you don't need? Term life insurance lets you pay for coverage only during the years when it matters, for example, when your mortgage is at its highest and you have young kids who need you for financial support. 

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

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, the probability of you filing a claim within that chosen period isn't that high. 

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

A 20-year, $500,000 term life insurance policy costs around $35/month for someone in their 30s. For many people, that can be enough coverage to keep their families protected if something were to happen to them.

Cost comparison of term vs. whole life insurance

Let’s have a look at how the costs of term versus whole life insurance compare. 

$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?

However, these are just samples. Your quotes are actually pretty personal. Here are certain factors that will impact your actual monthly premium payments:

  • Coverage amount, or the amount of insurance you want coverage for: If you want to be covered for $1,000,000, it will naturally be more expensive than coverage for $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. If you get your policy early, you can lock in a low premium.
  • 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, there are health concerns associated with smoking. If you're a smoker, you're at a higher risk of these health concerns, and therefore companies will charge you more to be covered by them.
  • 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 what they were initially quoted.

Life insurance riders and policy changes

It’s possible to 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 additional premium you’ll need to pay or a fee that would need to be paid to exercise the rider, all of which should be discussed 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
  • Accelerated death benefit rider 

When you consider getting into a contract with a company for 20 years or more, it's even more important to find the company that can provide you with the best life insurance in Canada for your exact needs.

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 numerous trips to see somebody in person?

Being able to answer “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 of time, which gives you a couple of really significant benefits. 

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

Second, the affordability of the payments means you can purchase 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. Therefore, it’s wise to consider options and ask lots of questions so you can 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, ageing 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 ageing parents?

2. 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 are left before your mortgage is paid? 

3. Compare types of policies and coverage amounts

Your potential insurer should be able to discuss different options and what each might cost you for premiums, and what type of coverage and death benefit is offered with each.

4. 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 an important responsibility, it’s important to discuss options you can afford so you don’t ever let payments lapse. 

5. Ask what is and isn’t covered by your policy

This is definitely a time to read the fine print and ask questions of your potential insurer. What’s included, and what is excluded? Discuss different scenarios and ask what would happen in each. 

6. 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 an integral part of your financial planning and shouldn’t be disregarded even if you’re worried about qualifying for coverage. Even if you’ve been denied coverage in the past, you still should do what you can to get this in place.

Father holding infant son for article titled What is Life Insurance

There are many insurance providers and a broad range of policies to choose from, meaning almost anyone will be able to find a policy they can afford that will protect their loved ones in the event of their passing. 

Compare policy quotes

When comparing life insurance policy quotes, you’ll want to have a clear understanding of certain factors. 

Look at each policy quote to be sure you understand: 

  • What type of life insurance policy it is
  • What’s included in the policy
  • The cost of the premiums
  • What the coverage includes
  • The amount of the death benefit that would be paid to your beneficiary or beneficiaries 

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 what resources you already have in place to cover your obligations. 

Once you establish the type of policy that is best for your family, you can compare quotes and ensure you understand how they are similar and where they differ.

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 will need to be taken care of 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 ageing 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 a portion of these needs, you may be able to adjust your life insurance coverage accordingly.

Prepare your application

When it comes time to apply for a policy, you’ll need to fill out an application with pertinent information regarding 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 term insurance, you’ll likely be choosing a 10, 20, or 30-year period. 
  • Personal information, including your date of birth, gender, marital status, health information, health 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 life insurance policies currently active.
  • Lifestyle factors, hobbies, habits, or activities that could make you a high-risk applicant.
  • If you require 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 that prioritize your family’s best-interest, so that you can feel equipped and confident that you’re making the right financial decisions for your family.

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

Life insurance is one of the most important steps you can take to protect your family’s future. It can be easy and affordable to set up, offering peace of mind to both you and those who depend on you. 

Your plans for your family likely include a secure future, a comfortable home, enough money to raise children and send them off to college without financial strain. Protecting these plans is all part of caring for them, now and in the future. 

It’s worth taking the time to learn what coverage you need and how life insurance could protect your family. 

FAQ: What is life insurance?

How does a beneficiary make a claim?

When making a life insurance claim, a beneficiary must submit documentation to the life insurance company so the insurer can process the claim and pay out the death benefit. While a claim can be made at any time, providing the policy was active at the time of their passing, doing so will give you peace of mind sooner. 

This documentation will typically include a death certificate, the life insurance policy document, and a claim form. You’ll also need to provide identification to prove you are the beneficiary of the policy, so they know they are paying the death benefit to the correct person under the proper conditions.

The insurer will review your claim and respond within a time limit, so you know if the claim has been approved, delayed, or rejected. They may also ask for more information to help process your claim correctly. 

What is the best life insurance for seniors?

Life insurance isn’t just for young families, though that’s usually the time when it’s most critical to have it. Seniors can still qualify for life insurance, and there are many options available to offer peace of mind to those who need it.

Some seniors may have dependent adult children who will need to be supported after they pass away. Others may want to ensure their mortgage is paid off to protect their partners from financial strain. 

While they may no longer have young children to care for, seniors may still have financial obligations to consider. Life insurance can offer this coverage, as well as a way to leave money to their heirs without a tax burden or ensure any final debts or funeral expenses are covered.

Laura McKay

COO & Co-Founder

About the Author

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