What is Life Insurance? Everything You Need to Know

There are some things in life that just make sense – wine and cheese together, pausing to admire a dog on the street, or caring for your loved ones. And believe it or not, understanding what life insurance is – and having a plan set up – is a big part of that last one. 

Getting life insurance to protect your family in the event of your death seems to make a lot of sense.  It may not be fun to think about – nobody wants to play for their passing – but if you pass away, your family might be relieved you signed up for a policy.

That’s why a basic understanding of what is life insurance is so important! When you understand life insurance, you can make the best policy decision to protect your loved ones. 

In this article, we’ll answer every question you may have about life insurance  to make finding the right policy for you as easy as possible! Let’s dive in.

What is Life Insurance?

Life insurance is an agreement between you (the policyholder) and an insurance company to provide a tax-free sum of money to your loved ones (known as beneficiaries) if you were to pass away. The money they receive is known as a “death benefit", and is meant to help your family out financially if they lose income they were dependent on. 

For this service, you pay a monthly premium each month to your life insurance provider.

In its simplest form, life insurance is a security blanket for your loved ones. It is there to protect anyone who depends on you financially in the worst-case scenario.

How Does Life Insurance Work?

While it may sound complicated, the structure of a life insurance policy is pretty simple. You pay premiums each month to an insurance company over an agreed length of time. In return, the insurance company promises to give your loved ones a tax-free lump sum cash payment (the “death benefit") if you die. 

Life insurance benefits are paid out in one full lump sum, which means that your death benefit would be received all at once by the people you select to receive your life insurance payout (als known as your beneficiaries). If your policy provides $500,000 of coverage, your beneficiaries will receive $500,000 all at once, and it’ll be tax-free.

This lump sum gives your family the option to use the money however they want to. Some people use it to pay off a mortgage. Others use it to continue making rent payments. In many cases, the money that the beneficiary receives is used to care for children, fund educational expenses, and cover day-to-day living costs that your income stream was helping fund.

Types of Life Insurance in Canada

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

Term life insurance is the simplest and most affordable form of life insurance. It pays out a benefit to your beneficiaries only if you die within a specified timeframe, usually 10, 20, or 30 years. This is the best option for 95% of young families.

The alternative to term life is permanent life insurance, the most common type of this being known as whole life. These permanent policies tend to be much more expensive –  hundreds of dollars a month more expensive.  

But why are these policies so much more? Permanent life insurance guarantees that your beneficiaries will receive a death benefit. You can die young, old, or somewhere in between, and your insurance company will still pay out.

What Type of Life Insurance Makes Sense for Me?

Deciding between whole life insurance vs. 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 life insurance, despite the fact that 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.

Right? 

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 really matters (when your mortgage is at its highest & 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 – enjoy your retirement!

Comparison of Types of Life Insurance in Canada

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

Cost Comparison of Term vs. 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

Who Needs Life Insurance?

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. For example, life insurance is essential if you have a partner, children or ageing parents who depend on you for financial support.  It could be the difference in your family being able to keep their house and handle day-to-day expenses, verses dealing with a huge financial burden if something were to happen to you.

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?

  • Anyone who is single with no dependents (i.e., if your death will not have a financial impact on your parents & or other family members)
  • Anyone who has managed to build up enough savings to provide the safety net on their own (think older parents whose kids are out of the house & who are pretty close to retirement)
  • Children. Many people consider buying life insurance for their kids, but this isn’t necessary! Chances are, your children aren’t contributing finances to the home right now, and therefore a policy isn’t necessary

How Much Does Life Insurance Cost?

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

As you can guess, the probability of you filing a claim within that decided on time period (because you die before you turn 65 or before the end of your term) isn’t that high. As a result, you’re not a high risk to your life insurance provider – this means the prices for term life insurance also aren’t that high either! Win win!

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

$250,000 of coverage for 20 years$500,000 of coverage for 20 years$750,000 of coverage for 20 years
Male, aged 30$18/month$30/month$46/month
Female, aged 30$15/month$23/month$34/month
Male, aged 40$28/month$49/month$72/month
Female, aged 40$22/month$35/month$53/month
Male, aged 50$72/month$130/month$195/month
Female, aged 50$51/month$85/month$129/month

However, life insurance quotes are actually pretty personal. Because of this, here are certain factors that will impact your actual monthly premium. Some of these factors include:

  • Coverage amount, or the amount of insurance you want to be covered 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 (term vs. permanent): As mentioned above, permanent life insurance policies are almost always more expensive
  • Your age: The younger you are, the lower your monthly rate. If you get life insurance early, you can lock in a low premium!
  • 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 life insurance companies will charge you more to be covered by them
  • Your health status: Having certain health issues can make covering you seem ‘high risk’ to insurance companies 
  • Driving record & 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 

All of these factors will be weighed to determine your final price.   However, most younger people wouldn’t see a change from what they were originally quoted.

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. You’ll want to buy life insurance when you get to the point that you have somebody depending on you. For most people, this is when they get married or when they start having kids.

At this point, you might be thinking, “I just got a mortgage, and having kids isn’t cheap! How am I supposed to afford life insurance?"

Fortunately, the younger you are, the more affordable your life insurance will probably 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.

How Do I Buy Life Insurance in Canada?

There are three main ways to buy life insurance:

  1. Directly with a life insurance company online (like Manulife CoverMe)
  2. Through an independent local insurance agent
  3. Through independent broker online

So how do you decide where to start your shopping process?

Think of it this way. If you were trying to pick what car to buy, do you only talk to somebody who works at a specific dealership? Probably not. You want to get information and prices across different companies, not just one. And if you talk to somebody who works for that one car dealer, chances are they’re going to try to swing you one way. 

You need to apply that same mentality when deciding where to shop for life insurance! You want to go with someone who can help you compare quotes across a variety of insurance companies. Life insurance rates, surprisingly enough, can vary quite a bit across companies (even for the exact same policy), so only getting quotes from a single company can end up being quite costly.

Evaluating a Life Insurance Company

Life insurance is a permanent purchase – you are getting into a contract with a company for 20 years or more, so it is important to find the company that can provide you 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?

These are the main factors to look at, but the good news is that every big life insurance company in Canada has a  long track record of financial strength. You can check out our reviews for some of the best life insurance providers to make sure you are comfortable with your pick for your life insurance company!

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 most best buying decision. After all, when this decision impact so many people, you want to go into decisions as informed as possible.

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