Alliance Income logo

What Is Life Insurance? All You Need to Know

Nov 28, 2022 | Insurance, Life Insurance

Finding the right life insurance in Canada is one of the best ways to protect your loved ones. But what is life insurance? Today, our team from Alliance Income is here to tell you everything you need to know about life insurance and its benefits. We will cover the different types of life insurance and how to find the right policy that fits your needs.

How Does Life Insurance Work?

The basic functioning of life insurance is fairly simple. Every month, you pay a premium for a policy with a specific death benefit payout. If you pass away while the policy is active, the insurance company distributes that payout to the policy’s beneficiaries. 

Actual life insurance policies might have more conditions and features, but the basic principle is the same. Life insurance exists so sole-income earners can financially protect their dependents in the case of their death. 

Dependents need a source of income for housing, food, education, and more, and life insurance provides a safety net for financial support. With a life insurance policy, you can ensure that your loved ones’ futures will be protected and secure.

Types of Life Insurance

Canadians typically have access to four main types of life insurance policies: term, permanent, simplified, and guaranteed. Each policy has pros and cons, and different policies are better for people with different ages, incomes, life goals, and preferences.

Term

Term life insurance is the most common kind of life insurance and is usually the go-to option for Canadians. With a term policy, you pay a monthly premium. If you die within the specified period of time, the company will pay the death benefit of tens or hundreds of thousands of dollars. Most life insurance policies provide coverage for ten to 20 years, though you can find policies with terms ranging from five to 30 years. 

Term policies are simple and usually have lower premiums than many other types of insurance. Whenever you die, your beneficiaries will receive the tax-free death benefit. The typical term policy can offer $250,000+ of coverage, with some policies providing over $1 million. You generally have to pass a medical exam to qualify for term coverage. 

The main downside of term policies is that they expire after a certain period or after you reach a certain age. If you die after the policy lapses, your beneficiaries will not receive the death payout. You can often renew a policy after it expires, but you may have to pass a new medical exam and pay higher rates. Term policies also offer relatively few tax benefits, unlike some other forms of life insurance. 

Pros

  • Low and consistent premiums
  • Simple payout conditions and process
  • Ability to cancel the policy at any time without penalty
  • Coverage limits that can be very high

Cons

  • Term life offers relatively few tax benefits
  • A policy can expire after a certain time frame or after you turn a certain age
  • Renewing the policy can cost you higher rates

Permanent

The other major option for life insurance is permanent or whole life insurance. Unlike term life insurance, permanent life insurance does not expire and will last as long as you continue to make premium payments. There is also no age limit to buy a permanent life insurance policy, so you can buy one at any age. 

The key feature of a permanent life insurance policy is the cash value portion of the premium. Whenever you make your monthly payment, part of that payment covers the premium to keep the policy active. The remainder of the payment contributes to the cash value. 

The cash value portion accrues value as time goes on. You can directly access the policy’s cash value or take out a tax-free loan against the cash value. You can also surrender the policy to receive the full cash value of the policy. However, beneficiaries only receive the policy’s death benefit rather than the policy’s cash value when the policyholder dies. 

The cash value portion of permanent life insurance policies makes them useful for several wealth strategies. The policy’s cash value grows tax-free, and you have several ways to access it. The main downside of permanent policies is that they have substantially more expensive premiums and more complicated conditions. You will also have to pass a medical exam to qualify for the policy. 

Pros

  • Permanent coverage will not expire as long as you pay premiums
  • Flexibility to adjust premium payments and death benefits
  • The cash value portion gains tax-free interest and allows for tax-free loans
  • The cash value can supplement retirement income

Cons

  • More expensive premiums
  • Cancelling the policy can incur tax penalties
  • Cash value does not go to beneficiaries

Simplified

Simplified life insurance is a kind of no-medical life insurance that does not require the recipient to pass a medical exam. Instead, it only requires the policyholder to answer a health questionnaire about family history and habits. Otherwise, simplified life insurance behaves like other life insurance products—when you die, your beneficiaries receive the predetermined death benefit. 

Since the insurers are taking on more risk by forgoing medical exam requirements, simplified policies tend to have more expensive premiums and lower coverage limits. Most simplified policies have a death benefit less than or equal to $100,000. You can find both term and permanent versions of simplified insurance policies.  

Many simplified policies also have a one- to two-year period before the policy goes into full effect, during which the company won’t have to pay the death benefit if you pass away.

Pros

  • It does not require a medical examination to qualify
  • Term and whole life insurance policies are available
  • Relatively fast underwriting process compared to other policies

Cons

  • Relatively low coverage limits
  • One- to two-year period of inactivity
  • Premiums are more expensive because the risk is higher

Guaranteed

Guaranteed life insurance is a kind of no-medical life insurance that provides a guaranteed payout upon death, regardless of medical history or health conditions. Guaranteed life insurance is for people who are too high risk for other kinds of life insurance. Anyone can qualify for guaranteed life insurance, and you don’t have to take a medical exam or fill out a health questionnaire. 

Because the eligibility requirements are low, guaranteed life insurance policies usually have low coverage limits and high monthly premiums. Typical coverage for guaranteed policies rarely exceeds $50,000. However, you can find instant approval and a fast underwriting process with a guaranteed policy.

Like simplified policies, guaranteed policies usually have a one- to two-year period in which beneficiaries cannot receive the death benefit if you pass away.  

Pros

  • No required medical exam or health questionnaire
  • Straightforward underwriting process
  • Guaranteed payout upon death, regardless of health

Cons

  • High monthly premiums
  • One- to two-year period of inactivity before full coverage
  • Low coverage amounts

Who Needs Life Insurance?

The purpose of life insurance is to provide dependents with an income if you pass away. You should consider getting life insurance if you have:

  • A non-working spouse
  • Children
  • Aging parents
  • Mortgage, business loans, or credit card debt

Not everyone needs life insurance, though. For example, if you are young, single, and have no children, the money you would spend on a life insurance policy would be better for savings and retirement. 

Someone with substantial business debt can also purchase a life insurance policy to cover their expenses. Many people go into business with other people. Life insurance can ensure that other partners don’t absorb your debts.

How Much Life Insurance Do I Need?

Part of finding your policy is choosing the proper coverage limit. It would be best if you had enough life insurance to cover your dependents’ expenses until they can support themselves. People use three standard methods to estimate the amount of life insurance coverage they need. 

Times 10 Method

The first method is the simplest and involves multiplying your income by ten. This method is good for estimating the amount of coverage you need but does not consider more detailed spending and expense requirements of your family. For example, if you make $50,000 annually, you should find a policy with coverage limits of at least $500,000. 

The Times Ten method also does not account for a large portion of household care that a stay-at-home parent might perform. Stay-at-home parents perform several valuable services for families, despite the fact they may not bring in an income.  

Times 10 Plus $100,000 per Child

If you want to fund your children’s college educations, you will need more than just your annual income times ten to account for their living expenses and their college educations. Multiply your income by ten, then add $100,000 for education expenses per child. 

For example, if you have three children and make $80,000 a year, you should buy a policy with at least $1.1 million in coverage. That would cover ten years of living expenses plus $100,000 for each of your three children. 

DIME Formula

The DIME formula is a more in-depth method of establishing life insurance coverage limits. The acronym “DIME” stands for debt, income, mortgage, and education. It represents the main expenses your life insurance policy needs to cover. 

  • Debt. Debt includes personal loans, medical bills, credit card bills, and any potential funeral and end-of-life care costs. 
  • Income. Multiply your annual income by the total number of years your family will require support. 
  • Mortgage. Calculate how long it will take to pay off your mortgage, including interest. 
  • Education. Consider the cost of education for your children, taking into account inflation for subsequent years. 

The DIME method is much more accurate than just multiplying your income by ten and gives a better picture of your dependents’ financial needs. 

How Much Does Life Insurance Cost?

Fortunately, the typical life insurance policy in Canada is reasonable. The average cost of a 10-year term life policy is $13 a month for $100,000 in coverage for the typical 30-year-old with no illness or chronic conditions. The same policy for a 50-year-old would likely be over $60 a month. As you get older, the price of life insurance increases every year. 

Generally speaking, term life policies are the least expensive and consist of a single monthly premium. Permanent life insurance is the more expensive option of the two and can cost roughly $120 a month for $250,000 of coverage for a healthy 30-year-old male.

Factors That Affect Life Insurance Costs

Life insurance costs can vary based on several factors, including but not limited to the following:

Age

Age is probably the most critical feature that determines policy costs. Generally, older Canadians have to pay higher premium costs than younger Canadians. Younger people have fewer health issues, so it costs less to insure them. 

For example, a 30-year-old paying for a 20-year $500,000 policy could end up paying substantially less than a 40-year-old with the same policy. Buying a policy younger can save you hundreds if not thousands of dollars over time. 

Health

Health and medical history are two other factors that play an essential role in determining life insurance premiums. Pre-existing medical conditions that could affect your premiums include:

  • High blood pressure
  • Diabetes
  • High cholesterol
  • Respiratory disease
  • High BMI
  • Kidney disorder
  • Liver disease

Assessments also look at previous prescription drug usage and family medical history. For example, if your family has a history of breast cancer, you could pay more for your policy. 

Simplified and guaranteed life insurance are two options for people who need coverage but do not have good health. These policies disregard health and medical history with the tradeoff of higher premiums and lower coverage limits. 

Gender

Gender is also a factor insurance companies take into account. Studies show that women have a slightly higher life expectancy than men, so men typically pay more expensive life insurance premiums. Whether or not policy premiums are based on gender identity or assigned sex at birth depends on the specific insurance company. 

Smoking Status

Smoking status is another very relevant consideration for insurance companies. Smoking presents several risks and causes 45,000 deaths in Canada every year. Life insurance companies account for all tobacco use, including cigarettes, vaping, and chewing tobacco. If you stop smoking, you can get better rates on your policy after about a year. 

Occupation

Insurance companies will probably charge more for coverage if a person works a high-risk job. Jobs that are considered high-risk can include:

  • Construction
  • Military
  • Resource extraction (e.g., logging, mining, fishing, oil drilling, etc.)
  • Industrial occupations (e.g., factories, chemical plants, warehouses, etc.)
  • Aviation and aerospace
  • Emergency and first responders (e.g., EMTs, police, firefighters, etc.)

Lifestyle/Hobbies

Life insurance companies also consider whether you engage in any high-risk behaviours or activities. For instance, if you are a regular skydiver, you will probably have to pay more for your policy. Hobbies that may affect policy costs include things like owning a motorcycle, rock climbing, and driving. 

When Should I Buy Life Insurance?

Life insurance is to compensate dependents if they lose you as a source of income. If you have no dependents, you should invest your money and save for retirement. If you are young, single, and do not have any dependents, you can focus on maxing out your retirement and investment accounts before buying life insurance. 

If you get married, have children, or become the sole-income owner of a house, you should get life insurance as soon as possible. Many people neglect life insurance when they are young and have dependents because they are not worried about their health. It is better to buy it early and not worry about difficulties buying when you are older. 

The Process of Getting Life Insurance

Canadians have several options for finding life insurance, including:

  • Licensed insurance agents
  • Insurance companies
  • Lenders
  • Registered insurance brokers

Once you find a policy that fits your needs, you will go through the underwriting process, which is when the insurance provider calculates the risk of providing insurance and determines your policy rate. 

As part of the underwriting policy, the insurance company will most likely require you to take a medical exam to determine your current health. Medical exams typically involve a physical examination, blood test, urine test, and health questionnaire. The questionnaire may also ask for medical information about family members to determine medical history. Insurance underwriters can request your medical records from your physician as well.

After the underwriting process, the insurance company will give you a rating, which determines your monthly premium costs. If you are in good health, you get access to a premium rate.

The entire application and underwriting process usually takes about two weeks. Once you start paying premiums, your policy will go into effect on the specified date. 

Benefits of Getting Life Insurance

Many people receive some life insurance coverage through their employer, though it’s typically a small amount. Even if you are young and single, getting life insurance can carry several benefits. 

Support for Dependents

The main benefit of life insurance is to support family and loved ones in the event of your death. Children and non-working spouses need a source of income to manage daily expenses, such as housing, food, healthcare, and education. Life insurance reimburses them for any lost income when you are gone. A life insurance policy can provide peace of mind and financial security. 

Tax-Free Benefits

Life insurance policies can also offer convenient tax benefits and wealth-building strategies. For example, beneficiaries can receive the death benefit tax-free when you pass away. The cash value of a permanent life insurance policy provides another financial resource to tap into. You can take out tax-free loans against the policy’s value and directly access the cash value by decreasing the death benefits. 

Coverage of End-of-Life Costs

Life insurance can take the stress out of family and loved ones performing end-of-life duties. The typical cost of a funeral in Canada is between $5,000 to $10,000, not including costs to organize end-of-life affairs such as property management. You can specify in your will that a portion of your life insurance should cover these end-of-life costs, such as funeral and legal expenses.

Payment for Medical Care

Many insurance policies allow for “riders”—special insurance additions that let you access the value of your policy while alive to pay for medical care. If you require medical care in your old age, you can purchase a rider so you won’t have to worry about funding additional medical care. Other riders can allow you to waive premium payments if you become disabled while your policy is active. 

Supplement Retirement 

Suppose you have a retirement fund but feel like you may need additional funds during old age. In that case, a permanent life insurance policy can supplement retirement income by accessing the policy’s cash value. You can also use a tax-free loan against the value of the policy. Remember that creditors will deduct unpaid debts from the death benefit if you pass away with a loan balance.

Additional Life Insurance FAQs

Life insurance is complex, and you will find many variants of policies with different benefits and conditions. Below are some of the most common questions about life insurance we receive.

A beneficiary is an entity that receives your death benefit when you pass away. Beneficiaries can be a person, multiple people, or even organizations, such as charitable foundations. The primary beneficiary is the primary recipient of the death benefit. Most life insurance policies allow you to designate multiple beneficiaries and allocate a percentage of the benefits to each. 

Contingent beneficiaries are people or organizations that will receive benefits if the primary beneficiary cannot claim the benefit. Policyholders can also name multiple contingent beneficiaries. 

There are also revocable and irrevocable beneficiaries. You can remove revocable beneficiaries from your policy whenever you want, but you cannot remove irrevocable beneficiaries without their consent.

Strictly speaking, children cannot be beneficiaries of life insurance policies because they are not at the age of majority. However, you can create a trust that will hold the money until each child is the age of majority, after which they can legally access the funds at their discretion.

Beneficiaries can claim a death benefit by submitting documentation of the policyholder’s death to the insurance company. The beneficiary must typically provide a death certificate and the required claim forms. Beneficiaries can claim a benefit any time they want if the holder died while the policy was active. 

After the beneficiary submits the documentation, the insurance company will verify the claim. Claims typically take about 60 days from the date of the filing to processing. The insurance company may contact the beneficiary to ask for additional documentation to verify information.

Yes, if your term policy expires and you are still under the maximum age, you should be able to renew your term policy. However, your insurance provider will most likely charge a higher premium upon renewal. As such, many Canadians choose to apply for a new policy instead of renewing their existing policy.

Most of the time, you will not have to retake a medical exam to renew term life insurance, which is why the premiums get more expensive. Insurance companies are taking on a more significant risk, as they cannot know your current health condition. The lack of underwriting means you will have to pay higher premiums, even if you are in good health.

Convertible life insurance is a kind of term life insurance that you can convert to a permanent policy when the term expires. Most insurance companies have a maximum age of 75 for term policies. After you turn 75, you won’t be able to purchase a term policy anymore. 

Instead, insurance companies allow you to convert your term insurance to permanent insurance. Converting a policy will enable you to keep your existing policy so you won’t have to go through the hassle of finding a new policy from a different provider.

A joint life insurance policy covers two spouses who want to insure both their lives on the same policy. Joint life insurance policies come in two types: first-to-die and last-to-die. First-to-die policies allow beneficiaries to collect the benefit after one party passes away, while last-to-die policies only issue a payout after the last party dies. 

Insurance providers might offer combined life insurance as well. With combined life insurance, two spouses can combine two separate policies into the same underwriting process. These kinds of policies have two death benefits—one for each party. Some insurance companies will offer a discount for buying combined insurance, as it saves time on the underwriting process.

If you are getting term or permanent life insurance, you will most likely have to obtain a medical exam before you can buy a policy. Medical exams assess your current health and inform insurance companies about medical risks. You can look into simplified or guaranteed life insurance if you want a life insurance policy that does not require a medical exam. These types of “no medical” policies do not require a medical exam in exchange for higher monthly premiums.

What’s best for you depends on your income and needs. Term life policies provide large coverage amounts and have straightforward terms and conditions. Most Canadians can find a term life policy with sufficient coverage for a reasonable price per month. 

Permanent life insurance policies make more sense if you want to provide a nest egg for your beneficiaries. Permanent policies do not expire, and the cash value portion of the policy offers practical wealth-building strategies. 

Finding the right kind of life insurance is a matter of determining your financial situation and preferences. We recommend speaking to a licensed insurance agent who can help you assess which type of policy would be best for you and your family.

Yes, if you have dependents, life insurance is absolutely worth buying. Life insurance can give your family peace of mind and financial security if you pass away. Many younger people neglect the importance of getting a life insurance policy because they are healthy and don’t think they need it. However, even young people can benefit from getting a life insurance policy before they get older.

Conclusion: Shop for Life Insurance Online!

Now that you know the answer to “What is life insurance?” it’s time to take the next step. Our team at Alliance Income Services, based in Vaughan, Ontario, strives to make shopping for insurance online as simple as possible for Canadians. Our lookup tool takes all the stress out of finding and comparing quotes from top insurance providers in the country. Fill out our form to receive an instant quote!

INSURANCE OFFERS & PROMOS


Online Life Insurance Quoter

Secure yourself with affordable life insurance from Canada’s top providers and be protected in minutes.

Manulife Health & Dental Plan

Help protect yourself and your family from regular health and dental costs.

Manulife Travel Insurance Plan

Affordable travel insurance for Canadians, visitors to Canada & students.

INSURANCE 101


CATEGORIES



Get the Best Insurance Rates and Offers

Get customized quotes from experienced advisors and brokers who work for you.

Insurance Shopping? We Can Help!

We make finding the right insurance coverage fast and simple by connecting you with the best insurance providers in Canada. Browse options, compare rates, and more.

GET A QUOTE NOW TO GET YOU STARTED!

Health Quote Form

Related Articles