Life insurance is an agreement between you and an insurance company. The way it works is this: you purchase a policy and make monthly payments to keep your coverage active, and in the event of your death, the insurance company pays a sum of money to your beneficiaries.
Life insurance gives you and your family peace of mind and financial security after tragedy strikes, especially if your family loses a crucial source of income due to your death. Here, we explain why life insurance is important, who should get it, and the types available and fit for your family’s situation and needs.
In this article
What Does Life Insurance Do?
Life insurance replaces absent income after the policyholder’s death. The payout or death benefit helps cover expenses, including mortgage payments that your family cannot cover themselves, making life insurance a necessity. After all, the last thing you want is to work hard for years to put a roof over your family’s head just to have it taken away from them after your death.
Life insurance coverage provides financial stability for your family after your death, and the payout from the insurance company is tax-free, so your family keeps the entire amount. If you purchase a $1 million policy, your family will receive $1 million when you die.
After paying for funeral arrangements for the policyholder, most Canadian residents split the remaining death benefits for monthly bills like gas and utilities and paying off outstanding debts. Others add the extra funds to savings accounts for future expenses like secondary school and university tuition for children. The savings can also provide for other necessary expenses such as:
- Homecare costs such as cleaning, childcare, cooking and various other household requirements
- Healthcare services like caregiving and nursing home assistance
- A funeral or burial service
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How Do Life Insurance Policies Differ?
Policies help the policyholder and their family through tough times, which is why life insurance is important. Still, you need the right coverage for your situation to take full advantage of the benefits without overpaying. That’s why the type of life insurance you apply for takes plenty of consideration.
What Is Term Life Insurance?
Term life insurance is most popular among Canadian residents because it is simple and affordable. Most of these temporary policies remain in effect for a set period of between 10 to 30 years. However, some policies use an age limit you and the insurance company agree on for when coverage ends.
Either way, term life insurance only pays out if the policyholder passes away during the policy term. If the coverage ends before that happens, the policyholder no longer has death benefits on hold for their family in case tragedy strikes. Fortunately, most term life insurance policies are renewable or allow the insured to switch to whole life insurance afterward, but new underwriting is necessary.
About 95% of families starting out in Canada turn to term life insurance because they have or are expecting children. Since these children depend on their parents, this temporary insurance stays active until they’re of legal age and financially independent. Otherwise, it helps the surviving parent raise them if death occurs, which is why life insurance is important.
Term life insurance also has smaller fixed premiums that won’t go up or down despite changes in your life, health, or finances. It’s ideal if you have limited funds and cannot afford costly whole life insurance. You should also consider it if you believe your financial situation will improve in upcoming years, meaning your family won’t need the additional funds from death benefits, like in the following cases:
- You’ll soon pay off your mortgage.
- Your savings will eventually build to cover future bills and funeral costs if there’s an emergency.
- You’re caring for overwhelming debt, so they’ll no longer be a concern in the future.
Many Canadians think life insurance is an unnecessary and exorbitant expense, but with a little research, you can find an affordable policy. Term life insurance is much more affordable than other types of life insurance.
What Is Whole Life Insurance?
Whole life insurance remains in effect for your entire lifetime as long as you continue paying life insurance premiums. However, they cost eight to ten times more than term life insurance because the insurance company guarantees a payout after your death.
This permanent life insurance also provides cash value so you can borrow against it during your lifetime like a loan. If you no longer desire the coverage, cash out the life insurance by withdrawing all cash value you accumulate.
However, your family cannot borrow from the policy before or after your death. Instead, they’ll receive a one-time, tax-free lump sum of cash as a death benefit before the policy closes.
Like with term life insurance, most insured Canadians choose permanent life insurance because of their dependents. If you care for an elderly or disabled family member who cannot support themselves, they won’t have another person or funds to keep them safe if you pass away. Whole life insurance guarantees they’ll have financial stability whether you’re there or not and also improves the quality of life for the rest of your family in the following ways:
- Provide an inheritance, especially to a stay-at-home or low-wage-earning spouse and children.
- Assist your family with funeral costs when the time comes.
- Use it as an investment plan so that paying your premium increases your premium value and investment.
Understanding the different types of insurance policies and the language within them is further broken down in our recent publication.
Who Needs Life Insurance Vs. Who Doesn’t
Whether you want whole or term coverage, your priority is protecting those you’re closest to, which is why life insurance is important. As mentioned above, most Canadians prefer term life insurance policies. As we know, term policies will expire, and if not renewed or converted, will leave one without coverage at all.
You should consider life insurance if you fall into any of the below categories:
- You’re married or have a partner who earns less than you.
- You have temporary or permanent dependents that rely on your income, like children or aging relatives, respectively.
- You’re a stay-at-home parent who saves the family money by being their unpaid driver, cook, nanny, housekeeper, etc., which means your death will lead to the surviving spouse paying for these services.
- You have crippling debt, loans, mortgages, or bills that your family cannot handle themselves.
On the other hand, if you and your loved ones don’t need assistance maintaining the family lifestyle, and you believe this stance won’t change, you may not need life insurance immediately. For instance, life insurance can wait in the following situations:
- You don’t have children or other dependents, meaning no one would suffer financially without your added income.
- You have enough assets or personal finances to help relatives pay for your after-death costs, like funeral arrangements, so they don’t have to dip into their funds.
- You’re a child or individual who doesn’t contribute to the family’s net worth or assist with household chores that would otherwise require professional paid assistance.
Who Can You Claim as a Beneficiary?
Life insurance may feel like nothing more than a hassle, especially with monthly premiums seeming like yet another bill. It’s not usually until beneficiaries receive the benefits during trying times that they understand why life insurance is important. But who are your beneficiaries?
Beneficiaries are one or more people who receive the death benefits upon your demise. If you choose multiple individuals, explain to your insurance company how you want to divide the payout. To ensure someone gets the benefits, consider a contingent beneficiary who’ll receive the funds if you and the original beneficiary pass away.
These beneficiaries can be anyone from a spouse, business partner, or adult child to an organization via charity or an underage child through a trust fund. Deciding who should be your beneficiary or beneficiaries, especially for those large families can be an arduous task. Anyone who has written a will can attest to that. According to Insurdinary, “one of the most important considerations when you purchase a policy, is naming your life insurance beneficiary”.
When Do Beneficiaries Collect Death Benefits?
How Much Are Life Insurance Premiums?
Different insurance companies may offer slightly different quotes, so do your research and compare quotes from multiple companies. How much you pay each month or year for your life insurance depends on factors like:
- Amount of coverage or death benefits you need
- Type of insurance (term life insurance is generally more affordable than whole life insurance)
- Age
- Gender
- Your health
- Whether or not you smoke
- Your hobbies and general level of risk (if you engage in risky hobbies, like skydiving or if you have numerous speeding tickets, the insurance company may assess you as high risk and charge higher premiums.)
You may also pay slightly higher premiums for added benefits called “riders.” Riders allow you to tailor your coverage to your lifestyle and cover specific situations. Some common riders include:
- Waiver of premiums
- Accidental death
- Guaranteed insurability
- Long-term care
- Disability income
What Are the Biggest Life Insurance Mistakes that Parents Are Making Today?
We explore the topic here.
Select the Right Life Insurance Policy with Alliance Income Services
There’s much to consider when looking at life insurance policies. Without thoroughly examining your financial situation, dependents, health concerns, and potential future concerns, you may choose coverage that won’t benefit your loved ones in the long run. That’s why our team at Alliance Income Services Corporation makes it easy to compare quotes from Canada’s leading insurance companies.
Trust over 1,000 five-star reviews and 50,000 happy customers throughout Canada. We have more than 50 experts ready to discuss why life insurance is important. Begin with a free quote by filling out our life insurance quote form at Alliance Income Services Corporation today!
