If Shakespeare was planning to build a healthy financial safety net for his family and business, we’re sure one of the first few questions he would ask as a potential policy owner is “To buy or not buy life insurance?”. Most people have a lot of questions about life insurance and don't know where to start to find the right life policies. Trust us, by the end of this article, you will have a better understanding of the details and plans available to support individuals and couples in their life insurance journey.
We understand exploring life insurance is nobody’s idea of fun, but life insurance is an integral part of any financial plan. We took it upon ourselves to demystify life insurance so that you can make an informed decision and ensure the security of your finances. From loans to riders to understanding order of payout, we'll cover it all.
What is Life Insurance?
Life insurance is a contract between you and the insurer. In exchange for premium payments, the insurance company agrees to pay a specific lump sum amount to your beneficiaries upon your death.
Terminology You Should Know
Life insurance has its own language — but thankfully it’s not too complex. Very soon, insurance terms, such as premium, beneficiary, and death benefit, will be intuitive and easily understood.
Here are the most common life insurance terms you should know.
- The insurer: The insurance company that provides the insurance cover
- The policyholder: The person who owns the policy. In most cases, the policyholder and the insured are the same people.
- The insured: The person whose life the insurance policy covers.
- Death benefit: The amount of money the insurer will pay to the policy’s beneficiaries when the insured passes away.
- Beneficiary: The person(s) entitled to receive benefits of insurance.
- Policy length: The term of duration of the life insurance policy. It encompasses the time between the date on which the policy goes into effect and the date on which the policy ends.
- Premium: The sum of money you pay the insurer for the life insurance coverage.
- Cash value: Many permanent life insurance policies have an in-built savings component called cash value. Policyholders can withdraw or borrow against their policy’s cash value. Term life insurance policies don’t have this feature.
What Situation Can a Life Insurance Claim Payment Be Used For?
Your beneficiaries are allowed to use the death benefit from your life insurance policy in whatever way they see fit. They may use it to cover your funeral expenses, pay off debts, pay for education, or take care of personal bills. They may even choose to invest the payout for future personal and business-related expenses.
If you didn’t create a will with an estate plan, the proceeds will go to your estate.
How Much Does Life Insurance Cost?
The price of life insurance depends on many factors, such as amount, policy type, age, gender, and health.
While you can’t do much about your age or biological sex, you can purchase life insurance at an early age to keep your premiums down. Adopting healthy habits, getting less coverage, and picking a term life insurance policy can help you qualify for low premium rates.
For the young and healthy, rates can be cheaper than a cup of coffee. For example, monthly premiums for a 20-year term policy worth $500,000 for a healthy 35-year old woman can cost around $25 per month. That’s less than a dollar a day! If she reduces the death benefit or lowers the term length, her premium rate will be even lower!
The long and short of it is that life insurance doesn’t have to be expensive. You can tweak the coverage to fit your budget and still get a good deal. Plus, the return on investment in terms of financial security for your loved ones is invaluable.
Do You Need Life Insurance?
You purchase life insurance not for yourself, but for the people you love. So the question is, do they need it?
Ask yourself these questions to find out if you need to buy life insurance.
Does someone in my life depend on my ability to make money? This could be a spouse, partner, child, or parent. If the answer is yes, you’re a likely candidate for life insurance. By contacting an agent and getting a quote, you can determine your insurability and the potential death benefits for your loved ones.
Do you have any debts you would pass on to your family after your death? This could be a mortgage or any lines of credit, credit card debt, etc. Having coverage can keep them from being saddled with your debt, as the death benefits can help pay off any outstanding taxes and other financial obligations.
Do you earn the lion’s share of the household income? If you’re the primary income earner, you probably need life insurance. It will ensure your loved ones get what they need to live comfortably after you’re gone.
Do you want to leave a financial legacy? If you want to leave a financial legacy to your kids, a favourite niece, or a charity, life insurance can provide them with a tax-free gift.
How Much Insurance Should You Have?
The amount of coverage you need will depend on your personal and financial circumstances. But you do need enough to cover your obligations after you pass away.
While it’s not possible to pinpoint the amount of coverage you need down to the penny, there are some ways to come up with a good estimate. You can start by calculating your long-term financial obligations and then deducting your current assets from that figure. The remainder is what life insurance should fill.
Another way is to multiply your annual income by the number of years left until retirement. For example, if you are 45 years of age and make $20,000 per annum, you will require $300,000 in life insurance.
Some experts recommend you should target for 10 to 15 times your annual income, so that’s yet some other strategies you may use, however, the approach can change depending on your situation.
If you hate crunching numbers, consider using a life insurance calculator to figure out how much life insurance you need.
The Different Types of Life Insurance in Canada?
Broadly speaking, there are mainly two types of life insurance — permanent and term life insurance. Each has its advantages and disadvantages, but 76% of Canadians prefer term life, in part because it’s more affordable.
|Term life insurance
|Whole life insurance
|Universal life insurance
|Fixed number of years (usually 10, 20, or 30 years)
|Protection for life
|Flexible. Usually protection for life
|Protect and replace your income with a death benefit
|- Protect and replace your income with a death benefit - Wealth preservation (tax-advantaged) - Tax-deferred asset growth
|- Protect and replace your income with a death benefit - Wealth preservation (tax-advantaged)
|Typically the least expensive option
|Typically more expensive than term
|Typically more expensive than term
|Rates can vary
|Building cash value
What is Term Life Insurance?
Term life insurance provides coverage for a predetermined number of years. Your family receives the death benefit if you pass away while the policy is in effect. If you survive the policy term, you don’t get anything.
Term life insurance is typically available in increments of 10, 15, 20, 25, or 30 years. If you want, you can also set the coverage to last until a specific age, like 65 or 80.
It insurance doesn’t accumulate cash value. Since the coverage is for a limited period and there’s no savings component, it is considerably cheaper than whole life insurance.
Do I Need Term Life Insurance? Is Term Life Insurance Worth It?
If you’re wondering whether term life insurance is worth it, the answer is yes — especially if someone depends on you financially. It acts as your family’s safety net if you were to pass away suddenly. A term life policy provides protection during the years families need it most.
You need term life insurance if any of these statements describe you.
- “I am the sole or primary breadwinner for my family.”
Term life insurance can act as an “income replacement” and help your family pay everyday expenses. Insurance companies provide a range of services and offer various types of policies depending on the content of their claims and the individual case of their customers.
- “I have young kids”
Term life insurance can cover the years your children are young.
- “I have a mortgage or several mortgages”
You can secure your home financially by matching the coverage amount and policy length of your term life policy to your mortgage.
- “I have long-term debt”
You can time your term life policy to end with your debt payments. This will ensure your family won’t have to bear the burden of the debt in the event of your untimely death in any case.
What is a Life Insurance Premium?
Simply put, a life insurance premium is a payment you make to your insurance to keep your coverage in place. So if you don’t pay your premiums on time, you run the risk of losing coverage. You can pay insurance premiums annually, semi-annually, quarterly, or monthly to suit the needs and preferences of different customers.
What Factors Affect the Cost of Insurance?
Life insurance costs depend on many factors, such as:
Your date of birth is one of the most important factors in determining your premium rates. The younger you are, the less likely you are to die, and consequently cheaper to insure.
Type of Life Insurance Policy
Permanent life insurance is more expensive than term life insurance because it doesn’t come with an expiry date. Within the second category, a longer-term life insurance policy will cost more than a shorter-term if everything else remains the same.
When you apply for coverage, the insurer reviews your health through a process called underwriting. You will have to take a brief medical test and answer some questions related to your health.
Insurance companies reward healthy applicants with lower premiums. On the other hand, certain health conditions, like diabetes or high blood pressure, can push your premiums up. If you’ve got a serious condition, the insurer could deny coverage altogether.
It’s no secret that tobacco use increases the risk of premature death. As a result, smokers pay substantially higher premiums — two to three times more — than non-smokers. However, marijuana usage can be treated differently than smoking tobacco by the insurer.
Women live six to eight years longer than males on average, and as such, receive lower premium rates.
Occupation & Lifestyle
If you have a job or a hobby — like skydiving or bungee jumping — that puts you at risk, expect to pay higher premium rates.
Should I Pick the Longest Term Life Insurance Available?
You can. But if you’re asking whether you should, well, that’s another question.
Taking the longest term life insurance available may sound like a good deal upfront, but in reality, you may end up paying for coverage you don’t really need. So first carefully assess your situation and then make a decision accordingly.
Here’s an example that shows why such a term life insurance policy may not be needed for everyone.
Samuel Brockett, 45 years old, is shopping for term life insurance. He is married with two kids, aged 12 and 10. His spouse, Margaret, is 30 years old and working full-time.
The average life expectancy for men in Canada is roughly 80 years. In other words, there’s a good chance Samuel will pass away in the next 40 years. Considering this, would you recommend a 40-year term policy to Samuel, taking into account the potential loss of coverage and the cost of the service?
Did you say yes? Well, perhaps these facts may convince you to reconsider.
In another 20 years, Samuel’s kids will be living independently and the wife may still be working. With kids becoming financially independent, cost of living will come down, and taking care of everyday expenses will become easier.
If Samuel takes out a 20-year term policy, he will pay much less as premiums than if he were to buy a 40-year policy with the same death benefit. This means he will be able to meet his coverage needs by spending thousands of dollars less, ultimately offsetting the service cost and potential loss of coverage.
If Samuel survives the term, he can renew the life insurance coverage, although at a higher premium. Alternatively, he can opt for a new policy with a smaller coverage to suit his current financial situation.
How Does Permanent Life Insurance Work?
Permanent life insurance covers you for your entire life. Most permanent life insurance policies also include a savings component called cash value. A part of your premium payments is put into this account.
Your cash value grows tax-deferred either at a fixed rate or at a variable rate, depending on the type of permanent life insurance you’ve bought and needed. You can withdraw or take a loan against cash value anytime and use the money for any purpose.
What is the Average Cost of Permanent Life Insurance?
Permanent life insurance provides lifetime coverage. It also bundles up as an investment tool. The savings component of a permanent life insurance policy— called cash value — accrues interest and can be tapped into tax-free.
However, these perks don’t come cheap. Permanent life insurance is five to 15 times more expensive than term life insurance. For this reason, it is not the best solution for everyone.
The Different Types of Permanent Life Insurance
Permanent life insurance comes in four forms. Learn which of these types of life insurance may be right for your needs.
Whole Life Insurance and How It Works
Whole life insurance policies offer protection for your entire life and builds cash value with lasting impact. The premiums remain constant for as long as you keep the policy.
A part of each premium is used for keeping the policy in force while the other part is used for building cash value. The cash value grows at a determined rate set by the insurance company. So, in effect, the investment component of a whole life insurance policy acts pretty much the same way as a high-interest savings account or other investments.
To pay the guaranteed rate on your policy’s cash value, the insurance company invests your premiums into a low-risk portfolio as it sees fit. You have no opinion in this matter.
You can make a withdrawal from or take a loan against the cash value. As long as you repay the loan, your beneficiary will receive the policy’s full coverage amount. If you are unable to repay, the death benefit will get reduced by the outstanding balance of the loan.
You can also cancel your whole life insurance policy and take out the cash value. But remember the amount of money you walk away with will be less than the policy’s actual cash value. That’s because some insurance companies are going to deduct the cancellation fee from the cash value.
Some whole life insurance policies also pay annual dividends depending on the insurer’s profits. This type of policy goes by the name of participating insurance policy. It is more expensive than a whole life insurance policy without dividends, which is called a non-participating policy.
Limited-Pay Whole Life Insurance and The Way It Works
In limited-pay whole life insurance, the coverage lasts your lifetime — but the premiums don’t. You need to pay premiums for a certain number of years or till you reach a certain age. Your death benefit, however, remains in place until you die and your cash value keeps on growing at a steady rate.
A limited-pay whole life insurance policy doesn’t come cheap. Since you need to pay premiums for a limited number of years rather than for your entire life, expect to pay more than you would with a standard whole life insurance policy.
The benefit is you won’t have to worry about paying premiums after retirement and will accumulate cash value faster.
Universal Life Insurance and The Way It Works
Universal life insurance is similar to whole life insurance in many ways. Like the latter, it offers lifetime coverage, provides a tax-free cash benefit to your beneficiary, and builds cash value with gains growing tax-free.
But that’s pretty much where the similarities end. Universal life insurance has several features unique to it, such as the following:
- You decide how the policy’s cash value is invested
- The life insurance company guarantees a minimum cash value growth rate, but the cash value can grow at a much higher rate if the insurer’s portfolio does well.
- You may be able to raise or lower premium payments within certain limits.
- The death benefit may be adjustable
Term to 100 Life Insurance and How it Works
Don’t let the word term in the name confuse you; the term to 100 is as much a permanent life insurance policy as any.
It provides lifetime coverage and has premiums that remain level until age 100. And if you manage to hit the 100 year mark, your premium payments stop — but the coverage doesn’t.
However, unlike whole life insurance, term to 100 doesn’t build cash value. Also, its premiums are generally more affordable.
Why Purchase Whole Life Insurance?
While whole life insurance is more expensive than term life, the permanence of its coverage and the tax-deferred cash value make it a good option for some people.
You may want to consider whole life insurance coverage if any of these statements describe you.
- You want a product that will cover you for the remainder of your life (long term coverage)
- You're looking to cover funeral and final expense costs
- You want to keep the price the same throughout your lifetime (no renewal)
- You're looking for the option of equity in a policy (Cash Value)
- You want to leave something behind for the family
How to lower life insurance premiums?
The most effective way to get a lower life insurance premium is to get coverage as early as possible. Quitting smoking, maintaining a healthy weight, and steering clear of hazardous hobbies can all help you qualify for lower premium rates. Also, keep in mind that term life insurance has a much lower cost than other types of life insurance.
Life insurance coverage at different ages
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How do I Apply for Life Insurance?
Complete the application and phone interview
When you apply for insurance, you will have to provide information regarding your medical history, family member medical history, and occupation. You’ll also have to specify the coverage amount and designate your life insurance beneficiaries.
After applying, someone from the insurance company will call you to discuss the disclosed information and schedule a medical review.
Take the medical exam
You may have to take an in-person medical exam to qualify for coverage or to get the premium rates. You can schedule the exam at a convenient place and time — for example, at work in the afternoon.
A paramedical examiner will do a basic health check-up, which typically includes height, weight, and urine and blood samples. You’ll know your medical history better than before when this is over.
Not all insurance policies require a medical review, though. If you don’t want a medical exam, guaranteed issue and simplified issue life insurance may be right for you.
Wait for the Attending Physician’s Statement (APS)
If you have certain medical conditions, the insurance company may ask your doctor to complete a form questionnaire, called attending physician’s statement. It lists the illnesses you’re being treated for, the medication you’re taking, and your prognosis.
Go through Underwriting
Underwriting is the process the insurer uses to rate your risk and set your premiums.
Underwriters peruse your application, medical exam results, and other personal information — for example, driving history and credit card score — to evaluate the risk you present. The higher your risk, the more you will pay for coverage.
Typically, the underwriting process takes four to six weeks. That said, delays in obtaining your medical records and verification of your application information can stretch the timeline.
Pay the First Premium
Once you’ve received and accepted your life insurance policy, it’s time for the last step — making the first premium payment.
Your policy will become active only after you pay the first premium. This is also the time to select a suitable payment option for your premiums. You can pay premiums monthly, quarterly, semi-annually, or annually.
How Long Does It Take for Insurance to Kick In?
Your coverage goes into force the day you sign your life insurance policy papers and make the first premium payment.
Once the insurance company approves your application and sends over the policy papers, it’s entirely up to you when you want the coverage to start. Typically, you have six months to activate your policy.
How Can I Save Money on Life Insurance?
Looking for the rock-bottom price for life insurance? There are many ways you can best save on life insurance.
- Buy sooner rather than later
The insurance premiums increase by roughly 8% to 10% on average for every year you age. So locking in low premiums when you are young and healthy can translate into hundreds of dollars of savings over the lifetime of the policy.
- Buy only what you need
There’s no point in buying a policy with a large death benefit if you can’t keep it in force without stretching your budget to the limit. Sooner or later, you are likely to start missing payments, and that will only make things worse.
The smart thing is to opt for coverage that fits into your budget, instead.
- Compare quotes
Work with an independent broker, like Dundas Life, that can pull up quotes from multiple insurers. Every life insurance company evaluates risk differently. For example, some insurers look more kindly on marijuana use than others. Grabbing quotes from different players is the only way to ensure you’re getting the best value for money.
- Pay annually
We know that’s easier said than done. But if you can pay premiums annually, you’ll save money. Some insurers offer handsome discounts — as high as 8% — for paying annually.
- Improve your health
Health problems make life insurance more expensive. Diabetes, high blood pressure, and heart disease are among health conditions that push your premiums up. Other factors include smoking and weight. Not only that, but being healthy can also save you money on health insurance.
How Do My Beneficiaries Get Paid When I Die?
The insurer may take up to two months to pay the death benefit to your beneficiary. Your beneficiary can initiate the claim process by filling and submitting a claim form, along with a death benefit and proof of identity. The life insurance company will then review the claim and distribute the payout.
If you had named more than one beneficiary, the policy will dictate the best how much life insurance death benefit each beneficiary will receive. If there’s only one beneficiary, he or she will receive all the proceeds.
Your beneficiary can choose to receive the payout as a single lump-sum payment or in instillments. Most people, however, prefer the first option.
In most cases, the death benefit is not taxable.
Additional Uses of Life Insurance
Life insurance is, first and foremost, about securing your family’s financial future after you pass away. However, the versatility of life insurance products allows you to use them for varied purposes.
To Pay For Your Retirement
Permanent life insurance typically includes a cash value component that grows on a tax-deferred basis. You can use it to fund retirement.
However, keep in mind these policies have high fees than other tax-advantaged savings and investment accounts. Consider using permanent life insurance policies for retirement planning only if you’re already maxing out other retirement vehicles.
To Minimize Your Tax Burden
Life insurance is generally not taxable (great for covering estate taxes). You can buy a whole life insurance policy to pay the estate tax that will be due after you pass away. This way you can ensure your heirs receive as much portion of your estate as possible.
To Borrow Money
Most permanent life insurance policies build cash value. You can use the latter as collateral to borrow money from the insurer with withdrawals against your policy. The insurer will not ask you any questions, nor will it check your credit history. You are free to use the funds as you see fit.
Is Life Insurance Worth It?
Yes, life insurance is worth the premiums you’ll pay the costs — especially if you have dependents. It acts as an income replacement, ensuring your family can maintain a comfortable standard of living after you’re gone.
From mortgage to monthly grocery haul and child care costs, life comes with many expenses. Of course, you do everything possible to take good care of your family here and now. But if the unthinkable happens, your loved ones would be extremely grateful for the financial safety net that life insurance offers.
To sum it up, life insurance is all about peace of mind — that you’ve done all you can to help with the financial protection and security of your family. An independent broker, such as Dundas Life, can help you find the coverage that’s right for you at an affordable price.
Steven has a deep background in life insurance. At Dundas Life, he's helped 1000s of clients find the right insurance coverage while also training dozens of insurance advisors during his career. Previously at Finaeo, Steven oversaw compliance and coaching for over 350 independent insurance brokers. Steven is also rated the #1 Insurance Agent in Toronto on Rate-My-Agent.