How Does Life Insurance Work in Canada?

How Does Life Insurance Work in Canada?
Published on: January 5, 2021
Author: Thomas Chan

In this article, we will cover everything you need to know about life insurance in Canada for 2020. From the types of insurance to determining if you need life insurance (the quick answer is yes!). Nobody likes to think about the moment of their death, but life insurance is a gift you can give your family in case the worst happens.

Life Insurance 101 in Canada: Why Buy Life Insurance?

Life insurance works by you making payments over the span of your life in exchange for a set amount of money when you pass away, which is called the death benefit. The life insurance covers the cost of your funeral, debts, tax bills and other financial burdens that you do not want to fall on your family’s shoulders when you are gone.

Key terms to know about life insurance:

  • Policy: Your agreement with the insurance company
  • Policyholder: The person who owns the policy
  • Premium: Your monthly, quarterly, semi-annual or annual payment
  • Beneficiary: Person(s) or entity who receives your death benefit
  • The death benefit is not taxable.

Types of Life Insurance in Canada

There are two basic types of life insurance in Canada.

Permanent Life Insurance in Canada

This type of life insurance covers you for life rather than for a specific term with locked-in premiums. However, this type is more expensive, perhaps about ten large pizzas per month instead of only one, but your beneficiary gets a guaranteed payout (unless you’re a vampire). Within permanent life insurance options, there are several subcategories:

  • Universal Life – this option provides more freedom as your premiums are not set and you can pay in any amount you wish. It is more of an investment account and is tax-sheltered. Many wealthy Canadians are using this as an investment type when they have maxed out on their TFSA or RRSP.
  • Whole Life – this option is where you pay for coverage plus an additional investment portion which is managed by the insurance company. They aim for low risk and moderate growth and this option is not taxed. You will get paid dividends which you then can use to either reduce your premiums or boost your death benefit. A common misconception about this option is people think you cannot get both the cash value of your investment and the death benefit payment, however this is not true with a properly constructed life insurance plan.

Term Life Insurance

Term life insurance will cover you for a specific number of years. As an example, if you opt for a 20-year policy and you die within that time, your family will get the death benefit. Most premiums will remain the same throughout the course of the term.

The cost of your premium is determined by your age and health. The approximate cost for a young and healthy individual looking for a $100,000 policy is equivalent to one large pizza per month. The older you are, the more expensive it is.

If you are looking to get started, there is an exclusive offer for 4 months of free premiums through Canada Life. A term policy can be converted to a permanent policy later if you prefer, usually without another medical exam.

What life insurance should I get?

To determine which type of insurance is best for you, here are the two considerations:

  1. How much life insurance do you need? You should look between 7 to 10 times your annual salary.
  2. Determine if you would like the term life, whole life or a universal account. You can also consider a hybrid portfolio. I recommend looking at the option that does not equal to more than 10% of your overall income.

If you are looking for a personalized suggestion or more information on life insurance, feel free to contact me for a free consult.

Thomas Chan

Thomas C.Chan has been advising for over 10 years and has built a reputation for his approach in developing personal finance strategies, setting up risk management, and accumulating wealth for Canadians.

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