Understanding Life Insurance: A Guide for Canadian Citizens

Posted on November 20, 2018

The World Health Organization ranks Canada seventh when it comes to life expectancy. WHO puts Canadian's total life expectancy at 82.8 years in 2018.

The year before that, the entire population's life expectancy was at 81 years. In fact, the numbers have continued to rise over the years, starting in 1921.

Awesome news, right? But it seems that for the first time in decades, the Great White North will see it drop.

Granted, that's not enough reason to panic. But it should be enough to prompt you to start understanding life insurance ASAP.

After all, even with all that estimated length of life, accidents can still happen. They can occur anytime, to anyone. In fact, they're the leading causes of death among Canadians age 44 and younger!

That said, it's best to prepare as early as now with life insurance. Use this guide to help you make the right decision!

Understanding Life Insurance: Is It a Legal Requirement?

First on this guide to life insurance is answering whether this policy is mandatory or not. Unlike car insurance, the law doesn't require you to purchase a life policy. In fact, only about 43% of Canadians have some form of life insurance.

But that doesn't mean you should already dismiss it. Consider it more of a personal requirement. The fact alone that it can help meet your (and your family's) financial needs in the future should be enough reason.

Life Insurance in 50 Words

Next up in this life insurance guide: What exactly is it?

Life insurance is an insurance product that pays out a lump sum in case the insured dies. This amount of money, called "death benefit" goes towards the policy's named beneficiaries. In other words, your spouse, kids, or other family members.

The Two Main Types of Life Insurance

Depending on the type of life policy you get, you can either have insurance for a set number of years or for life. Life insurance that expires is term insurance. The latter is what you call permanent life insurance.

We'll discuss both in more detail below, but to give you an idea, term insurance is the more popular option. One, because it's cheaper and two, it's super easy to understand. But permanent life also comes with its own set of benefits, such as an investment component.

The Terms of Term Life Insurance

Term life insurance insures and protects you and your loved ones for a set number of years. Most policies run for up to 30 years, although you'll find shorter terms. Some insurers offer term policies for terms as short as five years.

Once you've figured out how long you want to keep the insurance, next is to pick the death benefit amount. In essence, that's the amount of insurance you need to buy (we'll explain this further below).

Depending on your chosen insurer, you may have to undergo medical testing. But some insurance companies, like Manulife, have plans that offer guaranteed acceptance.

For a more in-depth term life insurance primer, check out this guide we have.

The Life-Long Permanent Life Insurance

There are two key differences between term and permanent life insurance. First, permanent life policies don't expire. But, you have to keep paying your premiums, either monthly or in larger amounts for a few years.

Second, most of them come with the added bonus of an investment component.

That's right! You can use permanent life insurance in Canada as an investment tool.

It works this way:

Every time you make your monthly insurance payments, part of that will go to a savings account. There are also insurers who put some of the funds on other investment tools, like stocks and funds. Others even offer both types of investment component!

In any case, all those months and years of payments will build up a cash value. Once a pre-specified number of years have passed, you can withdraw against what you've saved up. You can use the money any (legal) way you want, be it for yourself or your family.

If you cancel your policy, you'll still get the investment funds. We don't recommend this though since this means forfeiting the death benefit.

Calculating the Insurance Amount to Choose

To come up with a good estimate, consider what you want the payout to cover. There's your family, debts, and any other source of income like assets and investments.

Let's say you want a policy as income replacement until your family can start taking care of themselves. If so, then multiply your yearly income by at least six to 10 years. That's an example of how much insurance you should buy.

If you have debts, make sure you factor those too. Especially since consumer debts (without mortgages) average about $8,500 per person. That's a lot, as it's about two months' worth of salary of an average Canadian!

But you should also consider any other investments you have.

Say you're one of the two-thirds of Canadians who already started saving for retirement. In this case, you may want to subtract it from your estimate above. That way, you'll have lower monthly life insurance premiums to worry about.

If you want to leave a bigger nest egg for your loved ones though, then that means higher premiums. That's because the bigger the death benefit you choose, the higher the total cost of the policy. But if your finances are doing great, then you likely will be okay with higher premiums,

No Other Better Time Than Now to Get Life Insurance

Understanding life insurance doesn't have to be a pain. Nor does it have to be an expensive addition to your household's finances.

Note, however, that life insurance is cheaper the younger you are. That's why buying it isn't something you should keep postponing.

Besides, the sooner you have it, the earlier you can protect your loved ones from financial burden.

Once you're ready to shop around, shoot us a message so we can give you free quotes for comparison.

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