What is Life Insurance? Coverage and costs

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Have you ever wondered what is life insurance? It’s a product that ensure that your loved ones are taken care of if you were to suddenly pass, but not many people like to talk about it. Some people believe that talking about your death will bring it closer to reality, but that’s just silly.

Any person with dependents should strive to protect their family. That’s why talking about life insurance and getting it is so important. Here’s what you need to know to get started with life insurance. 

What is life insurance?

In simple terms, life insurance is an agreement between an individual and an insurance agency in which the individual will pay monthly or annual payments to the insurance provider, who, upon the death of the individual, will pay a lump sum to the beneficiaries of the individual.  

Types of life insurance

Life insurance isn’t a one-type-fits-all kind of product. There are a few different categories depending on your lifestyle and circumstances. Here is a look at three of the most popular life insurance options for Canadians.

Term life insurance 

Term life insurance is purchased for a term or a specified period of time, usually 10 or 20 years. During this time, you will pay the premiums, and should you die within the period of this term, your insurance provider will pay out a death benefit to your beneficiaries.  

Term life insurance policies are quite popular because of their affordability. There are no hidden fees or restrictions, and it can be cancelled before expiry without penalty. However, a term policy does need to be renewed once the term is over, and at this point, costs will increase due to age (life expectancy), health, and overall life circumstances. 

Whole life insurance

Whole life insurance, on the other hand, is a type of permanent insurance that provides coverage for the entirety of your life. Like with term life insurance, whole life policies include a death benefit, but additionally, it also has a cash surrender value should you need to cancel the policy early. Obviously, this is not an ideal situation, however, sometimes life circumstances come up where you need the money, and with a whole life insurance policy, some of that money can be made available through the cash value.  

Whole life insurance can offer this cash surrender value because in the early years, when you are (assumedly) young and at your healthiest, you will actually overpay. This overpayment is what forms the cash surrender value should you decide to claim it. Then, as you age, your premium payments actually end up being less than your insurance, so you underpay rather than overpay, and the insurance company takes the money from the cash surrender to make up the difference. This structure means your premiums stay the same every year. 

Note that whole life insurance is often referred to as a universal life insurance policy.

No medical life insurance

When it comes to getting life insurance, you will need to get a medical exam. Your age, health, and medical history all play a large role in the premiums you pay for health insurance, and if your health is in poor standing, you may not qualify with some life insurance providers.

In this case, you will want to look to no medical life insurance (also called guaranteed life insurance). This type of life insurance does not require any medical details, checks, questionnaires, or exams. It is worth noting that typically, no medical life insurance has higher premiums and lower coverage, so make sure to do your research before choosing this route. 

What is the best type of insurance?

The best type of insurance to get depends on your personal circumstances. Most life insurance purchasers stick with term insurance. It’s the more affordable option and can be tailored as your needs change with each new term. 

Typically, whole life insurance is only recommended to individuals with very high incomes to better take advantage of tax-deferred benefits. Generally speaking, the premiums are too high for the average Canadian to be worth it.

That said, every individual has their own circumstances, so take the time to learn more, do the research, and have discussions before you decide on the best type of life insurance for you.

When should you get life insurance?

Not everyone needs life insurance. If you are single and don’t have anyone relying on you and your income, then chances are you really don’t need it. However, if you have a young family or any parents or siblings that you take care of or help out financially, then life insurance might be a good idea.

That being said, even if you have dependents, there are still a few things to consider. These include:

  • Debt vs assets – Do you have a lot of debt that would then be a burden to your family should you pass away? Or are you in a strong financial standing that they will be able to get by fine with the assets you have in place?
  • The age of your children – Life insurance makes sense when you have little ones to care for but if your children are grown and have jobs of their own, then they likely don’t depend on you financially anymore. 
  • Your partner’s circumstances – Will your partner be able to support themselves alone in retirement? If not, life insurance can help build their post-retirement savings.
  • Do you care for anyone who needs lifelong assistance – If yes, then life insurance can act as a security blanket to continue to support them. 

How much life insurance do I need?

If you choose to go ahead and get life insurance you will need to figure out how much you need. There is no perfect number, it will depend on individual circumstances and can also fluctuate depending on where you are in your life. 

A general rule of thumb is 5-7 times your annual salary is a good start, but there are several factors to consider:

  • The remaining balance owed on your mortgage
  • Any personal debts or loans
  • Expenses (burial costs and  funeral expenses or even the potential of long-term care)
  • How much of your income do your beneficiaries rely on?
  • How many years your beneficiaries will need financial support for
  • Any other assets or funds you have in place that your beneficiaries will benefit from

How much does life insurance cost?

The cost of life insurance is personalized, and age plays a large role. That said, according to PolicyMe, the average cost of life insurance in 2022 for a healthy 30-year-old looking at a 10-year term is $13 per month for $100,000 in coverage. That same coverage would cost over $100 per month if you were a 60-year-old smoker. 

What affects life insurance premiums

Life insurance premiums are determined on a per-person basis. As mentioned above, most life insurance policies require a medical exam and/or questionnaire ahead of time to help determine these rates. Some of the things that will play a role in determining your life insurance premiums include:

  • Age
  • Gender
  • Health condition
  • Lifestyle and hobbies
  • Occupation 
  • The coverage amount 

How to get life insurance

There are a number of life insurance providers out there which means that there are many options. You will want to shop around for life insurance quotes to determine the best rates and life insurance products that best align with what you want and what you can afford. You can go to a life insurance company directly for a quote or use a broker who will get quotes for you. Online brokers are especially easy to use, as you can get quotes within seconds. 

When you have determined which provider you would like to go with and are ready to apply, make sure you have the following on hand:

  • Some form of identification (SIN, driver’s licence, passport, etc)
  • Proof of income (paystub or a letter of employment
  • Proof of address (from a bill or letter from your landlord)

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About Barry Choi

Barry Choi is a Toronto-based personal finance and travel expert who frequently makes media appearances. His blog Money We Have is one of Canada’s most trusted sources when it comes to money and travel. You can find him on Twitter:@barrychoi

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