What is life insurance?
You can think of life insurance as a financial safety net for those you leave behind.
Life insurance provides whomever you choose with a one-time, tax-free payment (also known as a death benefit) when the life insured dies, as long as you have paid the required premiums.
There are different types of life insurance. It not only protects your family, it can also be part of your financial plan, as you may be able to access money in your policy while you’re alive.
How much life insurance do you need?
The amount of insurance you need will depend on what you’re using it for – replacing your income, paying off your mortgage, funding education, etc.
According to the Canadian Life and Health Insurance Association, the average life insurance protection per household in Canada is $442,000.
Every person’s situation is unique. A 2021 Canada Life General Financial Knowledge Survey determined that only 27% of Canadians knew the recommended life insurance coverage.
An example
Trevor is in his mid-30s and makes $70,000 a year, wants to add $50,000 to his 2 children’s registered education savings plans (RESPs), pay off a $400,000 mortgage and provide $10,000 for funeral and final expenses.
- 5 times annual income ($70,000) = $350,000
- Registered education savings plans (RESPs) ($50,000 x 2 children) = $100,000
- Mortgage = $400,000
- Final expenses = $10,000
- Total = $860,000
That means his policy should payout $860,000. And because he’s married and his partner makes the same income, they should both have policies for this amount.
An advisor can help you determine the amount of life insurance that’s right for your situation.
The above example is for illustrative purposes only. Situations will vary according to specific circumstances.
What type of life insurance you need
There are 2 basic types of life insurance coverage: term and permanent. Each has unique features designed to meet different needs.
Term insurance
Term life insurance protects you for a set period of time, like 5 or 50 years. When that period ends, your coverage is renewed for a further period at a higher cost if you don’t cancel your coverage. You can also convert it to permanent life insurance without having to answer questions about your health.
It often has a lower initial cost than permanent life insurance, and it’s a popular way for those starting out to protect themselves and their families. Term life insurance is initially usually less expensive than permanent life insurance, so you may be able to purchase more coverage.
Permanent insurance
Permanent life insurance gives you lifelong insurance coverage as long as you pay the required premiums. There are 2 kinds of permanent life insurance – participating life insurance and universal life insurance.
For participating life insurance, the premiums you pay for your coverage, along with premiums premiums from other participating policyowners, go into a shared account called the participating account. The insurance company’s professional investment team manages this account, investing to increase its value for the benefit of all participating policyowners.
It’s from this account that your death benefit and any potential dividends are paid. Dividends can be generated when the actual participating account experience is better than the assumptions used for things such as expected investment returns, claims and lapses. While dividends are not guaranteed, any you may receive can be used to buy additional coverage, reduce your annual premium payments or be taken out as cash (though any cash values withdrawn from the policy may be taxed). If you borrow or withdraw money from your policy, it will reduce the policy’s cash value and how much money the person (or people) you’ve designated will receive (called a death benefit).
Universal life insurance is guaranteed, lifelong protection that lets you choose investment accounts and build your wealth. And it’s one of the most flexible and affordable products available that covers you for life.
There are 2 parts to a universal life insurance policy: insurance and investment components. You choose your investment accounts and growth can accumulate tax-free, within limits set by the government. You can withdraw or borrow from your policy, with certain tax implications. You can also choose who to leave your money to.
Other types of insurance to consider
Critical illness insurance
Critical illness insurance can give you a tax-free payment if you’re diagnosed with a covered serious condition. Your contract will define which conditions you’re covered for, but some examples include cancer, heart attack or stroke.
Disability insurance
Disability insurance can give you a tax-free monthly payment to help replace your income and cover your expenses if an illness or injury keeps you from working.