Types of Life Insurance in Canada: 6 Options

February 23, 2022
Types of Life Insurance in Canada: 6 Options

If you’ve been thinking about life insurance, then you’re not alone. Life insurance is a key aspect of many Canadians' overall financial plan. Especially when you’re the main financial backbone of the family

The main purpose of life insurance is to leave a tax-free income for the designated beneficiary after the death of the insured to pay for end-of-life expenses, mortgages and Children's education expenses, etc. (equivalent to a tax avoidance method for huge asset transfers).  So, how do you know the types of life insurance available in Canada and what type of life insurance is best for you?

In this article, we'll discuss everything you need to know about the types of life insurance in Canada, from the types of coverage to deciding whether you need life insurance (the quick answer is of course!). No one wants to imagine the moment they die, but life insurance is a gift you can give your family when something bad happens.

Before diving deep into the article, it’s important we understand what life insurance means.

What is life insurance?

Life insurance is a contract between a person and an insurance company, in which the insurer agrees to pay the person's beneficiary(ies) the amount named in the contract. This happens in the event that the person dies during the time that the insurance policy is in force.

To better simplify this, let take a look at this scenario below.

For example, Let say Sam, a 40-year-old man, purchases a 20-year term policy with $500,000 coverage that costs him $48 per month. Sam names his wife Laura as the beneficiary of the policy. If Sam dies within these 20 years, and Laura makes a claim with the insurance company. She will receive a check for $500,000.

What is the best type of life insurance in Canada?

There is no such thing as an absolute best or bad when it comes to insurance policies. There are over 38 million of people in Canada with different family status and needs at different stages of life development. That is, the best type of life insurance for you might not be the best life insurance plan for someone else. As we dive in more deeper into the article, you will get to learn the types of life insurance available for you as a Canadian and which of it is best for you.

However, before deciding what kind of insurance is best for you, you need to consider these two factors:

1.       How much insurance do you need? In general, life insurance coverage should be between 7 and 10 times your annual income.

2.      Decide whether you need term, participating or universal life insurance. You can also consider hybrid coverage. My advice is that the cost of insurance cannot exceed 10% of your gross income.

Types of Life Insurance in Canada

There are two basic types of Canadian life insurance are Term life insurance and Whole life insurance.

Term life insurance

Normally granted for a certain number of years, generally around 10 to 30 years span, and is subject to a medical examination. Every single year of the term, the charges will remain the same, and if suddenly the insured die during the term, the insured chosen death benefit will be paid to his or her beneficiaries. Term life insurance is available up to a certain age, usually about 85 years of age.

Whole life insurance

Often known as Permanent life insurance, covers an individual for the rest of your life. The insured will never 'age out' like he or she would with term insurance as long as the insured pay the premiums. Permanent insurance is substantially more expensive when compare to term policies with equivalent coverage since their pay out are guaranteed. Permanent life insurance plans compensate for their cost by providing additional benefits, such as tax-advantaged investment.

Types of Canadian term life insurance

Term life insurance can be subcategories into different categories based on the characteristics that distinguish them. The following are the types of term life insurance available in Canada.

Convertible term life insurance

Convertible term life insurance allows you to change your insurance plan to a permanent one at predefined intervals. If you make a decision to convert your insurance policy, you won't need tore-qualify, just as with the renewable terms. In most cases, you may convert to any kind of permanent life insurance issued by the same company.

Convertible insurance has the advantage of allowing you to upgrade to a greater plan if your circumstances change. However, this implies that the insurance provider assumes greater risk in the event you need to use it. As a result, rates for convertible term insurance are often higher when compare to those for non-convertible term life insurance.

Renewable term life insurance

A renewable term life insurance policy allows you to keep the insurance plan after the term expires without going through any sort of re-qualifying process. Term renewals put insurers at greater risk since the insured have become older and the insurance firm knows nothing about the insured current health condition. That means the rates of the individual insured will rise drastically, when the contract is renewed.

If your health is in a pretty good condition, re-qualifying for a new term might help you receive a better rate. If your health deteriorated within your first term, renewing might result in cheaper premiums than re-qualifying. Renewals are possible until you exceed the ultimate age, which is typically 85 years old. This implies, for instance, that at age 75, you'll be eligible to renew your last 10-year term insurance.

Joint life insurance

Several types of term and permanent life insurance plans are available as single or joint plans. A joint insurance protects two individuals as a single 'life insured,' usually partners or spouses. Insurance costs for joint coverage are always greater than that of single coverage, which accounts for the higher likelihood that the insured benefit will be given out.

This insurance policies are in two ways, it's either joint first-to-die or joint last-to-die insurance.  After one of the insured dies, joint first-to-die will pay the life insurance payout benefit to the surviving partner, whereas last-to-die provides the payment to the designated beneficiary after both persons on the insurance policy die. A joint policy differs from a 'combined' insurance, which is when you buy numerous single policies from the same insurer. This saves you money on premiums and is worth considering on occasion.


Types of Canadian Whole Life Insurance

This type of life insurance premiums are locked in and the coverage period covers a lifetime rather than a specific period. Whole life insurance is more expensive, though, and monthly premiums may cost about ten large pizzas instead of one, but your beneficiaries can be sure to get the payout (unless you're a vampire). Whole life insurance is also divided into the following subcategories:

Universal Life Insurance

This type of life insurance has a variable premium, which allows the policyholder to decide the premium amount, providing greater freedom. Universal life insurance is more of an investment account and avoids taxes. As a result, many wealthy Canadians turn to this type of life insurance as a type of investment when they run out of TFSA or RRSP credits.

Participating Life Insurance

This type of life insurance includes both insurance and investment components, with the investment component managed by the insurance company. Participating life insurance aims to have low risk, moderate growth, and no tax. Dividends received by policyholders can be used to reduce premiums or to increase death benefits. A common misconception about participating life insurance is that the policyholder cannot receive both the cash value of the investment and the death benefit, but this is false.



Is it reliable to buy life insurance? Will the company pay when needed?

It is very common to hear things like “good luck when they have to pay you” or “ insurance companies don't pay” . The reality is that life insurance is a very black and white contract. That is, the company has the obligation to pay the beneficiary if the insured person dies.

The only document required to make an insurance claim is a death certificate. Except for a suicide in the first two years of the policy, the company must pay in the event of death.

Despite what people say, the life insurance industry in Canada pays out on average 99.5% of all claims made to it, according to Munich Re's 2018 Individual Insurance Survey.

Why should I worry about life insurance?

Being healthy and young is the ideal situation to buy life insurance. The price of life insurance is linked to the person's age, sex and smoking status. Prices increase exponentially with the age of the person, that is, the older someone is, the higher the price they will pay to insure themselves.

In addition, when one receives a quote for life insurance, that price is based on that of a "standard" health person. The longer someone waits to get insured, the greater the chance of developing medical conditions that prevent them from qualifying for "standard" life insurance.


In Conclusion

Life insurance takes the life of the insured as the object of insurance, and the insured pays the insurance premium while the insured is alive, and transfers the risk to the insurer. In the event of the death of the insured, the insurer will pay a fixed amount of compensation, the so-called death benefit. In the event of the death of the insured, life insurance covers funeral expenses, debts, tax bills and other financial burdens, thereby relieving the family of the financial burden in this regard.

Key terms related to life insurance:

  • Insurance Policy: A contract signed between the policyholder and the insurance company
  • Policyholder: The holder of the policy
  • Premiums: Fees paid on a monthly, quarterly, semi-annual or annual basis
  • Beneficiary: Individual(multiple people) or entity receiving death benefit
  • Death benefits are tax-free.

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