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How does life insurance work in Canada?

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What is life insurance?

First things first, a life insurance policy is a contract between you (the policyholder) and an insurance provider (the insurer) that guarantees your beneficiaries (the individuals or groups who will receive the money) a lump sum payment upon your death.

But life insurance isn’t just a financial payout. It’s a promise and an expression of generosity. If that sounds like an exaggeration, consider how life insurance can make a difference in your life and the lives of all the people you care about.

When you die, your policy provides a guaranteed life insurance payout to your loved ones. They will have the financial means to carry on without giving up the dreams and plans you shared. The money your beneficiaries receive can be spent any way they choose.

Life insurance Canada

Who needs life insurance?

Everyone can benefit from having life insurance. Young adults often benefit the most from early planning. And most people need coverage as they start a family, take on debt, or start to build a retirement nest egg.

Consider three people of different generations and how they might benefit from a personalized insurance plan.

Life stageWhat’s on their mind?Why they need life insurance
Young, single, and just starting outI’m young and I have no dependents. The last thing I need is life insurance.”A young person starting a 30-year career has more lifetime income to protect than someone about to retire. Life insurance is the cheapest it will ever be when you’re young and healthy. Getting a small policy now means you can keep qualifying for coverage even if your health status changes.
Starting a familyBetween home and kids, there’s not a lot of extra money to pay for life insurance.” Because there are a lot of expenses when you’re building a foundation, it’s essential that you have a way of replacing your income. In fact, both parents should have life insurance policies. See Why Moms Absolutely, Positively Need Life Insurance.
Gliding into retirementMy debts are behind me. I’m not sure I need to keep paying for life insurance.”Some people reduce their life insurance coverage as their obligations taper off. Maintaining some level of coverage is still a tax-effective way to help your family carry on and deal with final expenses.

As you can see, everyone can benefit from life insurance for different reasons at different times in their life. The first step in selecting the right kind of coverage is to book a consultation with an experienced insurance advisor, who can familiarize you with the two types of life insurance in Canada.

What does life insurance cover?

Because life insurance benefits are a lump-sum payment, the money can be spent any way your beneficiaries choose. Here are a few examples of how a life insurance plan can help others carry on.

  1. Mortgage and loan payments – Your family won’t have to sell assets to cover outstanding debt.
  2. Children’s education – Money can be set aside to cover tuition and expenses so your kids don’t graduate with student debt.
  3. Investments and retirement – Your family can keep up with investment and retirement plans.

Benefits of life insurance coverage while you’re alive

There are many ways a life insurance plan can take some of the financial pressure off while you’re alive. Knowing that you’ve already put measures in place to protect your family, you might feel more confident about spending the money you make now. How refreshing to be able to:

  • Spend vacation time with your family
  • Contribute to your favourite charities
  • Invest a little more for the future

As you’ll see, policies come in all kinds of shapes and sizes. Personalizing a policy that matches your needs is part of the insurance process and what the experts at Serenia Life Financial do best.

We can help you understand your options, choose a plan that’s right for you, and let you know when it’s time to adjust your approach. Our goal is to make it easy for you to protect your wealth and live generously while you’re at it.

Types of life insurance in Canada

Life insurance policies fall into two categories in Canada: term life insurance and whole life insurance. They both offer great coverage and help you protect your loved ones – but they work differently. Your insurance advisor can help you assess your needs.

Option 1. Term life insurance

Term life insurance is a temporary option that expires at the end of each term, unless you decide to renew or convert to a longer term or to permanent coverage. You can buy insurance in pre-set increments (called terms) so that you have insurance when you need it most. For example, you will likely want a lot of coverage from age 30 to 60, when you have the greatest financial responsibilities, and replacing your income is vital to your family’s protection. But you may wish to reduce your coverage at age 60 when you have fewer debts.

How does term life insurance work?

You’ll be given the option of a 10-, 20-, or 30-year term. That means you commit to paying monthly premiums for the length of the term, and in exchange, your life insurance payout is guaranteed.

How to choose the right term

Your advisor can help you choose the length of term that’s right for your situation.

  • A 10-year term may be right for you if you have debts that will take 10 years or fewer to pay off, such as a car loan or mortgage. It’s also a guaranteed way to cover short-term income needs in the event of your passing.
  • A 20-year term may be right for you if you have less than 20 years left on your mortgage or if you wish to help cover your children’s education. It can also ensure your family’s income is protected until your children have left home.
  • A 30-year term is a great option if you’re looking for an alternative to traditional mortgage insurance. Why? Because you’ll own the policy and can name your loved ones as beneficiaries.

How much does term life insurance cost?

Term life insurance is typically the least expensive option for Canadians who want pay-as-you-go coverage at specific times in life. Premiums are based on age, health, and the amount of coverage you need. Get a free quote today.

Option 2. Whole life insurance

Think of whole life insurance as a lifetime of protection. It’s also called ”permanent life insurance” because as long as you pay all the insurance premiums, it stays in effect for life. This type of coverage is commonly purchased when you and your advisor have agreed that the lifetime advantages outweigh the ”pay-as-you-go” approach described above.

How does permanent life insurance work?

Permanent life insurance can be thought of as a ”combo-platter” because the insurer provides you with life coverage on the one hand and an investment account that grows on the other. Your investment account is referred to as the cash portion of your policy.

After a predetermined number of years of paying premiums on your permanent life insurance policy, you will own it. That means your payments stop*, but two important things keep going:

  • Your insurance coverage stays in effect for life – unless you choose to cancel it
  • Your investment account continues to grow


*There are also options to pay a lower premium for the lifetime of your policy. Speak to your advisor to learn which one is right for you.

Access to the cash portion of your account

The money the insurer invests on your behalf creates a number of financial advantages that you won’t get from term life policies. As the cash portion of your policy grows, it becomes accessible to you and can provide a lifetime of tax-effective rewards.

You may wish to:
  1. Give yourself a policy loan**
    If you need cash, you can borrow money from your life insurance policy without a credit check and the loan won’t appear on your credit history. Since you’re borrowing money from your own policy, you’re under no obligation to pay back the loan as long as it does not exceed your policy’s total cash surrender value (i.e., the total cash value available within your policy). When you die, the insurer will simply deduct any money owing — plus interest — from the death benefit (i.e., a payment made to designated family members or other loved ones after you die). Be sure to carefully compare the lifetime cost of borrowing to alternative forms of financing.
  2. Make a cash withdrawal**
    You may be able to withdraw a portion of the total cash surrender value of a permanent life insurance policy for any reason. Note that this option may reduce the amount of the death benefit for your beneficiaries, and that fees may apply at the time of withdrawal. But if there’s more than enough money to meet their needs, why not spread the love around?


**Note that policy loans and withdrawals may be subject to income tax. To better understand when and why this might occur, consider speaking with a tax specialist.

How much does permanent life insurance cost?

Whole life insurance involves a much greater upfront investment than pay-as-you-go term policies. But for many Canadian families, the long-term financial and tax advantages make this kind of coverage an essential foundation of a financial plan.

Phew! That’s a lot to think about

Here’s the great news. You don’t have to figure out the ins and outs of life insurance on your own. Serenia Life Financial advisors are here to help.

Regardless of your age, health, and financial situation, you could likely benefit from some kind of life insurance coverage. Time is always on your side when you start young, stay focused, and make protection a pillar of your financial plan.

A good advisor can help you choose the right coverage with premiums you can afford. With the right plan in place, you’ll have the peace of mind that comes with knowing you’re planning ahead for everyone.

Get the guidance you need

While there are lots of factors to consider, life insurance is not complicated when you work with an advisor. They can help you explore your options and show you how to choose a life insurance policy that’s right for you.

This blog post contains general information only. Because each person’s situation is unique, it is best to speak with a qualified professional before making any final decisions. Serenia Life Financial does not advise clients on tax, accounting, or legal matters.