What are the Benefits of Life Insurance?

Most of us don’t like to think about our own mortality. That could be one reason why only 39 per cent of Canadians have a life insurance policy, despite more than half agreeing that life insurance is important.

There are other reasons why people avoid purchasing life insurance. They may believe it’s too expensive, that their claim could be denied, that they won’t qualify, or that they simply don’t have enough assets to warrant life insurance. But the reality is almost anyone can benefit from having a life insurance policy.

For your loved ones, life insurance provides financial stability, especially if you have dependents who rely on your income. If you have any shared debts, such as a mortgage, life insurance can protect the other person’s financial future. For entrepreneurs, life insurance can ensure your business carries on after you’ve passed away.

Life insurance can even be an investment tool by helping you build wealth and earn dividends that you can access while still alive.

Here’s a snapshot of the types of life insurance available and nine compelling reasons why you may benefit from taking out a life insurance policy.

Key Takeaways

• Life insurance death benefits are tax-free in Canada, meaning beneficiaries don’t pay income tax on the payout.

• If your estate is tied up in probate, a life insurance policy offers more liquidity to cover final expenses.

• Permanent life insurance policies build cash value over time that you can borrow from while still alive or leave to your beneficiaries.

• Participating whole life insurance pays dividends, which you can use to supplement your income in retirement.

• If you own a business, life insurance can help ensure partners and employees are compensated.

• You can name a charity as a beneficiary or transfer your policy to a charity, both of which provide significant tax benefits.

Types of life insurance in Canada

Life insurance protects your loved ones if you pass away. You, as the policyholder, pay a life insurance premium and if you pass away, the beneficiaries you’ve designated receive a tax-free cash payout.

There are three main types of life insurance products available to Canadians: term life, whole life, and universal life.

Term life insurance

With a term life policy, you select how long you want to be covered for — anywhere from 10 to 40 years. If you pass away during the term, your beneficiaries will be covered. However, if you pass away outside this term, the coverage is void. For example, if you purchase a 20-year term life policy and have a fatal accident in year 21 and haven’t renewed your policy, your coverage will be expired.

A benefit of term life is that it’s usually more affordable than the other types of life insurance and your premiums won’t change for the duration of the policy. You may also choose to renew your policy (at a new premium) or switch to long-term coverage before the term is up.

Whole life insurance

A whole life policy, also sometimes called a permanent policy, is lifelong. You pay a set guaranteed premium for life, or you can choose to pay off the entire policy sooner, in 10 or 20 years, while still maintaining lifelong coverage.

One of the main benefits of whole life, in addition to having guaranteed coverage for life, is you earn a cash value guarantee from the portion of your premiums, which are professionally invested for you by the insurance company. If you have a participating whole life policy, you’ll receive dividends from those investments. With a non-participating policy, you don’t receive dividends, but your premiums are generally lower to compensate for any gains.  

Another advantage of whole life insurance is you can borrow from your policy while you’re still alive, such as for unexpected costs. But it’s important to note that you will need to repay this amount with interest and any amount not repaid will be deducted from your death benefit.  

Universal life insurance

Another type of permanent policy is universal life insurance. Like whole life, this is lifelong coverage that invests a portion of your premiums.

The key difference is that you can choose how much you want to pay into your policy, how you want to pay your premiums (with set minimums and maximums), and how you want your premiums invested. As such, this type of insurance is best for those who are comfortable with hands-on investing.

This flexibility is the biggest advantage of universal life. You also have the freedom to borrow from your benefits (with interest) while you’re still alive, such as to cover retirement costs and support you if you develop a terminal illness or disability.

Nine advantages of life insurance for Canadians

Life insurance plays an important role in your financial planning, offering protection for you and your beneficiaries. Here are nine key life insurance benefits:

1. Income replacement and provide for loved ones

Life insurance can help cover your loved ones’ expenses, especially if you have dependents who rely on your income to cover things like housing, childcare, and education costs.

In Canada, the death benefit under a life insurance policy is tax-free, which means your beneficiary doesn’t have to report it as income, and therefore doesn’t need to pay income tax on it.

2. Pay for outstanding debts and mortgage

When someone dies, their debts, such as such as outstanding personal loans, credit cards, or mortgage payments, are typically paid off through the estate. Whatever remains is then distributed to the estate’s beneficiaries.

While debt isn’t passed down the family tree like an heirloom, there are exceptions. If you co-signed for a loan or opened a joint account, and those debts are more than can be covered by the estate, that person will become responsible for paying off the debt in full. The tax-free payout from a life insurance policy can help to cover any debts your estate can’t. 

3. Cover final expenses and funeral costs

The average cost of a funeral in Canada can range from $5,000 to $10,000, or more. While final expenses typically come of the estate, this can take a long time. Probate, which is when the courts accept a will or appoint an executor, can take six weeks to 12 months, depending on your province and the complexity of your estate.

Life insurance offers more immediate tax-free liquidity to help you cover those funeral fees, estate settlement costs, and other final expenses.

4. Pay for your child’s post-secondary education

As of 2025, the average four-year undergraduate degree costs nearly $31,000 for tuition alone — and that’s not including students’ other expenses, such as residence fees, or commuting costs, meals, and books.

One option to help you save for post-secondary education in addition to an RESP is to purchase a universal life insurance policy for your child and make contributions to it while they are young.

Since this kind of policy lets you invest a portion of your premiums to earn interest, the policy can grow a cash value that can be accessed while alive. Once your child turns of legal age, you can transfer the policy to them, which they can then use for school or other future costs, like buying a home.

5. Help protect your business

If you own a business, you don’t just need to think about your personal finances, but also the business’s finances after you pass.

Maybe you took out a business loan that’s still being paid off or have business partners who will need financial security and a clear succession plan. Life insurance can help to ensure your debt is covered, partners are compensated, and operational costs aren’t left hanging.

For example, life insurance could be used to fund severance packages if the business closes or pay for transition plans and hiring your replacement if the business continues. 

6. Build wealth

Life insurance can help you grow wealth that you can access while you’re still alive or leave for your loved ones. Participating whole life and universal life insurance accumulates a cash value — as you pay your premiums, a portion goes toward the policy and a portion is invested. The interest earned is tax-deferred while it remains in your policy.

With universal life, you can even choose how your money is invested. Depending on your risk tolerance, you may opt for a more aggressive investment option that enables you to grow your policy’s cash value even further.

7. Supplement retirement income

If you’ve maxed out your RRSPs, TFSAs, and other investments, participating whole life insurance could be another way to supplement your retirement income, as this type of policy pays out dividends.

These dividends can be used any way you want — put toward your premium payments, held to continue earning more interest, or paid out directly to you annually.

Since borrowing from your life insurance incurs interest charges and anything you don’t repay is subtracted from your death benefit, collecting dividends could be a less costly and less risky way to use life insurance as an income source in retirement.

8. Estate planning and wealth transfer

It’s important that your assets go where you want them to. While your will is a way to ensure that your heirs receive their share, life insurance can provide extra estate planning support.

Before the assets in a deceased person’s estate can be distributed, the estate must go through probate. This is when the court confirms who has the authority to act as the estate trustee and verify that the deceased’s will is valid.

Probate can be a long process that takes several months or even a year or more, but a life insurance payout helps fill the financial gap while beneficiaries wait for probate to be completed.

As well, the tax-free death benefit from life insurance can help cushion your beneficiaries if a large portion of your estate needs to go to debts, legal fees, or funeral costs.

9. Charitable giving

Finally, you can use life insurance as a form of philanthropy. You can designate a charity as a beneficiary or even transfer your entire whole life policy to a charity of your choice. Both options come with considerable tax benefits.

If you donate your policy, you’ll receive a donation tax receipt for the value of cash surrendered and any accumulated dividends. If you name a charity as your beneficiary, you’re eligible for a charitable donation tax credit upon death, which can be used in your final income tax return.

Take the next step

While most Canadians make sure their cars and homes are insured, too few of us are doing the same for ourselves. But life insurance is an important tool that can financially protect your loved ones after you’re gone. It can even be used to cushion yourself and your family while you’re still alive.

Whether you have assets you want protected, a dependent you want to support, or a legacy you want to leave, a life insurance policy can give you that peace of mind.

Want to make sure your loved ones are covered? Get a quote online in minutes or contact us to speak to a licensed advisor.

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