Does the very thought of life insurance leave you scratching your head in wonder and confusion? If yes, you’re in good company.
A recent survey by the Financial Services Commission of Ontario (FSCO) found that only 47% of 25- to 34-year-olds in Ontario have life insurance, and almost half of those (48.6%) say they don’t fully understand their policy.1
There’s no getting around the fact that life insurance is a tough subject that isn’t particularly fun to think about, but it doesn’t have to be stressful and confusing either. This short article will help demystify the jargon so that you can feel more comfortable as you explore your options.
Life insurance comes in many varieties.
But, to put it simply, life insurance is a legal agreement—also known as a policy—between you (the insured) and an insurance company (the insurer). You purchase a certain amount of life insurance from the insurer (let’s say it’s a $200,000 policy) and the insurer promises to pay that $200,000 to your beneficiaries—these are the people you choose to receive this money (the death benefit) if you pass away.
It’s also important to note that life insurance can be very affordable—no matter how much money you make. That $200,000 policy we mention above? A 30-year-old woman who doesn’t smoke could expect to pay as low as $20 a month for $200,000 in coverage that covers her for 20 years.
To keep it simple, let’s first look at how most life insurance policies work in general.
In exchange for a fee that you typically pay monthly or annually (your insurance premium), an insurance company provides a certain amount of coverage on your life. If you pass away while you have this coverage, your beneficiaries will be able to make a claim to your insurer for the amount of coverage you purchased. The money that is paid to your beneficiaries is called the death benefit.
One of the great things about the life insurance death benefit is that it’s not usually taxable—whether your policy pays out $50,000 or $500,000. This means your family won’t have to report the amount as taxable income on their Canadian tax return.
A word of caution, however. If you don’t name a beneficiary on your policy, your “estate” will be designated as the beneficiary. If this happens, then the death benefit could be reduced by probate fees, also known as the estate administration tax. (Your “estate” is essentially all of your assets and liabilities at the time of your death.)
Another example of when life insurance might be taxable is if you have a whole life or universal life insurance policy that accumulates cash value. You can read more about cash value life insurance here: The Types of Life Insurance Explained.
To read more about taxes and life insurance, check out: Will My Loved Ones Pay Tax on Life Insurance Proceeds?
In addition to not having to pay taxes on the life insurance death benefit, your beneficiaries are free to use the money as they wish. For example, they can use the money to:
- Take care of childcare expenses and household bills
- Pay off or pay down your mortgage
- Settle other debts, like credit card bills and car loans
- Send your kids to college or university
- Cover your funeral and other final expenses
How much did insurers in Canada pay out in death benefits in 2018?2
While there are many reasons to get life insurance (more on that below), the #1 reason people buy it is to make sure that their family won’t struggle financially if they die. That means if you have someone who counts on you for financial support, life insurance is a must-have.
If you can check off one of the boxes below, you probably need life insurance:
I’m young, single and don’t have kids. I don’t need life insurance, right?
That depends. There can be benefits to getting coverage now while you’re young and unattached. Check out Six Reasons Why Now May be the Best Time to Get Life Insurance.
Life insurance protects your family financially if you pass away, but it can offer other benefits, too. Certain types of insurance can help you save up for whatever the future holds, whether it’s paying for your child’s education, protecting your assets or another goal.
Check out 4 Reasons to Get Life Insurance at Any Age.
While life insurance comes in many forms, all coverage essentially falls under two main buckets: term life insurance and permanent life insurance. Within those buckets are even more choices to help you get the specific coverage you need.
Term life insurance is the most affordable and provides coverage for a limited time—from 10 to 40 years, and anything in between.
Many people like to buy term life insurance when their kids are young and they’re carrying debt, such as a mortgage. It costs less than permanent insurance and is usually easy to buy. For example, you may not have to take a medical exam if you’re young and healthy and could even be eligible for an instant decision!
Permanent life insurance is typically more expensive but provides coverage for life and, in some cases, an opportunity to build savings.
Term 100, whole life and universal life insurance all fall under the umbrella of permanent coverage. Whole life and universal life combine lifelong insurance coverage with the opportunity to build up savings within your policy (called cash value or accumulation value). One of the perks to a cash value policy is that you may be able to one day access the “cash value” to supplement your retirement income, help your kids pay for post-secondary education and more.
To learn more about term and permanent life insurance, as well as specialty products, check out The Types of Life Insurance Explained.
The short answer? Probably more than you think. The answer to this question is unique for everyone. When choosing a coverage amount, there are a few different things you’ll want to look at. To get a quick estimate now, try our life insurance calculator. Or, keep reading to see what should play into your decision:
Your annual income
In general, it’s recommended that you have at least 5-7 times your yearly net income (“net” means after taxes are taken out). This would essentially provide 5-7 years’ worth of your annual income to your beneficiaries.
Who counts on you financially?
Think about each person who depends on you and how long you might need to provide financial support for that person. For example—how old is your youngest child? How many kids do you have and do you want them to have the opportunity to attend college or university? Or, is it just you and your partner right now?
If you have a mortgage, student loans or credit card bills, what would it take for your spouse or partner to completely settle all these debts? Having money to pay off the mortgage could mean the difference between your spouse having to sell the house or being able to stay.
Other life insurance, if you have it
If you have some group coverage through work or mortgage life insurance, you may be able to subtract these amounts from what you need to buy.
Is the life insurance I get through my work enough?
Most group life insurance policies only cover 1-3 times your annual salary, so it’s very likely you do not have enough coverage through work. Plus, if you change jobs, you will most likely lose your coverage. If you’re not sure how much you have, talk to your HR department or check your policy.
Your savings and investments
If you have savings and investments earmarked for certain future plans—such as a Registered Education Savings Plan (RESP) for your child’s education, you can subtract these amounts from your life insurance needs. You just want to make sure that if your family had to use your savings and investments earlier than planned that it would not negatively impact their plans in another area.
Tip: Review your coverage needs every few years and anytime you have a major life event—like a new family member or even an increase in your income.
Try our life insurance calculator now to see how much coverage you might need.
What if I can’t afford what’s recommended for me?
Buy the amount you can afford now because some life insurance coverage is better than none. You can always add more when your budget has more breathing room. Also, if you’re interested in permanent coverage, but you can only afford term coverage right now, keep in mind that most term policies give you the option to convert to permanent coverage later.
In 2018, the average amount of life insurance protection per insured Canadian household was3:
Well, that depends! If you’re considering term life insurance, you can have a cost estimate in hand pretty quickly by getting a life insurance quote. The premiums you’ll pay can be very different from what someone else might pay. That’s because premiums are based on a number of things, including risk factors that are unique to each person. In general, here’s what will figure into your cost:
The type of insurance you choose
Term life insurance is more affordable than a permanent life insurance policy such as universal or whole life insurance. Permanent policies offer lifetime coverage and, in some cases, an investment component and other bells and whistles. See Types of Life Insurance Explained.
How much coverage you buy
A million-dollar policy is going to cost you more than a $250,000 policy (for the same Term length).
Your age, health and gender
The younger and healthier you are when you buy life insurance, the less it will cost. Also, men typically pay more than women do. Sorry guys!
Here’s an example:
A 35-year-old female non-smoker can expect to pay around $30 per month for a 20-year term life insurance policy worth $350,000, while a 35-year old male non-smoker can expect to pay around $40 per month for the same policy.4
If you drink alcohol frequently or enjoy certain activities like scuba diving or rock climbing, you may pay higher premiums. And, if you smoke or use tobacco products, you will almost certainly pay more for your policy.
Family medical history
If cancer, diabetes or other medical conditions run in your family, this could increase your rates.
Get a quick life insurance quote now to see what a term life policy might cost you.
How much did Canadians pay towards life insurance premiums in 2018?5
The first thing you should know is that some types of life insurance are simpler to buy than others. Depending on the type of coverage you want and how much you’re applying for, your application may need to go through underwriting; this is the process an insurer goes through to evaluate the risk associated with insuring you.
Before we get into underwriting though, here are the routes you can take once you’re ready to buy:
Buying coverage through an advisor
Many Canadians buy life insurance with the help of an insurance advisor. At RBC Insurance, our licensed advisors can provide advice to help you make the best decision for you and your family and help you complete your application.
Buying coverage online
If your needs are fairly straightforward, there’s a chance you could get a quote and buy your coverage entirely online! At RBC Insurance, we offer a few options online:
Term life insurance: Depending on your age, health, the amount of coverage you are applying for and if you’re a Canadian citizen or permanent resident/landed immigrant, you may be able to request a quote and get an instant decision online6.
If you don’t receive an instant decision, you may need to complete a phone interview. It’s also possible that a paramedical nurse will need to visit you to take your vitals.
Personal accident insurance: If you’re an RBC® client, age 18 to 69, and a Canadian resident, you can buy personal accident insurance online. In fact, your acceptance is guaranteed. Learn more or enrol now7.
RBC Guaranteed Acceptance Life Insurance: If you’re a Canadian citizen or permanent resident/landed immigrant and age 40 to 75, you can buy up to $40,000 of life insurance. There’s no medical exam or health questions to answer. Learn more or get a quote8.
Getting coverage through work
If your employer offers a group life insurance policy, you’ll want to follow up with your HR department or plan administrator.
What information will I have to give when I apply for life insurance?
In most cases, you will need to give information about your lifestyle, health, age, personal and family medical history.
It is extremely important that you answer all questions in your application truthfully and accurately. If you give incorrect or incomplete information, the insurance company can deny, adjust your benefits or void your coverage.
What happens after I apply for life insurance?
Once you send in your application, it may go through some form of underwriting, although sometimes this isn’t required.
As mentioned above, underwriting is a formal process an insurer goes through to evaluate the level of risk they are taking on by insuring you. It can be very involved—or it can be minimal, depending on your situation. For example, you may need to complete a phone interview and/or a medical exam:
Phone interview: If the insurer needs more information, you may need to complete a telephone interview. The interviewer may ask personal, financial and medical questions.
Medical exam: If a medical exam is ordered, a paramedical nurse may come to your house to check your vitals. This could include collecting a urine and blood sample, weighing and measuring you, and taking your blood pressure and pulse.
How long will it take to hear whether I’m approved?
The time it takes to hear back varies. In some cases, you may hear back instantly. For example, if you’re under 56, have a good medical history and want less than $1 million in term insurance, you may get an instant response.
In other cases, it could take weeks or even months to find out if you’re approved. If your application requires a phone interview or medical exam, you’ll have to wait a little longer.
Once you have your life insurance policy in hand, don’t be afraid to ask questions! If something is unclear, it’s in your best interest to understand your coverage.