Introduction
Life insurance plays a vital role in providing financial security for Canadian families. This extensive guide examines why you should have life insurance, why it is critical, who needs it, key policy benefits, types of insurance available, how to determine ideal coverage amounts, the process of getting insured, factors that impact policy costs, who may not require coverage, alternative options, and more.
With insightful data and research, this article aims to help Canadians make informed decisions about protecting their loved ones.
Who Needs Life Insurance in Canada?
Over 22 million Canadians have life insurance, with the average policy providing $458,000 in coverage per household according to 2021 data from the Canadian Life and Health Insurance Association (CLHIA). But who really needs coverage?
Parents with Dependent Children
Raising children is expensive in Canada. The USDA estimates the cost of raising a child to age 18 is $233,610 on average. With high expenses like childcare, activities, schooling, and college, the loss of a parent can leave children at a severe financial disadvantage.
- 42% of dual income households state they would struggle financially within 6 months if they lost an income according to LIMRA’s 2021 Life Insurance Barometer Study.
- 25% of these respondents said they would only last one month before hardship.
Life insurance allows the surviving parent to maintain stability and normalcy for grieving children. The payout can fund schooling, daily expenses, and future dreams like college, weddings, or first home purchases.
Mortgage Holders
A home is the largest asset and liability for most Canadians. StatCan reports the average new mortgage in Canada is $364,000, with higher averages in cities like Toronto ($494,000) and Vancouver ($673,000).
If a homeowner dies before paying off their mortgage, beneficiaries and the lender are left in a difficult position. Life insurance can prevent this, allowing survivors to repay the mortgage using policy proceeds.
Mortgage life insurance purchased via a lender only pays out to the bank and lacks flexibility. By getting their own coverage, Canadians can ensure payouts help their families maintain their homes.
Primary Income Earners
Over 4 in 10 households say they would face financial hardship within six months if their primary wage earner died, according to LIMRA research. When families depend on one key income stream, its sudden loss can be devastating.
Life insurance allows primary earners to continue providing for their families even after death. This prevents survivors from having to immediately downgrade their lifestyles due to income loss.
Canadians with Substantial Debt
A 2021 Equifax Canada report revealed average non-mortgage debt has climbed to $21,183 per household. The highest debt loads are held by people aged 46-55.
If debts like loans or credit cards are co-signed, the surviving co-signer must assume repayments. Life insurance provides funds to repay debts so survivors aren’t burdened.
Even student loan debts can be transferred to parents who co-sign. It’s critical for Canadians with sizeable co-signed debts to carry life insurance.
Business Owners
Business owners pour their lives into their companies, but their sudden passing can sink everything they’ve built. Life insurance facilitates continuity, providing liquidity to cover costs, repayment of business debts, leadership transitions, and buyouts of deceased owner’s shares.
Partners should insure each other to ensure no one inherits a business they can’t afford to buy out or run alone. For sole owners, payouts fund operational stability, debt repayment, and smooth transfers of ownership.
Canadians Wanting to Leave a Legacy
Many Canadians wish to leave an inheritance or gift for loved ones and causes they care about. Permanent life insurance can make this possible through income tax-free death benefit payouts.
Canadians can name their children, grandchildren, or charities as beneficiaries to provide them with significant inheritances after passing away. This allows Canadians to gift more than they may have been able to during life.
Families Reliant on Dual Incomes
If couples or families require two incomes to pay the bills, losing one income stream can severely threaten their stability. A PolicyMe survey found that nearly half of Canadians could not maintain their lifestyle for a year on a single income.
Life insurance allows the surviving household member time to adjust without immediately selling assets or prematurely returning to work. The payout provides breathing room to grieve and determine suitable long-term adaptations.
Canadians with Insufficient Emergency Funds
A survey by Seymour Financial found that 61% of Canadians do not have emergency funds to cover three months of living expenses. If the primary earner died suddenly, families without adequate emergency savings could end up bankrupt, homeless, or in severe debt without life insurance.
Until an emergency fund is built up, life insurance can provide a tax-free lump sum to maintain housing, food, utilities, and other basic needs. This prevents putting families in dire financial risk.
Why You Should Have Life Insurance – Key Benefits
Below are some of the top reasons Canadians depend on life insurance:
Replacing Lost Income, Allowing Families to Maintain Their Lifestyle
Over half of Canadian households rely on dual incomes. Losing one income can mean a 50% or greater loss, drastically downgrading survivors’ lifestyle. Life insurance provides tax-free funds replacing years of lost income in a single payout. This prevents drastic lifestyle cuts.
- The average policy pays around $458,000 tax-free, according to CLHIA data.
- Payouts support everyday costs like housing, food, and utilities.
- Life insurance allows survivors time to adjust to a single income without immediately selling assets or tapping savings.
A life insurance payout prevents the surviving household income earner from abruptly having to solely support the family. The tax-free lump sum replaces the deceased’s future earnings that their family is losing.
For example, take a family where both parents work and share expenses. If the mother passes away, the father faces substantial income loss from her salary disappearing. The mother’s life insurance policy ensures the payout replaces her lost income so the family’s lifestyle is unaffected.
Canadians rely on dual incomes. Over 4 in 10 households say they’d face financial hardship within 6 months if they lost the primary earner according to LIMRA research. Life insurance prevents a harsh downgrade in living standards when a family transitions to a single income.
Paying Off Debts to Prevent Inheritance
Canadians use life insurance proceeds to settle debts, preventing survivors from inheriting obligations that may overwhelm them.
- Covers mortgages, credit cards, personal loans, student loans.
- Prevents selling assets like homes to cover inherited debts.
- Settlement of debts provides a fresh financial start.
Canadian household debt climbed to $2.01 trillion in 2022. Without life insurance, your surviving family may inherit debt obligations like mortgages, student loans, or credit cards they cannot afford. This risks their assets, as lenders call loans. Your payout prevents debt inheritance, so your family starts fresh.
For example, if you die with a $300,000 remaining mortgage balance, your spouse cannot comfortably manage the increased payments alone. Your payout covers the outstanding mortgage debt directly, so your partner keeps your home.
Covering Final Expenses
Funerals and end-of-life costs in Canada average between $6,000 and $10,000 according to funeral industry data. Many Canadian families cannot readily absorb these sudden costs. Few families budget for unexpected final expenses, but they arise at the worst possible time, emotionally and financially.
- Life insurance provides funds directly to beneficiaries, unlike mortgage insurance paid to lenders.
- Payouts prevent survivors from bearing sudden funeral costs.
- Beneficiaries can focus on grieving without financial burden.
Funding Educational Expenses
Life insurance enables Canadians to ensure their death benefits support their children’s or grandchildren’s education.
- Tax-advantaged savings vehicles like permanent life insurance allow Canadians to grow education funds for beneficiaries.
- If parents pass away before fully funding education, payouts fill the gap.
- Prevents student loan dependence.
Supporting Dependents
Over 1 in 5 Canadian seniors depend primarily on family for financial support, according to Statistics Canada. Life insurance ensures continuity of care for aging parents, special needs children, or other dependent relatives if the caregiver dies.
- Income replacement helps cover caregiving gaps by allowing paid assistance.
- Special needs children can lose governmental financial support when their parents pass away. Life insurance helps retain support.
- Dependent elders avoid being forced into inadequate or abusive care situations when caregivers pass away unexpectedly.
Funding Charitable Causes
Canadians can designate charities as life insurance beneficiaries. This provides significant donations exceeding what one may have donated when alive.
- Perfect for Canadians passionate about a cause but unable to afford large lifetime donations.
- Enables Canadians to support causes like medical research, social services, conservation efforts, and more.
- Charities benefit from new revenue streams during challenging fundraising conditions.
Types of Life Insurance Policies in Canada
There are two primary categories of life insurance in Canada – term and permanent. Each serves different needs.
Term Life Insurance
With term insurance, Canadians pay affordable premiums for a death benefit over a set term, usually ranging from 10 to 30 years. The policy only pays out if the insured dies within the term.
Term life insurance is best for temporary needs like mortgages, getting children through school, or replacing income until retirement. It is substantially more affordable than permanent insurance.
| Duration | Monthly Premium Estimate |
|---|---|
| 10 years | $25 (age 30 female) |
| 20 years | $32 (age 30 male) |
| 30 years | $43 (age 30 male) |
Consider a 20-year renewable term policy for needs like replacing income until age 55 and paying off a mortgage. Renewable policies allow extending coverage after the term expires.
73% of life insurance purchases in Canada are term policies according to CLHIA data. This makes sense given term’s affordability and suitability for common temporary needs like mortgages and child-rearing.
Permanent Life Insurance
Permanent life insurance provides lifelong coverage with premiums that remain fixed until death instead of expiring. It’s mainly used for estate planning, business needs, and maximizing wealth for Canadians requiring lifelong protection.
There are three main types of permanent life insurance policies:
Whole Life
- Whole Life Insurance offers guaranteed death benefits and level premiums that never increase.
- Builds cash value the policyholder can borrow against.
- Cash value grows at a fixed rate determined by the insurance company.
Universal Life
- Universal life insurance provides adjustable death benefits and flexible premium payments that can alter over time.
- Cash value grows tax-deferred based on interest rates and investments.
- Cash value is more liquid and can be invested in equities for growth.
Variable Life
- Premiums are invested in equity sub-accounts chosen by the policyholder to allow cash value growth tied to markets.
- Provides the potential for greater gains than whole or universal life, but also greater risk.
| Policy Type | Monthly Premium Estimate |
|---|---|
| Whole Life | $100 (age 30 male) |
| Universal Life | $150 (age 30 male) |
Permanent policies last forever and cost significantly more than term insurance, so they are more beneficial for high-net-worth Canadians who’ve maximized registered saving accounts.
How Much Life Insurance Coverage Do Canadians Need?
These factors help determine the right life insurance coverage amount:
Debts Owed
Include the payout amount needed to cover mortgages, loans, lines of credit, and other sizeable debts that survivors could inherit. Avoid burdening family with debts using life insurance proceeds to pay them off.
Number of Dependents
The more dependents relying on the insured Canadian’s income, the higher the amount of life insurance needed. Consider all direct and indirect dependents and factor in their ages and needs. For example, minor children require more years of support than adult children. Aging parents may depend on caregiving and financial help.
Income Replacement Timeline
Consider when dependents will no longer need income replacement. For example, a 30-year term policy can provide income replacement until retirement at age 65. If you pass earlier, proceeds support dependents until they can support themselves.
Assets and Savings
Life insurance needs decrease if you have sufficient assets and savings to support dependents. Include home equity, retirement accounts, investments, inheritance prospects, and emergency funds when calculating your net coverage needs.
Future Financial Goals and Expenses
Look ahead at upcoming expenses like a child’s college education, weddings, or vehicle purchases. Factor in key financial goals that life insurance proceeds can help fund if you’re not around. This ensures dependents aren’t forced to abandon financial plans and goals.
The Amount of Life Insurance Canadians Have
According to data from CLHIA and LIMRA:
- The average policy payout in Canada is $458,000 per insured household.
- Canadians aged 35-54 have the highest average coverage ($536,000).
- Young adults aged 18-34 have average coverage of $160,000.
- Over 65s have average coverage of $163,000.
- Most say their current coverage is inadequate. Just 15% of Canadians say they are adequately insured.
Canadians are likely underinsured, according to insurance experts, given rising household debt levels and the high costs of housing, child-rearing, and education.
Source : https://www.policyme.com/blog/canadian-life-insurance-statistics
Calculating the Right Amount
As a rule of thumb, multiply your gross annual income by 10-15x if you have dependents. So, a breadwinner earning $100,000 could purchase $1 million to $1.5 million in coverage.
For more precise estimates, consult a certified financial planner. They can run detailed needs analyses to ensure the optimal amount. Advisors consider your specific obligations, goals, and net worth.
An easy online life insurance calculator can also provide a starting figure that you can refine with an advisor’s guidance.
Obtaining Life Insurance Coverage in Canada
Here is the typical process for purchasing life insurance coverage in Canada:
Comparing Quotes From Insurers
The first step is getting quotes from top insurers. Comparing quotes helps find the best-priced options given your age, health, lifestyle, and needs. Quickly compare rates online through quote aggregators like PolicyMe.
Focus your search on insurers like Manulife, Sunlife, and Canada Life, which are highly rated by third parties like AM Best. Ensure the company you choose is licensed nationally and has strong financial standing.
Consulting An Independent Insurance Advisor
An independent advisor provides unbiased guidance and insights on products and providers. They run needs analyses to ensure ideal coverage amounts and types. Advisors simplify the buying process and help finalize applications.
Seek advisors who put client interests first, not commissions. Connect with an advisor through a direct platform like Insurance Direct Canada rather than banks or multi-level channels with less transparency.
Locking In Your Rate While Young and Healthy
Premiums rise significantly as you age. By getting insured while young, healthy, and active you lock in lower premiums over the long-term. Waiting shortchanges your savings and increases risk of disqualification if health declines.
Completing the Insurer’s Application Process
The final steps are completing the insurer’s application forms, answering their health questions, and undergoing a medical exam if required. This determines your eligibility, rates, and terms.
Simplified “guaranteed issue” policies with limited face values have less stringent underwriting requirements. But higher coverage amounts involve full underwriting.
Activating Your Policy
Make recurring premium payments on time to keep your policy active. Review beneficiaries, coverage amounts, and terms regularly and adjust to life changes where necessary. Contact your advisor for ongoing policy management guidance.
Who Might Not Require Life Insurance in Canada?
While invaluable for most, life insurance isn’t essential in certain scenarios:
Single-working Canadians with No Dependents
If you’re single with no financial dependents or co-signed debt obligations, life insurance is a lower priority. Your immediate priority is likely boosting savings and investments to build your wealth sustainably. Revisit life insurance when you have dependents or a partner relying on your income.
Dual-Income Households With Substantial Assets and No Debt
If you’re part of a dual-earning household with ample savings, minimal debts, and sustainable wealth-building plans, life insurance is potentially less necessary. Assess your joint net worth and ability to live comfortably on a single income before opting out.
Retirees Who’ve Paid Off Debts and Boosted Savings
Once retired, if you have sufficient pension/retirement income and net worth to cover your living costs and have paid off debts, insurance needs decrease. But consider final expenses so dependents aren’t burdened.
Very High Net Worth Canadians Who Can Self-Insure
Extremely wealthy Canadians with vast assets and incomes can potentially self-insure by using their assets to generate ongoing income for dependents if needed. However, insurance may still assist with estate planning and asset protection strategies.
While these groups may have reduced needs, permanent life insurance can assist even the wealthy with tax planning, wealth transfers, and business continuity.
What Factors Impact Life Insurance Costs in Canada?
The main factors impacting life insurance premiums include:
Age
Age significantly impacts life insurance costs since life expectancy and mortality rates increase with age. A 20-year-old may pay under $20 monthly for $500,000 coverage. By age 60, that coverage costs $200+ monthly.
Gender
Insurance is risk-based and weighted by actuarial mortality data. Women statistically have higher life expectancies. A 30-year-old woman often pays ~25% less than a man of the same age for identical coverage.
Health and Family Health History
Insurers ask extensive questions about personal and family medical history and require a paramed exam for sizeable policies. Issues like high cholesterol, cancer, heart disease, or stroke in your history can increase premiums substantially or lead to declined applications. Better health equates to lower risk and, thus, lower rates.
Lifestyle
Hazardous hobbies, cigarette smoking, heavy drinking, drug use, or high-risk occupations like aviation or drilling can increase premium costs or prevent qualification depending on severity. Insurers charge more for riskier lifestyles.
Coverage Type
Term life insurance is significantly cheaper than permanent insurance for equivalent amounts of coverage, given its limited policy terms of 10-30 years. Whole and universal life premiums are pricier due to lifelong coverage and cash value accumulation.
Coverage Amount
A $250,000 policy costs about half as much as a $500,000 policy. The higher the death benefit, the more risk is assumed by the insurer, so higher coverage amounts have higher premiums.
Alternatives to Traditional Life Insurance
While life insurance is recommended for most families, some alternatives exist:
Self-insuring
If you have substantial assets or savings generating strong investment income, you may be able to self-insure by setting aside funds to support dependents if you pass. This avoids paying for coverage but is only feasible for high-net-worth Canadians.
Insuring Specific Assets Like a Mortgage
Rather than insure your entire income, you may be able to purchase smaller policies tied to specific debts. Mortgage life insurance through a lender is one example. This costs less but also provides less flexibility to beneficiaries.
Working and Saving Aggressively
If you pass prematurely, even large savings likely won’t replace lifetime earning potential. However, systematically maximizing RRSP/TFSA contributions and saving for emergencies can help reduce the required life insurance coverage amount.
Relying on Employer Group Life Insurance
Many benefits packages include group life insurance at 1-2x annual salary. This can supplement individually purchased policies but is rarely adequate on its own. The coverage also ends when you leave your job.
Why Canadians Should Speak to an Advisor About Life Insurance
Purchasing adequate life insurance is complex. Canadians benefit from unbiased guidance from an advisor who can assess needs, recommend optimal policies, review the suitability of quotes, and help finalize applications.
Advisors also provide ongoing support like policy reviews when life circumstances change, assistance with claims and payouts, and ensuring your family understands your policy’s purpose.
An advisor takes the burden of assessing complex products off consumers’ shoulders. Their insights often lead to more suitable coverage at lower costs while avoiding unnecessary policies. They help ensure life insurance achieves its purpose of providing long-term financial stability.
Conclusion
The answer to the question of why you should have life insurance is different for everyone but for most it is simply a loving thing to provide certainty for your family going forward that their financial needs will be covered. Life insurance plays a vital role in securing Canadians’ financial futures in the event of premature death. While not mandatory, coverage is strongly recommended for families with dependents, mortgage holders, business owners, and other Canadians relying upon continued income streams.
The right life insurance product, coverage amount, and insurer depend upon individual circumstances like age, net worth, and beneficiaries’ needs. Working with a licensed advisor simplifies the process so Canadians can protect what matters most. Life insurance provides lasting peace of mind and stability to families when they need it most. Visit us at Insurance Direct Canada and get a few quotes to see how much you can purchase for a small amount of money.
Frequently Asked Questions
When should I get life insurance?
Ideally, you should get life insurance as soon as you have financial dependents or debts to cover. Your rates will be lowest when you’re young and healthy. Waiting can increase your costs and health risks that may prevent qualification. If you already have dependents, act now.
Is life insurance worth it if I have savings?
Even with substantial savings, life insurance can still be worth it. The death benefit can allow your family time to grieve and adjust to the loss of income without immediately tapping savings they depend on for retirement. An advisor can determine if a smaller policy to supplement savings is recommended.
When is getting life insurance mandatory?
The only time purchasing life insurance could be considered mandatory is if it is required by a legal agreement. For example, as part of a divorce settlement, the judge may require a parent to buy life insurance for minor children. Or business partners may sign a buy-sell agreement mandating life insurance to fund exits.
What happens if I stop paying life insurance premiums?
If you stop paying premiums, your life insurance company will send notices reminding you to pay. If nonpayment continues, they will eventually terminate your policy. Any built-up cash value may be returned minus applicable fees. Make sure to pay premiums on time to maintain coverage.
