What’s life insurance?
Life insurance can help protect your loved ones by providing them with a payment when you die. There are different types of life insurance policies and different ways they can fit into your financial plan.
What does life insurance cover?
Your life insurance policy will give your beneficiaries a one-time, lump-sum, tax-free payment when you die. This payment is called a death benefit.
How do I designate a beneficiary?
When you buy life insurance, you’ll be asked to choose someone to receive the death benefit. This is your beneficiary, or beneficiaries if you choose to designate more than 1 person. People usually choose a family member, such as their child or spouse, but you can designate anyone ‒ even a business partner, trust or charitable organization.
In some provinces, children under 18 can’t receive control over money left to them in an insurance policy. This means if you choose a child as your beneficiary, you’ll also have to choose someone to act as trustee on their behalf until they’re 18.
If you don’t designate a beneficiary, your money will go to your estate and may be subject to estate administration tax. It will also be available to any creditors of your estate.
How will my beneficiary get their death benefit?
When you die, your death benefit won’t be automatically paid. First, your beneficiary must file a claim with your insurer to let them know you’ve passed away.
Your beneficiary will likely be asked for the following:
- A completed claim form
- A copy of the death certificate
- Your policy number or other documents, like a copy of the policy itself (For individual policies)
How much does life insurance cost?
No matter the type of life insurance you choose, you’ll pay for the coverage. This cost is known as a premium.
The premium amount is based on several factors, including:
- Your age and sex
- The amount of coverage you’re buying
- The type of life insurance you’re buying – term life insurance is usually less expensive than permanent life insurance
- Your health history and your family’s health history – chronic diseases and some lifestyle choices (like smoking) can increase the cost
- Your occupation – if your job is dangerous, your premiums may be higher
How much life insurance do I need?
Financial experts often say you’ll need between 5 to 10 times your yearly income in life insurance coverage. But this is just a starting point. You might want more or less coverage depending on the debt and savings you have.
When deciding how much life insurance you need, you’ll also want to think about:
- Big expenses you want to provide for like school or weddings
- How much would be required to replace your income
- Debts you want to repay, like a mortgage or credit cards
- Other income or savings your family will be able to rely on
- Payments from other insurance policies, like accident or other life insurance you may have through your job, loans or mortgage
Who should get life insurance?
When it comes to life insurance, there isn’t a one-size-fits-all solution. Your insurance needs will change as your finances and responsibilities change.
Young and single – At this life stage, your life insurance needs might be lowerare low, but it can be a good idea to get coverage now, while you’re young and healthy, given that these rates will be lower than if you were fiver years older or unhealthier. to lock in lower premium rates.
Married or common-law – This is a good time to review your coverage. You and your partner should each have enough coverage so that should one of you die prematurely, the other will have help financially.
Parent – When you become a parent, your insurance needs will likely go up. Now, you have to consider how your family would pay for their daily living expenses as well as bigger expenses, like going to college or university, without your income.
Empty nester and beyond – your insurance needs could lower once you’ve repaid your biggest debts, like your mortgage, and your children are no longer financially dependent on you. You may want to have enough coverage to pay for your funeral costs, support a surviving partner or even to leave a gift to a charity, children or grandchildren.
What types of life insurance are there?
There are two categories of life insurance – term life insurance and permanent life insurance.
Term life insurance is temporary coverage that you buy for a specific period., anywhere from 5five to 50 years. It’s affordable coverage, used to offset the risk of leaving behind large, unpaid expenses. For example, paying the mortgage for your family home or paying for your kids’ post-secondary tuition.
Your beneficiaries receive a payment should you die within the term you choose for your life insurance. At the end of the term, you can choose to:
- Renew it
- Convert to permanent insurance
- Let it expire lapse if you don’t need the added protection anymore
Permanent life insurance is guaranteed lifelong coverage. Unlike with term life insurance, a permanent life insurance policy can build value over time. These savings are referred to as the cash value of your policy. You can access money in your policy while you’re alive (with certain tax implications). When you die, your beneficiaries receive a tax-free payment.
There are 2 types of permanent insurance – participating life insurance and universal life insurance.
It’s called participating life insurance because the premiums you pay for your coverage, along with premiums from other participating life insurance policyowners, go into a participating account. The insurance company’s professional investment team manages this account, investing to increase its value. It’s from this account that your death benefit and any potential dividends are paid.
Universal life insurance also offers lifelong coverage as long as you pay your premium. It offers some additional flexibility. This kind of insurance typically lets you to select your preferred premium schedule, the amount you want to pay (within limits) and an investment mix that matches your unique risk profile.
Should I get life insurance through work?
If you’re part of a group benefits plan, you might already have some life insurance coverage. Coverage that’s part of a group benefits plan is usually pre-approved – meaning you can get it without submitting your medical records or completing a medical exam. Another perk is that your employer may pay part or all your premiums as part of your compensation for your job.
An important thing to keep in mind when getting your life insurance this way, is that you may lose it when you’re no longer a part of the group plan. This could happen because you find a new job, retire or your employer closes their business.
Basic life insurance offered through your work is often tied to a multiple of your salary. Some employers offer the ability to apply for additional optional insurance.
In situations where this isn’t available, Canada Life’s portable life insurance available to members of some of our group plans, may be a great alternative. It’s optional insurance that’s available to plan members at group rates. Members can keep their coverage until age 85, even if they leave their group plan.
What’s a life insurance rider?
Similar to how you can upgrade a base-model car with extra features, sometimes you can upgrade your life insurance policy by buying riders. Riders are extra features you can buy for your policy. There are many types of riders to help you customize your policy for your unique needs.
The riders available to you will depend on the type of life insurance you’re buying and the options your insurer offers.
Does life insurance have tax advantages?
While the main benefit of life insurance is to protect what you care about, it also has tax advantages. The key tax advantage is that your designated beneficiary won’t be taxed on the death benefit they receive. This leaves them with more money to help them cope when you die.
A secondary tax advantage is that money held in a permanent life insurance policy is tax sheltered, which means it can grow tax-free as long as it stays within the limits set out by the CRA. But, it’s important to keep in mind that there are limits to how much you can put in this account before you exceed set funding limits.. Also, cash withdrawals from your policy may be taxed as well. Be sure to speak with an accountant or advisor about your specific situation.