How does life insurance work?
If sorting out a life insurance policy is something you haven’t yet ticked off your to-do list, we understand why you might procrastinate: It can be a bit of downer to think about, and the choices can be overwhelming when you don’t know quite how life insurance works or what level of coverage you need.
But if you have any dependents—spouse, children or anyone else you help support—it’s one of the smartest things you can do to ensure they’re cared for after you’re gone. So, how does life insurance work? Read on for everything you need to know to get started. (Learn how you can use life insurance to leave your family an inheritance.)
What does life insurance cover?
Life insurance pays out upon the policy holder’s death, but there are some exceptions, such as death by suicide and risky behaviours such as sky diving. The type of life insurance policy you choose is up to you. There’s a vast range of policies available, and it really comes down to what kinds of expenses you need to cover in the event of your death. The main things to think about when considering a policy are: any outstanding debts (including loans, joint credit card balances and lines of credit); mortgage; childcare costs; education fees; ongoing bills and day-to-day expenses; and funeral and burial costs.
Once you’ve purchased a policy, you’ll pay monthly premiums until either your policy expires or you pass. When you die, your beneficiaries will receive the predetermined non-taxable lump sum specified in your policy. There are benefits and drawbacks to all the different types of life insurance; which one is right for you depends on what stage of life you’re at, the level of coverage you need and how much you’re able to put toward your premiums.
What are the different types of life insurance in Canada?
There are two main types of life insurance in Canada: Term and permanent. Term life insurance covers you for a finite period of time, which means you get coverage for a set number of years (say, five, 10 or 20) or until you reach a certain age (50, for example). It’s typically purchased to cover temporary financial needs, such as debt repayment, mortgage protection or education fees for your children.
“Term insurance is a great solution for Canadians during their working years, but also for key moments in a person’s life, such as when they get married, start a family or buy a home,” says Rob Hollingsworth, head of distribution, individual insurance at Manulife. (Here’s an explanation of exactly how term life insurance works.)
Permanent life insurance is a policy that you maintain for the rest of your life (unless you cancel the policy). It’s usually bought for estate-planning purposes—that is, leaving a lump sum to your beneficiaries. The other key differences are that your premiums typically don’t increase and most permanent policies accrue some cash value. There are three subtypes of permanent life insurance: whole life, universal life and term-to-100.