As you check out Canadian life insurance rates, you will come across a variety of options such as term, whole life, and universal life. These describe types of policies. Today we will focus on the most common one: term life insurance.
First, let’s take a look at the big picture and answer the question, how does life insurance work?
How does life insurance work in Canada?
Life insurance is a contract among the person insured (the life insured), the person receiving the payout (beneficiary), the policyholder, and the life insurance company. Sometimes these people overlap. Let’s look at a couple examples.
Wendy is married to John and they have twin daughters. Wendy is the family breadwinner. John is a stay-at-home dad. John takes out a life insurance policy on Wendy so if she passes, there is money to continue to pay the bills and take care of the children while he prepares to enter the workforce. In this case, Wendy is the life insured and John is the policyholder and the beneficiary.
However, a smarter scenario would account for John as well. Housekeeping, childcare, meal prep – home tasks are labour and come at a cost when someone is not there to take care of them. An insurance broker suggests to the family that they purchase a joint-first-to-die life insurance policy. This means both Wendy and John have coverage and are the lives insured. If John passes first, Wendy is the beneficiary. If Wendy passes first, John is the beneficiary. If they pass jointly, their children or the estate (depending on how the policy is structured) are the beneficiaries. Both Wendy and John are the policyholders.
If Wendy and John had no insurance and were getting a mortgage, their bank may offer life insurance. While this has it’s time and place, know that bank-offered life insurance typically covers their lending products only and the bank, not the family, is the policyholder and the beneficiary. In some cases it is better to have a larger term policy (which is also portable, unlike a bank policy that does not transfer if you renew your mortgage elsewhere) where the benefit is large enough to cover debts and also leave funds for the rest of the policy.
What is term life insurance?
Term life insurance is a type of coverage that is tied to a specific term. Term 10 is for 10 years. Term 20 is for 20 years, etc. There is term life insurance in Canada called Term 100 insurance, however this is actually a permanent policy, as it covers a full lifespan.
Insurance is used to offset risk, for as long as the risk persist. The risk of death is only cleared by an actual death, which is why permanent insurance is the best life insurance solution. However, permanent insurance is expensive and can be difficult to obtain as you age. Term insurance is cheap, easy to get, and can be structured to convert to permanent as you progress in your career or income. Term is also used to cover risks with a known end date. For example, the years you hold a mortgage, the years you are clearing a large debt load, or the years your children are financially dependent.
What are term life insurance riders?
Riders are used to customize a policy. They are paid add-ons. Just a few rider examples include:
- Critical illness: pays the beneficiary a tax free lump sum if they become sick (does not have to be fatal) with an illness named in the policy. This is a living benefit (pays while the life insured is alive) and is very useful for severe illnesses with uncertain outcomes, or if time off work is needed for treatment and recovery.
- Return of premium: if the life insured does not pass away during a set time, the premiums paid (minus interest earned by the life insurance company) are returned to the policy holder.
- Disability: another living benefit that pays out upon the disability of the life insured. Unlike critical illness, which is a lump sum, disability is paid out weekly/bi-weekly to mimic ongoing income.
- Guaranteed insurability: allows you to purchase more coverage (during a set time period) without needing to prove your good health through a medical. As we age, it is harder to quality for term insurance. This rider can be vital for continued insurability if you develop a condition that would otherwise get your application for a new policy denied.
Where to get term life insurance quotes
As soon as you start your search for term insurance in Canada, you will be flooded with offers from agents, banks, and brokers. How do you find the term life insurance quotes you need? Don’t get overwhelmed! Here’s how to get term life insurance quotes.
- Agent: An agent sells the products of one company. If you call up Manulife, they will sell you a Manulife product.
- Broker: A broker is like a freelancer. They are licensed but do not belong to any particular company. They sell the products of any life insurance company in Canada. You tell a broker what you need, and they shop the market on your behalf, matching you with a policy that fits your risk profile and budget. Brokers are free to you. Life insurance companies compensate them for each policy they sell (commission).
- Work benefits: Many employer-sponsored plans include life insurance. Speak with a broker to see if the amount offered is enough to cover your risks. You may need a top up. And remember, if you leave the job, you need to either convert your policy to an individual one that you pay for, or you need to get a new policy. Once your work policy ends (if you leave or are fired) your benefits also end.
- Banks: Banks offer products that cover their lending products. Life insurance through a bank, more often than not, pays the bank to clear your mortgage or loan.
These describe ways to get insurance quotes, but as you search you will come across plenty of insurance jargon. InsurEye has put together a glossary of the most commonly used insurance terms in Canada. Access the glossary here.
Get term life insurance in Canada
Life insurance is never a one-size-fits all product, which is why we recommend speaking to a broker. Brokers have access to both wholesale and boutique products, in addition to the most up-to-date knowledge of the regulations, applications, and changes in the industry. A broker can help you even if you have a precondition that you think can get you rated or denied for a policy.
Don’t delay in getting the insurance you need. When you use a broker, they do all the work for you. All you must do is select from among the policies they find. Contact a broker today to get the peace of mind you deserve.
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