The Complete Guide to Life Insurance

Life insurance is essential if you have children, regardless of how young or old they are when you purchase the insurance.

Your life insurance benefits can be used to pay for a wide variety of expenses your children may have upon your death, including:

• Daily living expenses
• Educational expenses, including college expenses
• Costs of additional necessary childcare your partner may have in your absence
• Costs of counseling and other mental health care your children may require
• Setting up trust or savings accounts for future expenses

If you pay child support to your children’s other parent, you may be required to maintain a health insurance policy to secure your child support obligation.

The overall cost of raising a child in Canada is growing exponentially and if you have kids, you already know this. If you don't have children as yet and are curious about what your kiddos are going to run you, this is a must read.

Everyone’s life situation is different, and some households are single-income by choice or by necessity.

Whether your spouse is a stay-at-home parent, is in school, or may be physically unable to work, getting life insurance on yourself is essential to helping your spouse avoid a potential financial catastrophe in the event of your death.

The money from your life insurance policy can be used to pay your final expenses, pay off your mortgage, and keep your spouse able to pay the bills until they can find another source of income.

For many people, buying a home is the biggest investment - and biggest debt - they’ll make in their adult lives.

Even if you know your spouse will be able to cover the monthly mortgage payments following your death, having life insurance that will allow them to pay off even part of the mortgage can be a huge blessing in a stressful time.  Mortgage life insurance is an option many consider as well. Rather then the lump sum being issued to your beneficiary, the insurance company would pay out the balance of your mortgage directly to the lender.

When a person dies, their debts don’t just disappear. Instead, that person’s estate - or their family members, depending on the situation - is expected to repay those debts.

If you have any significant debt from student loans, consumer debt, real estate, or medical expenses, your life insurance payouts can help your loved ones cover these expenses without them having to worry too much about making ends meet.

Funeral costs and final expenses can add up quickly. A February 2020 report by the CBC estimated an average burial in Canada costs between $5,000 and $10,000. At the time this article was updated in March of 2022, those average numbers jumped to a whopping average of $5000 and $50,000. Those fees can easily skyrocket depending on the extravagance of the coffin, obituary notice, amount of flowers purchased, viewings, location of the wake or reception, burial, food and beverages.

There are alternatives however to the traditional funeral method mentioned above and although costs are still involved, this article is an excellent resource for some different burial options.

If you don’t have savings or other assets that your loved ones could sell to cover these costs, life insurance can help them pay for your final expenses. This provides them with a sense of peace and security in an already stressful time.

Term life insurance is insurance you purchase to cover you in the event of your death within a certain number of years, or term.

If you purchase a 25-year term life insurance policy at 35 years old, for example, your family will only receive the life insurance benefits if you die before you turn 60 years old.

These types of policies are designed to cover your family during years where an unexpected death could be the most financially disruptive, such as when your children are still young or before your mortgage is paid off. 

Because they only cover you during a period of time where a death is statistically less likely, premiums on term life insurance policies tend to be lower, making them more attractive to cash-strapped young people.

However, when you purchase term life insurance, you run the risk that you’ll spend years paying premiums and you’ll outlive the policy’s term. In this case, the insurance company doesn’t have to pay out a dime on your policy, making everything feel like a waste. We recommend these shopping tips for securing the best term life policy.

Whole life insurance is, essentially, the opposite of term life insurance. You purchase coverage at any age, and your family receives the benefits that you purchased regardless of when you die.

Your premiums on a whole life insurance policy will vary based on how much coverage you choose, the age you are when you buy the policy, and whether or not you have any preexisting conditions. In other words, it is much less expensive to purchase whole life insurance when you’re younger and healthier.

Limited pay whole life insurance is a whole life insurance policy where, at the beginning of the policy, the policyholder chooses to pay the premiums in the short-term to still receive benefits later in life.

Rather than paying the lower premiums on a whole life insurance policy over the course of 50 years, for example, a limited pay whole life insurance policy allows you to pay those premiums for 10 or 15 years, but still know that your family will receive your benefits upon your death.

In many cases, a limited pay whole life insurance policy is chosen by someone who purchases coverage later in life. People who want to be able to have more cash value in their policy more quickly often choose this option to help them build that cash value.

For the most part, limited pay whole life insurance policies are more beneficial to older policyholders and less beneficial to those who purchase their policies when they’re younger.

Universal life insurance is similar to whole life insurance, but it offers the policyholder more flexibility. With this flexibility does come some more uncertainty, however.

Here are some of the features of universal life insurance:

• Your traditional death benefits have an added money market investment of funds, and the rate of return on this investment is set by the market.
• Your annual premiums and death benefit payouts can vary based on a variety of factors, including how you choose to pay premiums, how the market performs, and how the insurer calculates the death benefit.
• You pay premiums at a rate you choose, which influences your death benefits and their value.
• You can increase your death benefits by making bigger premium payments and proving that you are in good health.
• You can pay extra to accumulate cash value in your policy, especially if the investment portion of your policy does better than the minimum you owe each year.
• You get to choose how your death benefits are calculated, either choosing a set benefit or increasing your death benefit as you pay more.

If you want the ability to adjust how much you pay depending on your life circumstances and are confident you can keep track of your policy and adjust your payments to match, a universal life insurance policy may be beneficial.

A term-to-100 life insurance policy operates in a similar manner to a traditional term life insurance policy, but it offers level premiums until you reach 100 years old.

While most term life insurance policies are only available for 10, 15, 20, 25, or 30 years, a term-to-100 policy gives you coverage until you’re 100 years old. This makes this type of coverage great for those who want the affordable premiums of term life insurance policies but who anticipate that they will outlive a traditional term policy.

Mortgage protection insurance isn’t technically a type of life insurance, but it is a type of coverage you can purchase with benefits that kick in after the death of the policyholder.

This type of coverage is not intended to replace a life insurance policy, but will pay off any remaining balance on your mortgage.

The amount of benefits that will be paid out changes as your mortgage balance decreases, and the money is paid directly to your mortgage provider instead of going to your family.

For those on a true budget and who do not have any beneficiaries they need to take care of in the event of their death, funeral expense life insurance coverage may fit the bill.

This coverage isn’t technically life insurance, but it is coverage that is designed to pay out for funeral expenses after you die.

In most cases, the benefits received through funeral expense life insurance tend to be lower than traditional life insurance coverage, ranging from an average of $5,000 to $25,000.

Many insurance companies offer customization options to policyholders so they can better meet their needs. The most common way insurers offer this customizable coverage is through riders.

The types and coverage available in riders depends on the individual insurer, but these extra policies typically cost extra on the insurance premium and provide additional coverage.

Some common riders available include:

• Accidental Death Benefit Rider: This rider provides additional coverage in the event that the policyholder’s death is accidental.
• Waiver of Premium Rider: This relieves the policyholder from making premium payments if the insured becomes disabled and unable to work.
• Disability Income Rider: This rider pays a monthly income if the policyholder becomes unable to work for several months or longer as the result of a serious illness or injury.
• Child Rider: A child rider extends life insurance coverage to a dependent child of the policyholder in the event that child dies prior to reaching adulthood.
• Accelerated Death Benefit Rider: If the policyholder is diagnosed with a terminal illness, this rider allows the insured to collect a portion or all of the death benefit.
• Long-Term Care Rider: This type of accelerated death benefit can be used to pay for nursing home, assisted living, or in-home care if the insured requires help with activities of daily living such as bathing and eating.
• Guaranteed Insurability Rider: This rider allows the policyholder to purchase additional insurance at a later date without a medical review.

One of the biggest differences between whole and term life insurance is in the length of time you receive coverage.

With term life insurance, your family only receives the benefits if you die within the term limits of your policy. Common term life policies are 10, 15, 20, 25, 30, and 35 years. 

If you outlive the term of your policy, you forfeit the benefits.

Whole life insurance, on the other hand, means that you are covered as long as you continue to pay the premiums and that your policy remains in force. This allows you the peace of mind knowing your family will be covered regardless of how long you live.

Another characteristic that differentiates whole and term life insurance is the cost of the premiums.

A term life policy tends to carry much lower premiums than a whole life policy. This makes term policies attractive to younger consumers who may not have a lot of disposable income, but who also want to protect their families in the event that something should happen to them.

Term life policies also are less expensive because their benefits are only available for a certain number of years, and insurers bank on paying out fewer policies so they can keep the premiums lower.

Purchasing a term life insurance policy doesn’t require you to make as long-term a commitment as you do when purchasing a whole life insurance policy.

Term policies allow you more flexibility to cancel your policy, giving you the option to stop coverage altogether or purchase coverage from another insurer if you find a better deal.

A whole life insurance policy accrues cash value over time. This increasing cash value allows policyholders to count their policies as assets and, in some cases, borrow money against their life insurance policies.

Term life insurance policies, on the other hand, are purely insurance policies. They do not include investments or the accrual of cash value.

Some people recommend a simple formula for determining your coverage amount, such as multiplying your annual income by four. However, this is not enough coverage for most people.

Assume, for example, that Bob makes $50,000 per year. Multiplying his annual income by four gives you $200,000.

While $200,000 may be sufficient if Bob is near retirement age, has grown children, and has his home paid off, it won’t be nearly enough if Bob is in his 30s, still a few decades away from retirement, has children in elementary school, and is just three years into a 30-year mortgage.

The closest method you can use to approximate how much coverage you’ll need is to multiply your current annual income by the number of years you have left before you anticipate retiring.

In the example above, if Bob is 55 and makes $50,000, he would multiply that $50,000 by 10, the number of years before his intended retirement at age 65. That means Bob needs to purchase $500,000 worth of life insurance coverage.

If Bob is 35, however, he multiplies that $50,000 by 30, giving him $1.5 million in coverage. 

This number can be adjusted up or down based on individual life circumstances. If Bob has a large amount of debt that needs to be paid, he should increase his coverage. If Bob’s children are older and won’t need provisions such as college expenses, he can adjust that dollar amount downward and purchase less coverage.

When calculating the dollar amount of coverage you may need, don’t forget to factor in things such as the cost of a funeral.

Another thing to consider when determining how much life insurance you need is to think about how long you will need the insurance.

For many consumers, they purchase life insurance in order to take care of their children before they reach adulthood, or to help pay off their home’s mortgage so their spouse has a decreased financial burden.

It may seem tempting to purchase one policy that’s in effect for the rest of your life, but this may be an unnecessary expense depending on your reasons for purchasing life insurance.

If your main goal is to protect your children while they’re young, or to pay off your home if you still owe a mortgage, the most cost-effective option may be to purchase term insurance that lasts until those milestones are achieved. 

For someone who has young children, for example, this could mean purchasing a 20- or 25-year term policy that gets their children out of college and off into the working world. If you’re wanting to ensure that your mortgage can be paid off should you die, consider a term policy that terminates as close as possible to the termination date of your mortgage.

However, something to consider in these calculations is that your expenses and debts may increase as you get older, meaning you may need more life insurance. A spouse or child with expensive medical needs, home improvement projects, student loans, or other expensive circumstances can increase the financial burden your family may have to bear if you die later in life.

And, in these circumstances, many people find it more expensive to purchase another life insurance policy to replace their existing term insurance past the age of 60, for example.

For these reasons, many consumers elect to take on the long-term premiums that come with whole life insurance for the peace of mind that their family will be covered in the event that their expenses increase.

When it comes to purchasing insurance and deciding how long you’ll need coverage, there is no one-size-fits-all answer. You need to consider all the contributing factors and make the determination based on your best projections for the direction of your life.

While you may not think you need life insurance right now, your life circumstances can change in a flash.

Marriage, divorce, children, changing jobs, and buying a home all can go from a distant thought to reality in a matter of months, even if last year you didn’t even have them on your radar.

Understanding life insurance, and why you may need to purchase a policy, is key to being able to quickly make the leap when it becomes a necessity.

All insurance is a contract between you, the policyholder, and your insurer. This means there are requirements both you and your insurer have to meet in order to keep that contract in place.

Be sure to carefully read over all the terms and conditions of any life insurance policy you’re considering before purchasing.

Life insurance is more than just a nice thing to have in case of an emergency; it’s a way that salespeople make money.

And because there is money to be made off the life insurance industry, there are people who look for ways to make money without providing the service they promise during their sales pitch.

Before you purchase life insurance, be sure to do your research on the company you’re buying from, the terms of the insurance, and anything else that feels relevant. Remember: If something feels off in a sales pitch, trust your gut. It’s much better to be safe and pass up an opportunity than to be sorry down the road! Also, be sure to read their reviews.

Many insurance salespeople will tout the investment opportunities and cash value accrual that comes with purchasing a whole life policy. However, chances are that the returns these salespeople quote you are extremely optimistic guesses, and your actual returns will be much less than those quoted.

For many consumers, whole life insurance is not the best way to utilize money in the hopes of getting a return on their investment.

Carefully consider all your options, weigh the risks and benefits, and compare costs before deciding what type of policy to purchase.

Just as with many industries, myths about the life insurance industry are everywhere, and many of them are wrong.

Don’t trust that a salesperson telling you you need to have a whole life policy worth 10 times your annual income has the answer that will be perfect for your situation.

Do your research, take time to compare your options, and make a choice that’s going to fit your needs the closest.

There are a wide variety of life insurance providers available. Take some time to research different companies, what they offer, and how much their coverage costs before selecting your final carrier.

Once you have selected a health insurance carrier, you will fill out an application for coverage. This application may ask you for information such as your health history, lifestyle habits, and annual income.

Be sure to be truthful when answering these questions, as your answers determine your eligibility for coverage and the premiums you will pay.

Some policies require that you undergo a physical exam to receive coverage. This exam may include:

• Your personal and family medical history
• Your lifestyle habits, including drinking, smoking, exercise, and diet
• Checking your vitals
• Collecting blood or urine samples
• Performing additional testing

The results of this exam may mean you won’t be approved for coverage, if you are deemed too much of a risk. Most often, though, the physical exam is used to determine how much you will be charged in premiums.

Some factors that can impact whether or not you receive coverage, and how much you pay in premiums, include:

• Pre-existing conditions, such as cancer or heart disease
• A major heart attack
• A high-risk occupation, such as military service
• Dangerous habits, such as frequent skydiving or bungee jumping
• Lying on your application

The better your health, the lower your premiums are likely to be.

Once you have been approved for coverage and have chosen your policy, you begin paying your premiums.

Depending on the options you choose, you may be able to pay your premiums monthly, quarterly, or annually. There often is a direct withdrawal option for payment, so you don’t have to even think about making sure your premiums get paid.