Life insurance highlights
- Life insurance is a contract between you and an insurance provider that protects your dependents financially in the event of your death.
- Canada has a number of different life insurance policies, including term life insurance, whole life insurance and universal life insurance. Each kind has its own function and features.
- To be fully protected financially from unexpected life events, you may also need home insurance, auto insurance, critical illness insurance and disability insurance.
Twenty-two million Canadians have life insurance, according to a 2022 report from the Canadian Life and Health Insurance Association (CLHIA). The biggest reasons why we buy life insurance? To ensure the financial security of loved ones, prepare for retirement and/or finance children’s educations, according to an April 2023 HelloSafe survey of more than 950 Canadians.
If you don’t yet have coverage, read on to learn what life insurance is, the different types of policies, how much coverage costs, and how to find the best life insurance in Canada.
- What is life insurance? How does it work?
- Do you need life insurance?
- How much life insurance do you need?
- What are the different types of life insurance? How do they compare?
- How much does life insurance cost in Canada?
- Life insurance “extras”: Some add-ons and riders to consider
- How to find the best life insurance in Canada
- Is life insurance taxable?
- When should I get life insurance?
- Why should I shop for life insurance online?
- Do I need life insurance if I already have mortgage insurance from my bank?
- Do I really need to do a health exam to get life insurance?
What is life insurance? How does it work?
You likely know the basics about life insurance. In Canada, it is a contract between you and an insurance provider. You make monthly or annual payments (called “premiums”), and in return, under specific conditions—namely, death—your family or other people you name in your insurance policy will be paid an agreed-upon amount.
The amount you pay for life insurance is based on many factors, such as how much coverage you need and the type of policy, or package, you select. Packages vary, but generally Canadians opt for enough coverage to pay for funeral expenses and any outstanding debt (think: mortgage, credit cards, car loans, etc.), as well as to replace lost income during the grieving period (if surviving loved ones miss work) and beyond (the absence of your paycheques to provide for your family members). Insurance money can also be used to pay for future expenses, like your children’s post-secondary education, or to make charitable donations.
To be clear: Life insurance isn’t for you—it’s for your dependents. It is intended to help the people you leave behind continue to live the life they are accustomed to. That includes the ability to pay the mortgage, household bills, education costs and any other debt or future expenses.
The life insurance industry offers Canadians the ability to customize their policies, so that payments and coverage fit your budget and your financial priorities for the future.
Learn more about how life insurance works, as well as how to get the best coverage for your loved ones for a price you can afford.
Do you need life insurance?
Not everyone needs life insurance: No dependents, no debt, no problem. But before you write off the idea that you need it, ask yourself these questions:
- Are you in a committed relationship?
- Do you have dependents? This could include a partner, children or even parents.
- Do you have a mortgage? How many years are left on the mortgage?
- Do you have outstanding student loans?
- Do you have outstanding debts that could fall to your family to pay after you’re gone?
- Do you want to leave money to charity?
- Do you want the ability to cash out a life insurance policy to make a big purchase in the future?
- Are your kids’ registered education savings plans (RESPs) large enough to fund their education?
- Would your family be OK without your income?
- How much money do you have saved?
If you get the sense from your answers that your loved ones would benefit from a life insurance policy payout, then it’s worth requesting a quote.
We outline the different scenarios when you should get life insurance—and when you shouldn’t—in another article: “Do I really need life insurance?”
How much life insurance do you need?
To get the best life insurance for your situation, start by deciding how much coverage you need. This amount determines not only how comfortable your family will be after you pass away, but how much you will pay for your coverage, too.
The average Canadian life insurance policy pays out $200,000, but many life insurance professionals suggest this may not be enough to cover the average person’s needs. In fact, the rule of thumb is that individuals should have coverage equivalent to roughly 10 times their annual income. The ideal amount is specific to you, your family and your lifestyle.
Here’s a simple calculation that can help you ballpark how much insurance you need. It is based on the DIME method, which stands for debt, income, mortgage and education expenses.
LIFE INSURANCE POLICY AMOUNT
=
Outstanding debt
+
(Net annual income X number of years you want to provide for family)
+
Mortgage still owing
+
Children’s education costs
A more detailed accounting of your assets (what you own) and liabilities (what you owe) can help you determine your current financial state and what you will be leaving behind to your dependents. Calculating the balance between your assets and liabilities can help you figure out whether you need life insurance, and how much coverage you need.
In your list of assets, consider including (if applicable):
- The value of your home, vehicle(s) and furnishings (resale value)
- The savings in your bank account(s)
- Your registered investments (RRSP, TFSA, RESP, FHSA)
- Non-registered investments (mutual funds, ETFs, stocks, segregated funds, real estate)
In your list of liabilities, consider including (if applicable):
- The balance on your mortgage
- Car loan(s)
- Lines of credit and credit card debt
- Funeral and estate settlement costs
For more on how much coverage you need and other things to consider when buying life insurance, see this article: How much life insurance do I need?
What are the different types of life insurance? How do they compare?
There are two major categories of life insurance in Canada: term and permanent. Within these categories, there are many different types of insurance policies:
- Term life insurance is purchased for a set period of time—say, 10, 20 or 30 years. It tends to be cheaper than permanent life insurance for most people.
- Term 100 life insurance provides coverage until you are 100 years old. These plans offer lifetime protection and a level premium (until you reach the age of 100, at which point you no longer pay premiums), so they are considered permanent policies. The difference is that they don’t build a cash value, like whole life or universal life plans.
- Whole life insurance, a common type of permanent life insurance, doesn’t expire. It covers you for your whole life, hence the name. Whole policies come with a cash value that accumulates over time.
- Universal life insurance, another form of permanent life insurance, includes an investment account, allowing policyholders to invest and accumulate wealth on a tax-deferred basis. Depending on how the investments perform, the policyholder may be able to lower their premiums for a certain period of time.
Comparing the different types of life insurance available in Canada
This table details the major differences between insurance policies, based on information from the CLHIA.
| Term | Term 100 | Whole | Universal | |
|---|---|---|---|---|
| Type of coverage | Term | Permanent | Permanent | Permanent |
| Coverage period | Based on the length of the contract (e.g., 1, 5, 10 or 20 years) | For life (no premiums paid once you turn 100) | For life (as long a premiums are paid) | For life (as long as premiums are paid) |
| Premiums | Fixed for the duration of the term; typically increases when renewed (as you get older) | Usually fixed until the age of 100, at which point you no longer have to pay premiums | Usually fixed | Amount can change over time, within certain limits |
| Death benefit | Guaranteed and remains level | Guaranteed and remains level | Guaranteed and remains level | Can change based on performance of the policy’s cash value fund |
| Cash value | Usually none | Usually none | Guaranteed in the contract and usually grows over time | Can change according to the premiums paid and the performance of investments in the cash value fund |
There are many other differences between these policies. For example, with whole, you can pay off your premiums early and still be covered. With term insurance, once you stop paying, the insurance coverage is done. Plus, you may be able to cash out a whole life policy, but that is not an option with term.
Read more about which life insurance option is best for you.
How much does life insurance cost in Canada?
Life insurance rates vary significantly. Average monthly premiums range from as low as $17 to well over $300 per month. The reason for such a wide gap? Life insurance rates are quoted based on your coverage requirements and lifestyle, and no two individuals have exactly the same needs.
Before you get a quote online or connect with a broker, it’s a good idea to have a sense of your liabilities and assets, which indicates what you’ll leave behind for your family. You should also consider what type of life insurance you need, as well as your health, lifestyle and age. These variables can help you estimate whether you will fall on the high or low end of the cost spectrum.
To give you an idea, the table below shows the average life insurance costs for a 35-year-old in good health, seeking $500,000 in coverage. The figures are based on data from Ratehub.ca, a rate comparison website. (Note, MoneySense.ca is owned by Ratehub Inc., which also owns Ratehub.ca.)
| Policy type | Average male premium | Average female premium |
|---|---|---|
| Term life insurance (10-year term) | $23 per month / $259 per year | $17 per month / $193 per year |
| Term life insurance (20-year term) | $34 per month / $375 per year | $25 per month / $280 per year |
| Term 100 insurance | $313 per month / $3,412 per year | $266 per month / $2,953 per year |
| Whole life insurance | $338 per month / $3,751 per year | $287 per month / $3,194 per year |
For a more in-depth look at the factors that will affect how much you will pay for life insurance, check out: “How much does life insurance cost in Canada?”
Life insurance “extras”: Some add-ons and riders to consider
While it may sound like an upsell, there is value in customizing your life insurance policy with “extras” that work for you.
If you’re looking for a family plan, it is important to know this type of policy is actually a basic form of insurance with modifications and riders (amendments), such as a child rider. Since it is composed of different insurance products already, you may as well get it exactly as you need it.
Maybe you are self-employed, or maybe your group benefits from your employer won’t cut it. Whether you pay for your policy or your company does, ensure that it includes short-term and/or long-term disability insurance. If you didn’t ask about it when signing your employment contract, it’s not too late to ask the HR department. Critical illness is another type of coverage to consider. It offers you a single payment if you are diagnosed with a condition or disease such as cancer, multiple sclerosis or paralysis.
How to find the best life insurance in Canada
You’ll need to prepare a few things before you buy life insurance. In addition to knowing what kind of policy you would like to buy (term or permanent) and whether you need any additional coverage or riders (children, disability and/or critical illness), think about how much you can reasonably spend on premiums each month or each year. And you should also have a good sense of how much money you need to leave to your family, loved ones or even a charity that’s important to you. You’ll be better prepared to answer the questions when asking for an insurance quote. You will also be asked health-related questions, like whether you smoke or have certain health conditions or a history of illness in your family.
Depending on whether you go through an insurance broker or an online broker, or even directly through an insurance provider, you will be given a range of quotes to choose from. (This is how brokers get paid.)
And once you are ready to apply, you will need proof of the following:
- Your driver’s licence, social insurance number, birth certificate and/or passport to prove your identity
- Your paystubs and/or letter of employment to prove your income
- Your property tax statement, mortgage bill, lease and/or letter from your landlord to prove your address
You will also need to set up automatic payment of your premiums. You will be given a life insurance policy that outlines your agreement, as well as projections for the value of the policy. You can request to receive digital and paper copies for reference.
Is life insurance taxable?
You set your loved ones (or even a charity) up as beneficiaries to make lives easier, so it makes sense to want to know if the money they will receive from your policy will be a hassle tax-wise. The good news is that most of the money received from a life insurance policy is not taxable. But you may be hanging off that word “some.” There are fees that accrue tax that will come out of the money left for them, including probate fees, estate planning fees and more. To read the full list and learn how to make receiving life insurance payouts more efficient for your beneficiaries, read the article: “Is life insurance taxable in Canada?”
When should I get life insurance?
For many Canadians, the answer could be “as soon as possible.” If you have dependents whose lifestyle would be impacted if something were to happen to you, consider getting life insurance. Many people think about the timing of life insurance in terms of getting it done before they develop any health problems. There’s something to be said for that—higher risk generally means higher premiums—but the main purpose of life insurance is to spare your loved ones from financial hardship after your death. For more scenarios when life insurance is helpful, read: “Do I really need life insurance?” and “5 reasons to buy life insurance—right now.”
Why should I shop for life insurance online?
You could get life insurance from where you bank or got your mortgage, but it’s worth shopping around for the best rates. Shopping online for the best life insurance companies allows you to compare products and rates. Take it a step further with an “aggregator” site, which pulls rates from various providers just like a broker would. It can be very easy and straightforward, depending on the website.
Do I need life insurance if I already have mortgage insurance from my bank?
Mortgage life insurance ensures that you and your dependents are able to pay off your mortgage if you die; it is considered a kind of life insurance, with the lender receiving the policy’s proceeds. But note that it isn’t the same as mortgage insurance (also called mortgage default insurance), which protects your lender in case you aren’t able to make your mortgage payments. Read: “Life insurance vs. mortgage insurance: Let’s break it down.”
Do I really need to do a health exam to get life insurance?
It’s up to you. Life insurance is available in Canada without a medical. It is worth knowing that these types of policies can cost more than those that do require one. That said, it’s worth asking about. You may find out that the medical exam isn’t as rigorous as you think. For more reading, check out “How does age affect life insurance rates?”
Frequently asked questions
A life insurance policy does not specify how the payout must be used; the policy’s beneficiary can choose how they use the money. However, the funds are commonly used to cover the deceased’s funeral costs and outstanding debts, such as a mortgage, personal loan or line of credit balance. The payout can also cover ongoing bills and day-to-day expenses, which helps dependents of the deceased maintain their standard of living.
The average Canadian life insurance policy pays out $200,000, but many life insurance professionals suggest this may not be enough to cover the average person’s needs. In fact, the rule of thumb is that individuals should have coverage equivalent to roughly 10 times their annual income. The ideal amount is specific to you, your family and your lifestyle.
Average monthly premiums for life insurance range from as low as $17 to well over $300 per month, according to data from rate comparison website Ratehub.ca. There is such a wide variety in costs because an individual’s quote is based on their coverage requirements and lifestyle, and no two individuals have exactly the same needs. The age at which you get life insurance is also likely to have a large impact on your quote.
Read more about life insurance:
- Term vs. whole life insurance: Which type of policy is best?
- How does age affect life insurance rates?
- Can you sell a life insurance policy in Canada?
- What is a beneficiary?
- What is a viatical settlement?
What does the * mean?
Affiliate (monetized) links can sometimes result in a payment to MoneySense (owned by Ratehub Inc.), which helps our website stay free to our users. If a link has an asterisk (*) or is labelled as “Featured,” it is an affiliate link. If a link is labelled as “Sponsored,” it is a paid placement, which may or may not have an affiliate link. Our editorial content will never be influenced by these links. We are committed to looking at all available products in the market. Where a product ranks in our article, and whether or not it’s included in the first place, is never driven by compensation. For more details, read our MoneySense Monetization policy.
