This is a sponsored post by PolicyMe. All views and opinions expressed represent my own.
Life insurance should be one of the many things on your mind when you are thinking about organizing your finances.
If you are a single, young adult with no kids or dependents, it’s no big deal. However, when you have dependents, life insurance can mean the world between providing your loved ones with financial security or having them suffer if you suddenly pass on.
It’s somewhat understandable when you hear that 41% of Canadian adults do not have life insurance, according to this study by PolicyMe.
In my opinion, this is not so surprising since other studies have shown that people shy away from dwelling on their own mortality, and similar trends can be seen when it comes to writing a last will and testament.
Regardless of our inherent desire to avoid morbid discussions, the recent pandemic has shown that life insurance is something to have in place early on and not wait until when it is crunch time.
What is Life Insurance?
Life insurance is a contract between you (the policyholder) and an insurance company stipulating that in exchange for premium payments, the insurer will pay your designated beneficiary a lump sum amount of money (death benefit) when you die.
The money paid to your dependents is tax-free and can be used to:
- Pay off your debt e.g. mortgage
- Help your family maintain their standard of living
- Support your kids through college
- Pay for your funeral expenses and probate fees
- Make a donation to charity
Types of Life insurance
There are two main types of life insurance in Canada: Term Life Insurance and Permanent Life Insurance.
Simply put, term life insurance provides protection for a specific period, whereas, permanent life insurance offers lifelong coverage.
Let us dig into the two types of life insurance a bit further.
Term Life Insurance
If you have a young family and have a house with 20 years left on the mortgage term, you could opt for a term life insurance with coverage for 20 years.
What this means is that for a period of 20 years, you will pay the insurance company a fixed amount of money every year. If you die within the 20-year period, they will pay your beneficiaries the benefit amount agreed to in your policy e.g. $1 million.
If you are alive after the 20 years has elapsed, no death benefits are paid out.
A term life insurance policy offers flexibility and it is generally a lot cheaper than permanent life insurance. It is also the most popular life insurance policy in Canada.
You could choose a timeline that coincides with specific milestones in your life. For example, if you have 10 years left to pay off your mortgage, a 10-year term life insurance policy could serve as a hedge to protect your family so that if something happens to you, your family is still able to pay off the mortgage.
If all is well after 10 years and the mortgage is paid off, your life insurance coverage ends and you won’t need to continue paying premiums.
Often, insurers will allow you to renew a term life insurance after it has expired; however, premiums will go up. You can also add a few options to your policy to make it more useful. For example, you may be able to add disability and critical illness insurance.
Permanent Life Insurance
Permanent life insurance policies are exactly that and offer permanent protection as long as you continue to pay your premiums.
A permanent life insurance policy is generally more expensive than term life insurance and they can be more robust and complicated. You may be able to borrow funds from your accumulated life insurance benefits while still alive or even cash out.
Two broad types of permanent life insurance policies are:
- Whole Life Insurance: This straightforward permanent life insurance offers fixed premium payments and a guaranteed cash value.
- Universal Life Insurance: This option offers some flexibility when it comes to the premiums you pay, your control over the investment in your account, and the value of the death benefit.
How to Buy Life Insurance in Canada
If you have procrastinated getting life insurance until now because of the potential costs, then you definitely do not want to pay more than you need to.
The cost of life insurance is impacted by many factors including your age, gender, health status, occupation, whether you are a smoker, and of course, the type of policy you choose.
If you are a smoker or have history of various health conditions, your premium will be higher compared to someone who is a non-smoker of similar age and gender and who has a clean bill of health.
In addition, you can save on costs by comparing rates across insurers and choosing the best offer available given your circumstances and needs.
Hint: Similar to finding the best mortgage rates, you can cut your life insurance premium by shopping around.
Here are your options for getting life insurance in Canada:
1. Buy Direct From an Insurance Company
Your bank may have an insurance division and you could purchase life insurance directly from them. It can be super-convenient to have all your financial accounts with the same financial institution and they may offer access to insurance advisors who can help you decide on type of insurance, etc.
The downside of this option is that you have nothing to compare with to determine whether you are getting the best rate for your age and health history.
2. Buy through an Agent
An insurance agent may represent one insurance company (i.e. a captive agent) or they may sell on behalf of multiple insurance companies.
While insurance agents can be expected to be licensed and knowledgeable about the products they sell, you could run into a few issues.
A captive agent is incentivized to sell products from one insurer which means you may not be seeing all the options available on the market and end up paying more.
3. Purchase Life Insurance from an Online Broker
An independent online broker provides free access to compare life insurance quotes across multiple insurers on one platform.
After you have entered your information, these online platforms show you the best rates available from top life insurance companies in your area.
The advantages of this approach are numerous and include:
- You get free access to multiple life insurance quotes without leaving the comfort of your home
- There is no pressure from sales agents to make a decision and there’s no obligation to buy a policy
- You get free advice from licensed advisors
- They offer fast approvals within days
One of the most popular online brokers in Canada is PolicyMe. They are an independent third-party broker with no affiliation with the insurance companies listed on their site.
When you choose a quote from one of the many offers available on their site, the insurance company pays them a commission and they are not incentivized to push one insurer over the other.
Also, their licensed advisors are paid a salary and thus can make impartial recommendations based on your real needs.
PolicyMe has a proprietary life insurance algorithm that will tell you whether or not you need life insurance. I reviewed the service they offer in more detail here.
On an annual basis, we audit our finances for gaps in our insurance (home, car, and life) and investments in order to ensure we are adequately insured and also to find ways to save money on our expenses.
One thing I have realized over the years is that it pays to shop around. Whether it is for a new chequing account, mortgage rate, or life insurance, comparing rates and fees side by side can end up saving you a lot of money.