What is life insurance?

Serious asian man looks at computer
Chaay_Tee / Shutterstock

Here’s the deal: In exchange for regular payments during your life, an insurance company you choose will guarantee that a predetermined amount of money will be paid out to your loved ones after your death.

Formally called a death benefit, this payout will help cover their cost of living after you pass away.

Life insurance is mostly designed for people with dependents, but single people can buy some, too. You might need $10,000 or more to pay for a proper funeral and save your parents, friends and siblings from bearing that burden.

Plus, your loved ones don’t have to report life insurance payouts as taxable income; they're basically tax-free.

Maximize Your Tax Refund with TurboTax Canada!

Simplify tax season with this user-friendly software. Get step-by-step guidance, maximize deductions, and file with confidence. Trusted by millions, TurboTax Canada ensures accuracy and peace of mind. Start your taxes today and get the refund you deserve

Get the tax refund you deserve

Decoding the lingo

Jumble of letters
Shahril KHMD / Shutterstock

Before you buy a policy, online or in-person, there are some terms you need to know:

  • The policy is your agreement with the insurance company.

  • The policyholder is you: the person who owns the insurance. You can buy policies on behalf of loved ones, too.

  • Premiums are the regular payments made to the insurance company to maintain your policy. They are generally paid monthly, quarterly, bi-annually or annually.

  • The beneficiary is the person who will receive your death benefit. You can also split up the payout among several beneficiaries.

Types of life insurance in Canada

Term life insurance

An attractive happy, smiling Indian family
StockImageFactory.com / Shutterstock

Term life insurance covers you for a specific period of time, usually in ranges of 10 to 30 years.

So, when you get a policy with a 20-year term, the insurance company will pay your beneficiaries if you die within the next 20 years. With most term policies, your premiums won’t increase during that time.

Term life insurance is the most affordable option. However, signing up later in life would lead to much higher insurance costs, because your risk of dying is higher.

This is a great option if you feel you only need coverage for a set period — say, until the home is paid off and the kids move out.

Many term policies can be converted to permanent policies. And keep an eye out for “unconditional renewability,” which means you don’t need to take another medical exam if you decide to start another term.

Permanent life insurance?

loving senior african couple relaxing at home
michaeljung / Shutterstock

Permanent or “perm” life insurance provides lifelong coverage. Like term life insurance, your premiums are typically locked in — but they’ll be much higher at first. Maybe even 10 times higher.

After all, you will die someday, so as long as you keep your policy active, the insurance company will eventually have to pay out. And you might be locking in your rates for 70 years, not just 10 or 20.

There are three main types of permanent life insurance coverage:

Term to 100

Don’t be thrown by the word “term,” as this uniquely Canadian product is a form of permanent policy.

Your premiums stay the same until you turn 100 years old, at which point your coverage becomes free.

Unlike other permanent policies, Term to 100 policies don’t have a cash value or investment component. They’re the simplest, purest form of long-term coverage you can buy.

Whole life insurance

Your premium pays for your insurance coverage, plus an investment portfolio that can grow your money over time. The insurance company manages that portfolio, aiming for low risk and moderate growth. Those investments are also sheltered from tax.

Whole life insurance policies can be “participating” or “non-participating.” With a participating policy, you’ll share in the company’s profits in the form of dividends, which you can cash out, use to pay your premiums or boost your death benefit.

Lastly, your premiums and earnings will slowly increase your policy’s “cash surplus value” over time.

There are two ways to use this value. First, you can use it as collateral in a low-interest loan. You’ll be given a sum of money no greater than your cash value and agree to give up some of your death benefit if you don’t repay what you owe. Second, you’ll be able to get most or all of that cash value back if you decide to cancel or “surrender” the policy.

Universal life insurance

While universal policies have plenty in common with whole life policies, they provide more investing freedom. In fact, these participating policies act more like investment accounts with a life insurance component.

Instead of paying regular premiums, you can invest as much as you want in your account, and you’ll have the freedom to manage those investments as you please. Your insurance company will then deduct the cost of your actual life insurance from the account on a regular basis.

Rather than being locked in, you have the ability to increase or decrease your premiums (and death benefit) as you wish, according to your budget. In addition to borrowing money through your policy, you can treat it like a savings account and pull out cash if you need it — though you’ll have to pay income tax on your withdrawals.

Because these policies offer lots of choices and are sheltered from taxation, wealthy Canadians often use them to invest once they’ve maxed out their TFSAs and RRSPs.

Grow Your Savings Effortlessly with Moka

Automate your savings with every purchase and watch your money multiply. Moka rounds up your transactions and invests the spare change. Start building wealth effortlessly today. Join thousands of Canadians embracing financial freedom with Moka

Sign up now

How much life insurance do I need?

beautiful woman think and write notes on paper working on a laptop freedom from office at home. alternative lifestyle and place to work on. Nice life daily scene
simona pilolla 2 / Shutterstock

The Government of Canada suggests most people should get coverage worth seven to 10 times their annual salary. But you’ll want to look at your particular situation.

You need to account for all your debts (including mortgages and student loans), your family’s annual expenses (such as child care, groceries and transportation) and your funeral costs to get a solid estimate.

When buying term insurance, think about where you are in life.

If you've just had a baby, you’ll want at least a 25-year term in case you die while your kid is still in school. Or if you just bought a house with a 15-year mortgage, a term of at least 20 years will help your partner make payments on their own, even if you refinance and choose a longer amortization.

If you can’t afford the coverage you think you need, pick the option that fits your budget. As long as you get a flexible policy, you can always increase your coverage once you have more free cash.

How does life insurance work in Canada?

Doctor woman sitting with male patient at the desk
sheff / Shutterstock

Whether you’re buying term or perm insurance, you’ll likely have to fill out a health and lifestyle questionnaire and complete a medical exam to qualify. This fact-finding process is called underwriting.

Just as your debt habits determine your credit score, your bill of health defines your insurance status. The healthier you are, the more offers and better terms you get.

And remember, honesty is the best policy. Your loved ones won’t get a cent if you lie about your health and break the terms of your contract.

There are still options if you don’t want to fill out a form or take a medical exam — but these policies generally cost more, provide less coverage and may not be renewable or convertible.

How do I pick the best life insurance policy for me?

Young couple relaxing drinking a coffee and using the computer laptop around cardboard boxes, very happy moving to a new house
Krakenimages.com / Shutterstock

All of these options can seem overwhelming.

You might be reluctant to even start the process of applying for life insurance, which has traditionally taken weeks and involved confusing paperwork and unpleasant medical appointments. Thankfully a new generation of providers has entered the market with the mission of bringing life insurance into the 21st century.

Online life insurance companies like PolicyMe use automated-underwriting technology to make the formerly invasive and lengthy application process painless and quick.

Getting a legit quote takes only a few minutes and involves a handful of basic questions. And after fully applying for a term life policy through PolicyMe’s website, which for most people will take about 15 minutes, you’ll immediately find out whether you’re approved. No weeks-long waiting periods, and most healthy applicants won’t need a follow-up medical exam.

A little prep work now will ensure your family is protected for many years to come.


Trade Smarter, Today

With CIBC Investor's Edge, kick-start your portfolio with 100 free trades and up to $4,500 cash back.

About the Author

Juliette Baxter

Juliette Baxter

MoneyWise Contributor

Juliette Baxter is a writer and editor who has covered everything from designer runway trends to RESPs for publications such as Chatelaine, Flare and The Globe and Mail. She also strategizes words and ideas for leading brands including Birks, RE/MAX and Shoppers Drug Mart.

What to Read Next


The content provided on Money.ca is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter.