Popular Types of Life Insurance in Canada
Life Insurance Coverage: For now, or forever?
Learning about the types of life insurance in Canada shouldn’t be complicated. You can boil it down to a simple concept, would you like to rent or own? Some people like to rent. Others like to own. The best case for renting is that you can walk away when you no longer need the thing you’re renting, like a cottage. One family might prefer to rent a cottage for a few weeks every summer while another prefers the long-term investment option of owning it, paying it off, and passing it on to their heirs.
Renting is the “for now” option (have it while you need it) and owning is the “forever” alternative (permanent ownership).
Different types of life insurance
Life insurance is no different. Some people buy coverage for now, meaning they want to be insured for a period when their death would result in financial hardship for others. The coverage has a start date and an expiry date.
Others like the idea of using permanent life insurance to supplement their long-term financial plan because it will never expire and is guaranteed to pay out sooner or later (hopefully much later). It also provides parents and grandparents with a tax-effective way to leave money to future generations.
And then there are those who also purchase permanent life insurance for their child, and pass on ownership to them when the time is right.
Why buy child life insurance? Well, for starters, you can:
- Take advantage of the cheapest time to buy — the younger and healthier a child is, the less expensive their policy
- Lock in the right for your child or grandchild to stay insured for life, regardless of changes to their health status.
- Provide insurance coverage and grow savings you can pass on tax-free.1
- Maintain control of the funds until you feel the time is right to bestow your gift.
There are many more benefits to buying permanent life insurance for a child and your Serenia Life advisor can help you determine if this is the right approach for you and your family.
What’s the best type of life insurance based on your needs?
An insurance specialist can help you answer this question based on your financial situation and goals. In the meantime, let’s take a look at two people who set out to buy life insurance in Canada and came to different conclusions. One opted to get life insurance “for now” and the other chose the “forever” option. Both are popular options and are dependent on your budget and needs.
Two popular types of life insurance
Sarah chose insurance “for now” called term life insurance
Sarah is like most working Canadians with children. She has a spouse, a mortgage, a balance on a line of credit, and some credit card debt that goes up and down. It takes two incomes to keep ahead of the bills and still put some money aside for retirement, the kids’ education, and savings for an emergency.
For now, Sarah wants a life insurance policy that will provide her beneficiaries (i.e., the individuals and groups who will receive the money) with enough to fill the income gap that would result from her death.
Sarah’s plan (life insurance “for now”) | ||
|---|---|---|
How much | An advisor suggested that Sarah should purchase enough life insurance to cover between six and 10 years of income. She chose the high end to be safe. Her income before tax: $80,000 x 10 years = $800,000. | This is the “amount” of insurance coverage. Find out how much you need in three 3 easy steps. |
How long | Sarah’s children are still little, so she likes the idea of being protected until they’ve become independent, so she purchases a 20-year term life insurance policy. When it expires, the coverage will stop. At any time within those 20 years, she has the option to continue her coverage by converting to permanent insurance despite any changes to her health . The cost will be determined by her age at the time of conversion. | This is the “term” of the insurance policy. You can typically choose 10, 20 or 30 years. |
Advantage | For a relatively young person, the payments on a 20-year term life insurance policy are quite affordable given the level of protection they provide. | |
Matthew chose insurance “forever” called whole life insurance
Matthew is married with two children and earns a good living. Like Sarah, he has a mortgage on his primary residence, but he also owns a family cottage that will likely be handed down to the children. Based on his current financial plan, retirement is not a problem. It’s a nice place to be.
Matthew is looking for a long-term life insurance solution guaranteed to leave a legacy behind for his loved one (e.g., a lump-sum payment that will help them in life). Plus, he’d like the money to take care of any estate taxes resulting from the inheritance.
His plan includes paying for permanent life insurance policies for both kids to help the family prepare financially for the uncertainty of the future.
Matthew’s plan (life insurance “forever”) | ||
|---|---|---|
How much | Matthew and his spouse want life insurance to provide their family with at least $1-million so they can easily pay any estate taxes and have money left over. In addition to the death benefit (i.e., a payment made to designated family members or other loved ones after you die) he also wants to leave as much money in savings as possible. | The “amount” of insurance coverage is a combination of the death benefit and the cash portion of the policy. For more details, see Permanent Life Insurance: A Lifetime of Tax-Effective Rewards. |
How long | Matthew agrees to pay monthly payments on a whole life insurance policy for 20 years. After that, the policy will be “paid up” yet coverage remains. In addition to the guaranteed payout of $1-million, the policy includes a cash portion that grows in value over time. | Because permanent life insurance is “forever,” there is no term or expiry date. To learn more about your options, see How does life insurance work in Canada? |
Advantage | For individuals who can afford the relatively higher cost of permanent life insurance options, such as whole life, the long-term financial benefits and tax savings can more than cover the cost of coverage. | |
Adding the kids | Matthew knows that by also purchasing whole life insurance for the kids at an early age that he is setting them up for success without them even knowing. He and his spouse will make the payments until the policy is paid up in 20 years. After that: - The kids will have guaranteed coverage for life without ever having to pay for it. - Matthew and his spouse control the cash portion (i.e., the total cash value available within their policy) of the policy and can access it2 at their discretion, at any time, to pay for emergencies or give the kids a leg up. - Both kids can easily take ownership of the policy from their parents when they’ve grown up and have a family of their own, giving them the freedom to update the beneficiary and other important policy details. This coverage is designed to complement all the other moving parts of the family’s financial plan and can result in significant tax savings for everyone. |
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Your turn: What’s the best type of life insurance based on your needs?
Sarah and Matthew chose different types of insurance and got exactly what they wanted and needed. They’ve made good choices based on their income today and wishes for the future.
Contact an advisor today to find the right type for you
To find the right type of life insurance for your needs, speak with your Serenia Life advisor. Don’t have an advisor? Fill out this short form to get the ball rolling.
1According to the rules in subsection 148(8) of the Income Tax Act, the transfer of ownership can be tax free to a child or grandchild as long as there was no consideration paid on the transfer. The proceeds of the disposition for the transfer are deemed equal to the policy’s adjusted costs basis (ACB), resulting in no income tax payable by the policy owner when the transfer is made.
2Cash value may be accessed by a withdrawal, policy loan, or surrender. Taxation may apply and a tax slip will be issued as appropriate.
