Explain How Life Insurance Works: What to Know About Canadian Policies
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3 Ways Life Insurance is Misunderstood (and what you need to Know!)
It's only necessary for those who are old or wealthy.
a) The reality is; life insurance is essential for anyone who has loved ones who depend on their income or financial support.
b) Life insurance can help provide financial security to your family and loved ones in the event of your unexpected death, regardless of your age or income level.
It’s too expensive…
a) However - there are various types of life insurance policies available to fit different budgets and needs.
b) It's important to consider the long-term financial impact of not having life insurance versus the cost of paying for coverage.
Life Insurance is only beneficiary if you aren’t healthy…
a) Unexpected accidents and illnesses can happen to anyone at any time.
b) Having life insurance can help ensure that your loved ones are protected financially if something unexpected were to happen to you.
c) It’s better to act than to react.
Book a call with us here for 15-min a Q&A call, where we will answer any question you have about budgeting, investments, or insurance.
So.. let’s dig in.
Life insurance is an important investment that can help protect your loved ones financially in the event of your untimely death.
So, how does life insurance work, and what do you need to know about Canadian policies?
We'll break down the basics of life insurance and provide some examples to help you better understand how it works.
What is Life Insurance?
Life insurance is a contract between you and an insurance company that provides a lump-sum payment, known as a death benefit, to your designated beneficiaries upon your death.
In exchange for paying monthly or annual premiums, the insurance company agrees to pay out the death benefit to your beneficiaries upon your passing.
There are two main types of life insurance that we will talk about:
Term Insurance:
Term life insurance provides coverage for a specific period of time, typically 10, 20, or 30 years.
If you pass away during the term of the policy, your beneficiaries receive the death benefit.
If you outlive the term of the policy, however, the coverage ends and you do not receive any payout.
As an example, John is a 35-year-old father of two who wants to ensure that his family is taken care of financially if something were to happen to him.
He decides to purchase a 20-year term life insurance policy with a death benefit of $500,000. He pays $50 per month in premiums for the duration of the policy.
If John were to pass away within the 20-year term, his beneficiaries would receive the $500,000 tax-free. If he were to outlive the term, however, the coverage would end and he would not receive any payout.
Permanent Life Insurance:
Permanent life insurance, on the other hand, provides coverage for your entire life, as long as you continue to pay the premiums.
It also includes a savings component known as cash value, which can be accessed while you're still alive.
As an example, Sarah is a 45-year-old business owner who wants to provide financial security for her family while also building a nest egg for her retirement.
She decides to purchase a permanent life insurance policy with a death benefit of $1 million and a cash value component.
She pays $500 per month in premiums, which are split between the death benefit and the cash value.
Over time, the cash value grows tax-deferred and can be accessed through loans or withdrawals.
If Sarah were to pass away, her beneficiaries would receive the $1 million death benefit tax-free.
How Does Life Insurance Work?
When you apply for life insurance, the insurance company will assess your risk based on various factors such as your age, health, occupation, and lifestyle.
The higher your risk, the higher your premiums will be.
Once you are approved for coverage, you will pay a monthly or annual premium to the insurance company.
If you pass away during the term of your policy, your beneficiaries will receive the death benefit tax-free.
They can use this money to pay for funeral expenses, outstanding debts, or ongoing living expenses.
It's important to note that there are some exclusions and limitations to life insurance policies.
One is, if you die as a result of suicide within the first two years of your policy, the insurance company may not pay out the death benefit.
Additionally, if you engage in risky activities such as skydiving or scuba diving, you may have to pay higher premiums or your coverage may be limited.
In Canada, life insurance policies are regulated by the government to ensure that they are fair and transparent. When purchasing a life insurance policy, it’s important to read the fine print and understand the terms and conditions.
Here are a few things to keep in mind:
Premiums can be affected by age, health, and lifestyle factors such as smoking and dangerous hobbies.
Some policies may require a medical exam or health questionnaire.
Beneficiaries can be changed at any time by the policyholder.
Life insurance payouts are generally tax-free in Canada.
Life insurance policies can be canceled or surrendered, but there may be penalties or fees involved.
Life insurance can provide valuable financial protection for your loved ones after your passing.
Understanding the basics of how life insurance works and the different types of policies available in Canada can help you make an informed decision when purchasing a policy.
Remember to read the fine print and if you have any questions or concerns please feel free to contact us with any questions!