What is life insurance in Canada?
Life insurance in Canada is a contract between you and the insurance company, wherein you will pay regular premiums and your beneficiaries will receive a tax-free cash payout if you pass away. This money can be used by your beneficiaries for expenses. For example:
• Paying off debts
• Covering daily expenses
• Managing funeral costs
• Supporting your children's education
It's one of the most cost-effective and simplest ways to protect your family from any future financial uncertainty if you are not there.
How does life insurance work in Canada?
So if you are wondering how life insurance work in Canada could help you, the answer is simple: it provides a guaranteed payout, as long as your policy is active. Life insurance gives your family breathing room during an incredibly difficult time," says Eldho George, Senior Life Insurance Advisor at PolicyScanner.
Life insurance in Canada is regulated at both the federal levels and at the provincial level. At the federal level its Office of the Superintendent of Financial Institutions (OSFI). This provides transparency, fairness, and financial protection for Canadians.
What are the different types of life insurance available in Canada?
Life insurance policy may vary by region. Let's briefly look into the main types of life insurance in Canada.
• Term Life insurance
• Whole life insurance
• Universal life insurance
• Critical illness insurance
Now let's discuss each of them in detail.
What is term life insurance?
Term life insurance in Canada is the most affordable option that covers you for a specific period — usually 10, 20, or 30 years. It costs less than permanent coverage because there is no cash value generated, and coverage will expire when the contract ends.
Term insurance is a perfect fit if you are looking for a policy that offers coverage for a financial obligation such as a mortgage or an outstanding debt, which will eventually end.
Here is a quick list of advantages offered by term life insurance:
• You pay the same premium throughout the term.
• If you die during this period, your beneficiaries receive a tax-free payout.
• If you outlive the term and want the coverage long term, you can convert it to whole life insurance (usually at a higher rate).
What is whole life insurance?
Whole life insurance combines a death benefit with a cash value component which grows over time. If you are looking for permanent protection with cash value it's one of the best products available in the market.
Your premiums will stay the same for the lifetime. A part of each premium goes into a cash value account. You don't have to pay any tax as the amount in the cash value account increases over time.
Even Though the premiums are high, it provides guaranteed coverage till 100 years or it never expires, until you die.
What is universal life insurance?
Universal life insurance in Canada also offers permanent protection, but with more flexibility compared to whole life insurance. It is best suited for people looking for lifetime protection along with investment options and premium customization.
The key difference is that Universal life insurance policies let you adjust premiums and death benefits based on your needs any time through the term. You also have full control over the investment component.
It also offers permanent protection with more flexibility than whole life policies.
What is no-medical life insurance?
No medical life insurance in Canada allows you to get insurance coverage without undergoing a medical exam. It is best suited for people who are not qualified for standard insurance due to their health conditions. There are two popular types of non-medical life insurance.
• Simplified Issue: Includes a medical questionnaire but skips the medical exam
• Guaranteed Acceptance: No questionnaire, no medical exams, guaranteed approval for eligible ages
Please note that even though these types of insurance policies are easier to qualify for, it offers lower coverage and higher premiums compared to fully underwritten policies.
These are the major types of life insurance in Canada, and they give you a general overview of the policy options available. Now, let's move on to the next section.
At PolicyScanner we recommend term life insurance for most Canadians because it's affordable and provides the highest coverage amounts during your family's most vulnerable years.
Who needs life insurance in Canada?
There are a variety of reasons for buying life insurance in Canada. A few of them are listed below:
• Protecting dependents who rely on you
• Buying a home with a mortgage
• Having debts that others might inherit
• Wishing to leave money for loved ones
• Owning a business
• Wanting to cover final expenses like funeral costs
In short, life insurance helps you to cover your present and future financial obligations and debts if you are not there to pay it back. It also ensures you won't leave any financial burden on your family during such hard times.
As per the Life Insurance Marketing Research Association (LIMRA), more than 70% of Canadian households have life insurance coverage, yet around 30% still believe that they need additional coverage.
How does life insurance work in Canada?
The life insurance process in Canada involves several key steps that ensure you get the right coverage for your needs.
How do you get coverage?
Getting coverage is pretty straightforward in Canada. For certain policies you need to answer a few questions related to your health, lifestyle, and family medical history. In case of fully underwritten policies you might need to pass the medical examination and this is as per the discretion of the insurance company.
Once you fill the insurance forms your insurance company will thoroughly evaluate risk factors to determine if they can provide you the coverage. They generally consider the following things:
• Your age and sex at birth
• Your health status
• Smoking status
• Occupation
• Lifestyle
• Family medical history
How do you make a claim?
Beneficiaries must complete the claim forms and submit the following documents to get the benefits.
• Death Certificate
• Policy Documents
Most insurance companies take 30 to 60 days to process the claims(timeline may vary provided by provider). Beneficiaries will receive tax-free funds in their bank account. As per Canadian Life and Health Insurance Association (CLHIA), approximately 97% of life insurance claims are paid within 30 days of receiving complete documentation.
How do you compare life insurance options in Canada?
Selecting a perfect insurance policy is a daunting task. But with PolicyScanner you can do the life insurance comparison side by side. Here are a few tips to choose a perfect insurance:
How much coverage do you need?
There are several factors that need to be considered while determining the coverage amount. It varies based upon your unique requirements.
In general, it should be:
• 10-15 times your net annual income
• Equal or more than your total debts
• Able to cover future expenses including education costs
Coverage Amount = Your Debts + Final Expenses + 5-10 Years of Income
How much protection does your family need?
Let's build your family's financial safety net together
A personalized calculation that takes just 2 minutes
Personal information
Financial details
Coverage breakdown
Let's look at different family situations through different examples.
Understanding how coverage calculations work in practice helps you make informed decisions about your own family's needs.
Young family
Sarah and Mike are both 32 years old. They have two children. The Eldest child is 5 years old and the younger one is 3 years old. Sarah earns $85,000 annually while Mike earns $75,000. They have a $450,000 mortgage.
Their coverage amount should be:
• Sarah: $1,275,000 (15× her income) + $225,000 (half the mortgage) + $100,000 (children's education) = $1,600,000
• Mike: $1,125,000 (15× his income) + $225,000 (half the mortgage) + $100,000 (children's education) = $1,450,000
For mortgage protection specifically, they might also consider mortgage life insurance as an additional layer of protection.
Mid-career professional
Priya is 45 years old. She is divorced with two teenagers. She earns $120,000 annually, has a $300,000 mortgage, and $50,000 in savings for her children's education.
Her coverage amount should be:
$1,200,000 (10× her income) + $300,000 (mortgage) + $100,000 (additional education funds) = $1,600,000
Given her health concerns as she ages, she might also want to explore critical illness insurance to complement her life insurance coverage.
Pre-retirement couple
Roberta and David are both 58 years old. They have paid off their mortgage, have adult children, and want to protect their retirement savings.
Their coverage amount should be:
$500,000 each to cover income replacement for the surviving spouse and final expenses.
At their age, whole life insurance might be more appropriate for estate planning purposes.
Single person
Emma is 29 years old and has no dependents. She has $45,000 in student loans and wishes to protect her parents from funeral expenses.
Her coverage amount should be:
$100,000 to cover debts, funeral costs, and leave a small gift.
A simple term life insurance policy would be perfect for Emma's situation.
Should you choose term vs permanent insurance?
The selection of type of insurance policy depends upon your specific needs. Term life insurance is for people looking for coverage for a specific period. On the other hand, permanent life insurance policies like whole life insurance in Canada offer lifetime coverage along with cash value.
Choose term insurance if:
• You need affordable coverage for specific periods
• Your budget is limited
• Your needs are temporary (mortgage, young children)
Choose permanent insurance if:
• You want lifetime coverage
• You want to build cash value
• You're using insurance for estate planning
• You have a lifelong dependent
Top-rated insurance companies in Canada
| Company | AM Best Rating | Financial Strength | Key Benefits |
|---|---|---|---|
| Canada Life | A+ Superior | Excellent | Strong digital platform, flexible options |
| Sun Life Financial | A+ Superior | Excellent | Comprehensive coverage, good customer service |
| Manulife Financial | A+ Superior | Excellent | Innovative products, strong reputation |
| Industrial Alliance/iA Financial Group | A+ Superior | Excellent | Competitive rates, specialized products |
| Desjardins Insurance | A Excellent | Very Good | Quebec-focused, bilingual service |
How do you evaluate provider reputation?
Assessing provider reputation is very important because not all insurance companies offer the same level of service or financial stability.
While you are comparing policies with PolicyScanner we clearly display these company ratings for you to review.
Here is a quick list of things to check:
• Financial strength ratings from agencies like AM Best
• Customer reviews
• Digital services used to manage policies
These ratings represent each company's ability to pay claims and fulfill their promises. Many of them are considered among the top life insurance companies of Canada, tested even during economic downtimes.
What is the life insurance application process in Canada?
The life insurance application process starts from identifying the coverage needs to the final policy issue. This process is fairly simple and easy to-follow, with the right tools and resources. Here are a few things to keep in mind while assessing the application process:
1. Needs assessment
Use our online calculators to determine how much coverage you need. As we have already discussed above, please focus on your situation to estimate the coverage amount. Calculate all your debts, your income and the system will provide you with the necessary coverage. The Life insurance calculator is free and you can find it here.
Consider whether you need additional protection like mortgage life insurance or critical illness insurance alongside your main life insurance policy.
2. Application submission
After identifying the coverage amount, you need to submit personal details, health information, and lifestyle details to complete an application.PolicyScanner representative will fill the application along with you and send it to the insurance provider.
Many insurance providers offer an online application portal for quick submission. However, working with brokers like PolicyScanner ensures personalized guidance.
3. Underwriting
This is a time -consuming process. It may take up to 6 to 8 weeks (case by case) to complete depending upon the complexity.
During this period, the insurance company will request,
• Medical Examination
• Medical History
• Additional Questionnaire in case of Specific Conditions
4. Policy approval and delivery
Once the policy is issued, PolicyScanner representatives will share the policy documents. Make sure to review your policy documents carefully before signing. It includes details about coverage, premiums, terms and conditions, any exclusions laid out by the insurance company and so on.
5. Coverage activation
Your coverage or policy activates after first premium payment. In the meantime, you can request for a temporary coverage which will be given by the insurance company while they are reviewing the application. PolicyScanner representatives will guide you with that also. According to data from the Canadian Institute of Actuaries, only 4% of life insurance applications are declined. It shows that most people, even those with pre-existing conditions, can secure coverage.
What will life insurance cost you?
Let's find your perfect monthly rate
Real quotes in seconds • No spam, we promise • Compare 20+ insurers
What are the tax benefits of life insurance in Canada?
Life insurance in Canada provides more than financial protection. It offers multiple tax benefits to Canadians, let's discuss some of the important ones.
1. How are life insurance payouts taxed in Canada?
No, the life insurance death benefit paid to your beneficiaries is tax-free. When you pass away the money received by your beneficiaries are not subject to income tax.
2. Does life insurance build tax-free cash value?
Yes, the whole life insurance policies in Canada build cash value along with insurance protection and the cash value grows tax-deferred. You don't need to pay any tax if the value remains inside the policy.
3. How is life insurance used for estate planning in Canada?
Life insurance is an excellent way of offsetting estate taxes. When someone passes away their estate owe taxes on the capital gains, RRSP's and other assets. A life insurance policy provides immediate tax free cash o cover all those expenses without forcing your loved ones to sell any of the assets.
Most Canadians don't realize that life insurance represents one of the last remaining tax-efficient wealth transfer methods," notes tax specialist David Chang. "It's particularly valuable for those with significant assets they want to preserve for the next generation.
Life insurance death benefits are completely tax-free to your beneficiaries, making it one of the most efficient ways to transfer wealth to the next generation.
What are life insurance considerations by age, lifestyle, or occupation?
Not every individual has the same life insurance requirements. Here's how life insurance applies to newcomers, families, and business owners.
What life insurance do newcomers to Canada need?
Newcomers to Canada are eligible to get life insurance only when they have the following documents.
• Valid residency documents
• Proof of Canadian income
What is the best life insurance for families with young children?
While you are raising a family with little ones the financial responsibilities are high, thats why parents choose to ladder multiple term life insurance policies to provide:
• Affordable protection
• High coverage during early years
• Reduced coverage as children grow and financial needs decline
Many families also add mortgage life insurance to ensure their home is protected, and critical illness insurance to cover medical expenses not covered by provincial health plans.
What life insurance do business owners need?
Business owners can benefit from specialized life insurance strategies that protect the company and offer tax advantages. These include:
• Key Person Insurance – to protect your business if a crucial employee passes away
• Buy-Sell Agreements – to fund succession plans in case a partner dies
• Corporate-Owned Life Insurance (COLI) – to fund obligations and enhance liquidity
For business owners, whole life insurance often provides additional tax advantages when held within a corporation.
Frequently Asked Questions
• Your outstanding debts
• Future expenses for dependents
• Final expense costs
• Replacement income requirements
For specific protection needs, consider specialized policies like mortgage life insurance for your home loan.
Most popular life insurances bought together are:
• An employer-provided group policy
• A personal term life insurance policy for additional protection
• A permanent whole life insurance policy for lifetime coverage
• Critical illness insurance for living benefits
• Mortgage life insurance for home protection
However, note that the death by suicide within the first two years may not be covered. For non-accidental deaths, the guaranteed issue policies often have waiting periods.
• Condition severity
• Treatment adherence
• Time since diagnosis
• Overall health status
A Canadian Institute of Underwriters study found that only about 4% of life insurance applications in Canada are declined, showing that most people with pre-existing conditions can still get coverage - though possibly at higher rates.
For those with health concerns, critical illness insurance can provide additional protection for specific conditions.
Another important consideration is that the coverage will end when you leave the job. That's why many Canadians supplement with personal term life insurance or whole life insurance policies.
How do you make your decision?
Life insurance isn't only about you! It's about the people you love. Taking this step today ensures they'll have financial security tomorrow. Start by asking yourself:
1. What financial obligations would my loved ones face without me?
2. How long will these obligations last?
3. What's my budget for premiums?
4. Do I want coverage that builds value over time?
Select an insurance policy based upon your specific needs and budget. Don't get pressured into buying more coverage than necessary, but ensure you have enough to protect those who depend on you.
Consider your specific needs:
• For temporary protection: Term life insurance
• For lifetime coverage with cash value: Whole life insurance
• For mortgage protection: Mortgage life insurance
• For illness protection while alive: Critical illness insurance
"The right coverage gives you peace of mind," says financial advisor Emma Johnson. "You'll sleep better knowing your family is protected, no matter what happens."
Ready to explore your options?
Start by getting quotes from multiple providers to compare coverage and costs. Consider working with an independent broker who can help navigate the choices and find the perfect policy for your situation.
PolicyScanner is an online tool to compare multiple insurance policies like a pro.