Life insurance can be useful if your death would create a financial shortfall that your assets can’t cover.
This guide uses information from the Financial Consumer Agency of Canada’s life insurance guide. It answers these questions: Do I need life insurance? How much coverage and for how long? Find out when you don’t need life insurance, how to manage beneficiaries and exclusions and what to consider before applying.
Our editorial team also reviewed FCAC’s guide to getting an insurance policy, the Canada Revenue Agency’s list of amounts that are not reported or taxed, and FSRA’s life-and-health insurance consumer rights guide.
Why Is Life Insurance Important?
Life insurance aims to shift some of the financial risk associated with a household, business or estate onto an insurance company.
This insurance may pay your beneficiaries if you die while the policy is in effect. Beneficiaries might use the money to replace earnings, cover unpaid care, settle obligations or create liquidity in an estate that might be difficult to divide.
Life insurance may not be needed if your death wouldn’t have a substantial financial impact on those left behind or if there are adequate liquid assets.
Do I Really Need Life Insurance?
| Situation | Financial consequence if you die |
|---|---|
| A household relies on your income | The income shortfall over a set number of years |
| You provide unpaid care | Child care, elder care, transportation or household work must be replaced |
| You have a mortgage or other debt | A survivor may have to pay off the obligation, refinance the property or sell it |
| You own a business | Buying an equity stake, losing a key employee or manager, or paying down business loans |
| You want an estate or charitable gift | Funding for this goal may not come from other assets |
| No one depends on you and assets cover costs | There is little or no shortfall |
Read More: Review Reasons Not to Buy Life Insurance
Is Life Insurance Worth It?
Before buying life insurance, consider alternatives. Options include using personal savings, relying on employer-provided insurance, paying off existing debt or buying a less expensive term life insurance policy.
A policy makes sense if it’s affordable and covers a financial need better than these alternatives. Policies that don’t make sense are those bought out of fear, those that duplicate reliable coverage or those that require giving up necessary living expenses to pay.
How Much Life Insurance Do You Need?
Use this formula: Immediate costs and debts + income or care support + planned education, estate or business needs − liquid assets reserved for survivors − dependable existing coverage = estimated coverage gap.
Do not count an illiquid home as cash unless selling it is part of the plan. Treat job-linked coverage cautiously because it may end when you leave your job.
A salary multiple can miss the real answer. Change every part of the calculation to match your household, then test a lower and higher support period. Round the final amount only after checking available policy sizes and the premium you can continue paying.
Read More: Estimate How Much Life Insurance You Need
How Long Should Coverage Last?
| Need | Possible end point | Coverage question |
|---|---|---|
| Income replacement | Survivor retirement, return to work or financial independence | How many years is the monthly gap expected to continue? |
| Children or other dependants | When a funded objective is met or reliance ends | Could the period extend because of disability or ongoing care? |
| Mortgage or loan | Repayment, sale or refinance | Does the survivor need the balance all at once? |
| Estate liquidity or lifelong dependant | Potentially lifelong | Is permanent coverage affordable under guaranteed assumptions? |
| Business agreement | Buyout, loan or succession date | Does the amount in the agreement reflect its current value? |
Read More: Compare Term and Whole Life Insurance
Is Life Insurance Important if I Don’t Have a Family?
You don’t have to name a spouse or child. A friend, business partner, charity, your estate or a trust can be a beneficiary.
Think about a specific goal or shortfall. For example, do you want to make sure there is money to cover your final expenses? If so, compare a modest policy with any money you’ve already set aside for this purpose.
Are you thinking of leaving money to charity? Talk with the charity and your legal or tax adviser about ownership and beneficiary options before applying.
Read More: Read the Life Insurance Guide for Singles
What Does Life Insurance Cover?
Claims are determined according to the insurance policy, the application and applicable law.
Generally speaking, life insurance provides a benefit upon the death of the insured while the insurance is in force. A life insurance policy does not cover medical expenses unless another contract or a special rider does.
| Policy point | What to verify |
|---|---|
| Death benefit | Level, decreasing or variable amount and any minimum guarantee |
| Contestability | Period and wording regarding misrepresentation or claim review |
| Suicide provision | Exact period and treatment after reinstatement or replacement |
| Other exclusions | Any contract-specific exclusion or limitation |
| Beneficiary | Primary, contingent or revocable beneficiary and any trustee for a minor |
| Policy in force | Premium due date, grace period, policy lapse and policy-loan provisions |
When Life Insurance May Not Be the Right Purchase
Life insurance may not be the right purchase if:
- No person, estate or other entity would have a large financial need as a result of your death.
- You can reach your target amount without harming your other financial goals by using cash and other liquid assets.
- Your budget is tight, and insurance premiums would crowd out spending on food and shelter, minimum debt payments, an emergency fund or other required insurance.
- Your employer offers adequate insurance. However, you need a plan in case you lose your group insurance.
Before You Buy or Replace a Policy
- Make sure the agent or broker is licensed in your province or territory.
- Answer all questions on the application completely and honestly, and keep a copy of the application.
- Compare guaranteed and non-guaranteed values, premium payment schedules, riders and exclusions. Read the contract carefully during its free-look period.
- Do not cancel your current insurance until the new insurance is in force and you are satisfied with it.