Is Life Insurance Worth It in Canada? Understand When and Why to Buy

The prospect of paying for insurance you may never use can lead to some reflection on whether the coverage is worth it. These thoughts might be amplified with life insurance, not only may it never pay out (depending on if you have term or permanent coverage), but even it does, you are not around to see it work.

While this thought exercise seems a little morbid, have to think about your death to truly gauge whether life insurance is worth it to you. Coverage can be expensive but worthwhile in a variety of circumstances.

Solid end-of-life planning (including life insurance) will have a significant and positive effect on your loved ones in the case of your premature death. But life insurance isn’t a priority for everyone at every stage of their life. It can even be a costly mistake for those that miscalculate the amount or type of coverage they need.

Read on to learn more about when and why life insurance is a worthwhile expense.

Is life insurance worth it in Canada?

Yes, life insurance is worth it in Canada. It offers financial protection for your loved ones by providing a tax-free payout in the event of your death. This can help cover expenses like mortgage payments, and living expenses, ensuring your family’s financial security.

Whether you’re single, have dependents, or own a business, life insurance can be a key part of your financial planning.

Understanding life insurance

Life insurance is a contract between you and an insurance company. In exchange for regular premium payments, the insurer agrees to pay a lump sum, known as a death benefit, to your beneficiaries upon your death. There are different types of life insurance policies in Canada, each designed to meet various needs, from temporary coverage to lifetime protection.

Factors to consider when evaluating life insurance

Here are some factors that you should consider when considering life insurance policies:

Age and timing

The age at which you purchase life insurance significantly affects your premium costs. Younger people typically pay lower premiums, making early acquisition of a policy more cost-effective. Additionally, life events such as marriage, buying a home or having children often prompt young individuals to get life insurance coverage.

Health and medical exams

Your health status is a critical factor in determining your life insurance premiums. Many policies require a medical exam to assess your overall health, which can influence the cost of your policy. Those in good health usually enjoy lower premiums, while pre-existing conditions can increase costs or limit coverage options.

Financial situation and obligations

When evaluating life insurance, it’s essential to consider your financial obligations, such as debts, mortgages, and dependents. Your policy should provide enough coverage to settle these obligations and support your loved ones after your death. This consideration ensures that your family won’t be financially burdened in your absence.

Benefits of life insurance

These are among the key benefits of life insurance:

• Financial protection for loved ones: Life insurance provides a tax-free death benefit to your beneficiaries, ensuring they have the financial resources to cover expenses such as funeral costs, outstanding debts, and daily living expenses. This protection can offer peace of mind, knowing your loved ones will be financially secure.
• Providing for children’s future needs: Life insurance can help secure your children’s future by providing funds for their education, living expenses, or other long-term needs. This ensures that even in your absence, your children will have the financial support they need to achieve their goals.
• Covering a mortgage: One of the most common uses of life insurance is to cover outstanding mortgage payments. By designating a portion of your death benefit to pay off the mortgage, you ensure that your family can continue living in their home without financial strain.
• Cash value with permanent life policies: Permanent life insurance policies, such as whole life or universal life, not only provide a death benefit but also accumulate cash value over time. This cash value can be borrowed against or withdrawn, offering a flexible financial resource during your lifetime.

Drawbacks of life insurance

While life insurance has many benefits, it comes with a few drawbacks:

• Policy costs and affordability Life insurance premiums can be a significant financial commitment, especially for permanent life policies. It’s essential to weigh the cost of premiums against your budget and financial goals to ensure that the policy remains affordable in the long term.
• Exclusions and limitations: Life insurance policies come with exclusions and limitations that may affect coverage. Common exclusions include death due to suicide within the first two years of the policy or death resulting from risky activities.

However, with the right advisor, such as those at PolicyAdvisor, you can find a life insurance policy that suits your budget and is customized for your needs.

When is life insurance worth it?

If you have dependents, life insurance premiums are much more likely to be worth the cost. Life insurance provides peace of mind knowing that your family will be taken care of financially if you die prematurely.

If you don’t have dependents, there could be other circumstances where life insurance is not a  waste of money.

You are at right age to buy coverage

Many put life insurance decisions on the back burner because they’re young and healthy. While we brought up buying insurance too young earlier, buying coverage in your younger years can be advantageous.

Premium prices are lower when you are younger, healthier, and less likely to have any diagnosed medical problems: the likelihood of your death is lower and thus less risky for an insurance provider to insure your life. Finding that balance is tough, but usually big events (like homeownership, marriage, and children) trigger one’s need for financial protection.

Providing for your loved ones

The most important thing to consider when examining life insurance options is the impact your premature death would have on your family. Do your dependents have enough money to maintain their current lifestyle should something happen to you? It would be best to determine how much your dependents would need for the foreseeable future when deciding on the amount of coverage you should purchase.

Taking care of children’s future needs

If you’re a parent, having life insurance is essential. Even if you have significant savings, life insurance is still a good idea as your estate may take time to settle.

Kids are costly and that responsibility doubles for single parents.

Picture your children’s lives over the next 5, 10, or 20 years and how opportunities could be altered without the security you provide as a family breadwinner;  not just a roof over one’s head or food in the fridge, but extra-curricular activities and summer vacations. These extra experiences you envisioned for your children can be covered by a life insurance death benefit.

Providing a financial cushion for your co-parent

It’s essential to purchase life insurance for both parents, even if one parent stays at home. If you are a stay-at-home parent, your partner will have a new set of expenses to make up for if you pass away, such as childcare. With the costs of childcare rising, that monthly price can be comparable to a full-time salary in some Canadian cities.

Life insurance is worth it for couples looking to replace their income or emotional labour when they die, so their partner or dependents aren’t left to struggle to find a way to cope with the financial and emotional loss.

Covering a mortgage

Generally, it is recommended to buy term life insurance whether you share a mortgage with another person or carry the mortgage debt by yourself. It can be tough to sell a house quickly if your estate or dependents need access to money immediately to pay off any debt. 

A life insurance policy will help your loved one make mortgage payments if they decide to stay in the home, or at the very least afford them the time to make the right decision about the property instead of forcing a rushed sale. Life insurance protects your family and their assets, so you don’t have to change your lifestyle drastically if tragedy strikes. 

If you have a family that depends on you for childcare, income, or both, you should seriously consider life insurance as a way to protect their future in case you prematurely pass away.

When you shouldn’t purchase life insurance

Life insurance is not a priority purchase at every age or price. When determining your life insurance needs and whether to purchase coverage, you should keep things like your age, financial risk level, and future plans in mind.

Too young for term life insurance

If you are young and without debt, you don’t have to worry about your loved ones covering loans or credit card bills if you were to pass away prematurely.

Additionally, if you have no dependents at this time, you also don’t have to worry about their potential needs should something happen to you.

Purchasing a term life insurance policy in your younger years doesn’t always make sense. You are not coupling the coverage with any significant financial risks (like a mortgage or family) and the coverage term may run out by the time you do find yourself taking on such risks.

In these circumstances, if you are still keen to purchase life insurance coverage, it’s a good time to explore a whole life insurance policy. The premiums are generally lower in your younger years, your money is going towards lifelong protection, and it provides opportunities for future guaranteed insurability.

The policy is too expensive

While this may seem like a given, life insurance is not worth it if you purchase a policy you cannot afford. Depending on your circumstances and health profile, life insurance premiums can be expensive and that cost rises with the size of the death benefit.

You need to maintain your premium payments to keep your life insurance coverage, and if you lapse in your payments, you lose that coverage. A large life insurance policy (and associated premium) is not worth it if you end up losing the coverage because it is prohibitively expensive.

While bigger is better may be a prevailing attitude among consumers, the best life insurance policy is the one you can afford.

Policy options: Which is worth it for me?

Typically, there are three options that most Canadians choose from. These are:

Term life insurance

Term life insurance offers coverage for a specific period, usually 10, 20, or 30 years. It is generally more affordable than permanent life insurance and is ideal for those who need coverage for a defined period, such as until a mortgage is paid off or until children reach adulthood.

Because it offers coverage for a set period, term life insurance is generally more affordable than permanent life insurance, making it an attractive option if you need substantial coverage at a lower cost.

Advisor’s advice:

Term life insurance is particularly beneficial for those with temporary financial obligations. If you’re looking to protect your family during your working years or until your children become financially independent, term life insurance offers a cost-effective solution. 

However, keep in mind that once the term ends, the policy expires, and if you still need coverage, you may have to purchase a new policy, potentially at a higher premium due to age and health changes.

Permanent life insurance

Permanent life insurance provides lifelong coverage and includes policies like whole life and universal life insurance. These policies are more expensive but offer additional benefits, such as cash value accumulation and the ability to borrow against the policy. 

Permanent life insurance is suitable for those looking for lifetime coverage and a financial investment.

Advisor’s advice:

Permanent life insurance is suitable for those who need lifelong coverage and are looking for a policy that doubles as an investment vehicle. While more expensive than term life insurance, it provides the peace of mind that comes with knowing your loved ones are covered for life, and the added benefit of cash value accumulation. This type of policy can be an integral part of a long-term financial strategy, especially if you’re considering wealth transfer or legacy planning.

Group life insurance

Group life insurance is provided by employers as part of a benefits package. While it can be a cost-effective option, coverage amounts may be limited, and the policy may not be portable if you change jobs. It can be a good supplement to individual life insurance policies.

Advisor’s advice:

Group life insurance is a valuable perk provided by employers, offering basic coverage that can supplement your individual life insurance policy. However, the coverage may not be portable, meaning if you change jobs, you might lose the insurance. 

For those relying solely on group life insurance, it’s crucial to assess whether the coverage amount is adequate for your needs and consider purchasing additional individual coverage if necessary.

Alternatives to a life insurance policy

While you may not receive the same benefits from a life insurance policy if you have no dependents or outstanding debts to cover, there are other future-minded steps you can take in the meantime. While we mentioned whole life insurance above, other alternatives include:

• Directing your money into an RRSP, TFSA, or another type of savings account
• Contributing to an RESP or children’s insurance for a grandchild
• Ensuring your will and estate planning is up to date

Cost considerations

Average annual rates for men and women

The cost of life insurance for women in Canada varies depending on age, health, and the type of policy. Men typically pay higher premiums for life insurance than women because, on average, men have a shorter life expectancy.

In Canada, the average life expectancy is 82 years for men and 84 years for women.

Medical exam vs. no medical exam policies

Policies that require a medical exam generally offer lower premiums because the insurer has a clearer understanding of your health risks. However, no medical exam policies are available for those who prefer a quicker application process, though they often come with higher premiums.

Common misconceptions about life insurance

Now, let us clear some of the most commonly heard myths about life insurance:

1. Life insurance is only for the elderly: Life insurance isn’t just for older individuals. It’s valuable at any age, especially if you have dependents or financial obligations. Getting coverage early can also lock in lower premiums
2. I don’t need life insurance if I’m single: Even if you’re single, life insurance can be crucial. It can cover debts, help with future estate planning, and even leave a financial legacy
3. Life insurance is too expensive: Many people assume life insurance is costly, but there are affordable options available. Policies vary widely, and you can often find coverage that fits your budget
4. My employer’s life insurance is enough: While employer-provided insurance is a good start, it often doesn’t offer enough coverage or flexibility. Personal life insurance policies can be tailored to better meet your needs
5. I don’t need life insurance because I don’t have children: Life insurance isn’t just for parents. It can protect your loved ones, cover debts, and provide financial security for your family or other beneficiaries
6. I’m healthy, so I don’t need life insurance: Good health doesn’t guarantee you won’t need life insurance. Accidents and unexpected events can happen to anyone, making it important to have coverage in place
7. Life insurance is too complicated to understand: While life insurance policies can seem complex, understanding the basics can simplify the process.

Recent changes to capital gains taxation in Canada and their impact on life insurance

The Canadian government has introduced significant changes to the capital gains taxation rules particularly relevant for those incorporating life insurance into their estate planning strategies.

As of June 25, 2024, the capital gains inclusion rate has risen from 50% to 66.67% for profits exceeding $250,000. This means that two-thirds of capital gains over this threshold will now be taxable. For corporations and trusts, this increased inclusion rate will apply universally, without the $250,000 limit, leading to a higher tax burden across the board.

These adjustments will mainly impact high-income earners, active investors, and individuals planning to transfer assets such as real estate or family businesses. For instance, if someone sells a property for a $400,000 profit, the taxable amount would increase from $200,000 to $266,800, resulting in a significant rise in tax liability.

The role of life insurance in estate planning

With the upcoming increase in capital gains taxes, many Canadians are re-evaluating their estate plans. Life insurance is becoming a vital tool to manage the potential financial impact of these changes, particularly for those looking to preserve family assets.

Here are some key aspects you must know about:

• Tax liability management: Life insurance can provide the necessary funds to cover the increased tax obligations that arise when assets are sold or passed on after death
• Family asset preservation: For families wanting to retain properties or businesses, life insurance helps avoid the forced sale of valuable assets by covering capital gains taxes
• Customized term policies: Term life insurance can be tailored to cover the estimated tax liability for specific assets, such as a family cottage, ensuring they remain within the family
• Additional financial resources: Permanent life insurance offers a death benefit and accumulates cash value, which can be used by beneficiaries as an extra financial resource
• Strategic estate planning: Given the new tax laws, incorporating permanent life insurance into estate planning provides a strategic way to ensure financial security for heirs and protect legacies.

Frequently asked questions

Do I need life insurance?

Whether you need life insurance depends on your personal and financial circumstances. If you have dependents—such as a spouse, children, or aging parents who rely on your income—life insurance is essential to provide for them in the event of your death. It can also be important if you have significant debts, like a mortgage, that could become a burden on your loved ones. Even if you’re financially independent, life insurance can help cover final expenses and leave a financial legacy.

What age is best to get life insurance?

The best time to get life insurance is when you’re young and healthy. Premiums are generally lower for younger individuals because they are less likely to have health issues. By securing a policy early, you lock in a lower rate, which can save you money over the life of the policy. Additionally, purchasing life insurance early ensures that you’re protected as your life circumstances evolve, such as when you get married, buy a home, or have children.

Is life insurance a smart investment?

Life insurance can be a smart investment, particularly if you choose a permanent policy like whole or universal life insurance. These policies not only provide a death benefit but also build cash value over time, which can be accessed through loans or withdrawals. This can serve as a financial asset that grows tax-deferred, offering benefits similar to other long-term investments. However, it’s important to compare life insurance with other investment options based on your financial goals, risk tolerance, and need for liquidity.

Is life insurance worth it if I’m single with no dependents?

If you’re single with no dependents, life insurance may still be worth considering, especially if you have debts that you don’t want to pass on to your family or if you wish to cover your final expenses. Additionally, if you anticipate having dependents in the future, securing a policy now can lock in a lower premium. Some people also use life insurance as part of their estate planning or to leave a charitable gift.

Can I get life insurance without a medical exam?

Yes, you can obtain life insurance without a medical exam. These policies, known as “no medical exam” or “simplified issue” policies, typically have a quicker approval process and are ideal for those who prefer not to undergo a medical exam or have health conditions that might make traditional policies more expensive. However, these policies often come with higher premiums and lower coverage amounts compared to traditional policies that require a medical exam.

How does life insurance provide financial protection for my loved ones?

Life insurance provides financial protection by delivering a tax-free death benefit to your beneficiaries after you pass away. This lump sum can be used to cover various expenses, such as funeral costs, outstanding debts, mortgage payments, and everyday living expenses. For families with young children, life insurance can help fund their education and future needs. In essence, life insurance ensures that your loved ones are financially secure and can maintain their standard of living even in your absence.