Life insurance is often touted as the financial safety net we all need, but what if it’s an added expense you’re not sure you can afford? If that’s your thinking, you’re far from alone—a 2019 study showed that most Canadians are underinsured, with 49% having never purchased life insurance at all. But before you veto the idea altogether, let’s look at how much life insurance can cost.
First, what is life insurance?
Life insurance is a policy you pay into in regular installments, and in the event of your death, your beneficiaries get a payout. The contents of your specific policy will vary based on your needs, but it can pay for end-of-life expenses such as a funeral, as well as settle debt obligations including a mortgage, an auto loan and credit card bills. Most importantly, a policy can make life easier for your family when you’re gone by helping them keep their home, covering their everyday living expenses and supporting their plans for the future, the cost of your children’s post-secondary education, for instance. (Find out the difference between life insurance and mortgage insurance.)
How much life insurance do I need?
Determining how much coverage you need can be calculated by adding up the things you own and the things you owe.
“Consider using life insurance to pay off your debts and obligations,” says Peter Wouters, director of tax, retirement and estate planning services at Empire Life Insurance Company in Kingston, Ont. “Then consider that your obligations will also include providing ongoing income to a surviving spouse and children, and factor in how long your family will need a certain amount of income.” Once you add that up, use that figure to help determine how much life insurance you need.
Wouters gives the following example. “Let’s consider someone who wants a $250,000 mortgage paid off or reduced, so their spouse can handle the payments; has credit card debts of $5,000; and funeral and estate-settlement expenses of $15,000. There’s a basic need of life insurance coverage for $270,000.”
Then factor in living expenses. “If the family needs $2,500 a month to get by for the next 10 years, then an additional $300,000 [$2,500 x 12 x 10] is required, for a total of $570,000 of coverage.”
But bear in mind, Wouters says: almost half of that will be spent shortly after you pass away, and your beneficiaries’ cost of living may well rise over time.
How liabilities and assets can affect the cost of life insurance
You’ll see the terms “liabilities” and “assets” thrown around a lot in the insurance world. Simply put, assets are the things you own and liabilities are the things you owe. It’s the difference between the two that’s important for coverage.
“The difference presents either a surplus of assets—you’re worth more than what you owe; or a deficit—you owe more than you own,” says Wouters. “The exercise of documenting and comparing assets and liabilities can give you an idea of where you stand at any given time.”
It may feel morbid, but Wouters suggests looking at your financial situation through the hypothetical lens of “What if I died last night?” “It tells you what shape you’re leaving your estate in for your family and the executors/estate administrators who must wrap things up for you and then move on.”
Fill out the following chart to help you figure out what you might need:
|Assets||Resale value||Useable to pay off debts and obligations||Liabilities||Amount owing||Cash difference|
|Furnishings (saleable value)||+$||No||-$|
|Registered investments (RRSPs, TFSAs)||+$||No||Income taxes if sold (30%-50% on RRSPs or RRIFs)||-$|
|Non-registered investments (mutual funds, ETFs, stocks, segregated funds, real estate)||+$||Maybe||Income taxes on capital gains or capital losses if worth less at time of death||-$|
|Lines of credit||-$|
|Funeral and estate settlement costs||-$|
|Moving costs if family doesn’t remain in current location||-$|
“The net amount of your assets minus your liabilities represents the legacy you leave behind,” says Wouters. “Life insurance can pay for your liabilities, preserve your assets, and provide the amount of money you were planning on having for your family had you lived longer.”
How much money should I leave my family?
In a perfect world, we’d all leave our family billions, but we’ll settle for figuring out what’s reasonable. Wouters suggests asking yourself some questions about your current state of finances to determine what your family needs. “Will the income you’re generating be needed to support your family’s lifestyle? How much are you bringing home each pay period? Are there dreams and plans that now are in jeopardy?”
Then there’s the future. Wouters also recommends considering plans for your children’s education. “Consider leaving money so your children can still go to university, or pursue a trade and go to the college of their choice.” He also recommends accounting for any special needs. “Do you have children who are disabled or have needs requiring ongoing support? Would you have helped out if you were around?”
Consider the little things that might pop up as added expenses, too. “There are weddings; your own funeral; the furnace, air conditioner, windows or roof that need replacing. And then there’s the car that’s on its last legs. You’re no longer around to pay for that, or pay debts like the mortgage, car payments and credit cards, and provide income for living expenses.”
The types of life insurance
There are basically two kinds of life insurance: Term and permanent (sometimes referred to as “whole life”). “Term insurance is temporary—it’s like renting,” says Wouters. “You don’t build up any equity.” Lock in your policy for, say, 20 years and the premiums won’t go up. Once you need to renew, the premiums can go up.
The cost covers the average amount of risk for each period being covered, and you can buy it for a 10-, 20- or 30-year period. “Depending on your age, you may be able to renew the coverage for a further period of time at higher rates—much higher at each successive renewal,” says Wouters. “For example, the rates for a 10-year renewable term can go up 2.5 to three times with each renewal. If it’s any reassurance, the insurance company generally guarantees what those rates are going to be up front. If the insurance company’s claims experience is worse, expenses go up, and/or long-term interest rates stay low or drop, your rates are still contractually guaranteed as long as you continue to pay the premiums on time. It doesn’t matter that you may become a worse risk down the road because of health and lifestyle changes either.”
Permanent—or whole life—insurance coverage is just that: permanent. “It provides coverage for as long as you live—provided you pay the premiums—and the cost is generally the same throughout,” says Wouters. “The extra amount you pay in the early years is invested by the insurance company to help pay the cost in the later years, when the actual premiums you’re paying are insufficient to cover the risk.”
Wouters explains that permanent life insurance generally builds up equity in the form of cash value. “If you don’t need the coverage, you can [cancel] the policy for ‘cash surrender value.’ Alternatively, you can use the accumulated cash value to completely pay up that policy for a smaller sum insured. It’s like selling a house and using the equity to downsize to a smaller one with no mortgage and no extra costs or requirements.” Life insurance companies do not invest your money for high returns. Instead, the money is invested in secure bonds.
Factors affecting the cost of life insurance in Canada
Regardless which kind of insurance you buy, the price is based on the net cost of pure insurance. “Specifically, what the risk of dying is at any given time for [individuals in your age group]—that risk goes up with age,” says Wouters. “Then you factor in acquisition and administration costs, including underwriting and servicing the policy.”
The insurance company must also set aside reserves against future claims and invest that money conservatively, making long-term predictions of rates of return. “The higher [your] risk of dying, the higher the premium,” says Wouters. “The higher the costs of underwriting and servicing the policy, the higher the premium. The lower the rates of return on money, the higher the premium.”
So, how much does life insurance cost in Canada?
Short answer: The cost of coverage depends. You can use an online life insurance calculator or life insurance estimator to get a personal estimate.
Wouters says people tend to overestimate how much life insurance costs. “One way of looking at the cost is as a percentage of the benefit. It’s like buying dollars for pennies whenever those dollars are needed.”
Here’s what makes your policy more (or less!) expensive.
The type of insurance
“Permanent life insurance—coverage that lasts as long as you live—can cost between one to five cents per year for every dollar the insurance company will pay when you die,” says Wouters. And if you’re under 30, it’s even less. “It’s generally two to three cents for every dollar of coverage at age 60, payable every year.”
What’s more, permanent life insurance generally has growing cash values, which can be a source of emergency funds or that you can get if you surrender the policy. “Alternatively, you may decide to downsize your policy down the road,” says Wouters. “The cash value in the policy is like equity that can provide you with a reduced, paid-up policy for life.”
The cost of permanent life insurance is generally fixed. Your rates are determined when you buy your policy, but your age when you buy does play a big factor. Young and buying whole life? You pay more compared to term insurance. But whole will cost much less compared to term in your later years, when the risks for dying are much higher. But either way, it’s cheaper when you’re younger.
How much does term life insurance cost in Canada? Initially, it costs less than permanent insurance, but rates go up at the end of each term (every 10, 20 or 30 years) and increase substantially at each renewal. Another thing to consider is that most term insurance will stop providing coverage years before the average person passes away. “You can pay for it monthly, semi-annually or annually, depending on your budget.”
Age, gender and habits
Again, the cost of life insurance depends in part on how healthy you are when you apply for coverage, as well as your lifestyle habits and your family’s medical history. Generally, the older you are, the higher the cost. “Men, on average, don’t live as long, so they pay more than women, and the same applies to smokers,” says Wouters. “There’s a higher risk of dying sooner.“
Interestingly, weight isn’t as much of a factor as you may think. “You need to be much heavier than the average person before life insurance rates go up,” says Wouters. “Someone who is five-foot-eight, weighs less than 247 pounds. and is otherwise healthy could get coverage at standard rates. The same holds true for someone who is five-foot-four and weighs less than 219 pounds.”
Healthy, active, clean-living individuals (non-smokers, casual or non-drinkers, non-drug users) who don’t have a family medical history that may impact their own health and longevity will pay less for coverage. “If all that gets worse after they buy the coverage, the rates are locked in as long as they pay their premiums on time,” says Wouters. “Policy owners who kick the smoking habit and other lifestyle habits can apply to have their rates reduced.”
Life insurance through an employer: Do you need more insurance?
You can bridge this gap by also buying insurance personally. “No matter what happens to your job or group plan, you’ll have that coverage for as long as you pay the premiums for the period you want covered,” says Wouters. “Remember that group life insurance ends at a certain age—generally normal retirement age. You and your family may have ongoing needs for tax-free cash whenever death occurs, and individual life insurance can fill the gap.”
And when it comes to life insurance, the more coverage, the better. “That burden falls on the shoulders of those you leave behind,” says Wouters. “Life insurance is for people who care. How much do you care to leave them, to make sure that life goes on as if you were still alive to join in?”