Life Insurance
Life insurance is a financial protection product that provides a tax-free lump-sum payment, known as a death benefit, to designated beneficiaries when the insured person dies. It is designed to replace income, pay debts, cover final expenses, or provide financial stability for dependents and loved ones. Life insurance helps ensure that family members can maintain their quality of life and meet ongoing financial obligations even after the loss of the primary earner.
How It Works
Life insurance is a contract between you and an insurance company: in exchange for paying premiums, the insurer pays a death benefit to the beneficiaries you choose when you die. That benefit is a one-time, tax-free payment your beneficiaries can use however they need, such as replacing lost income, providing for children or dependents, paying for funeral expenses, paying off debts, or making a charitable donation. Term life insurance pays a death benefit only if you die within a specific period, such as a 10- or 20-year term or until you reach a set age like 65, and once the term ends the coverage ends with no payment; it carries no cash value, so you cannot borrow against it and receive nothing back if you cancel. Permanent life insurance instead provides lifetime coverage and usually builds a cash value you can receive back if you cancel, though that amount is less than the premiums you paid. Universal life insurance is a form of permanent coverage that combines life insurance with an investment account, so its death benefit and cash value may rise or fall depending on the investments chosen and their returns.
Example:
Picture a Canadian parent with a mortgage and two young children who buys a 20-year term life policy alongside their workplace health and dental benefits. The health plan reimburses everyday costs OHIP does not cover, like dental cleanings and prescription drugs, while the life policy does nothing during their lifetime. If the parent dies within the 20-year term, however, the insurer pays a tax-free death benefit the surviving family can use to replace the lost income, keep up mortgage payments, and cover funeral costs.
What to Watch For:
Life insurance and health insurance serve different purposes: health insurance pays for medical care beyond what government-funded plans like Ontario's OHIP cover, while life insurance pays a death benefit to your survivors. Some policies include living benefits or accelerated death benefit riders that let you use part of the death benefit for medical expenses if you are seriously ill, though doing so reduces the eventual payout. Coverage generally extends to natural, accidental, and illness-related deaths, but exclusions often apply to high-risk activities and, in most cases, to suicides within the initial years of the policy.
