How to choose your life insurance?

It's not pleasant to think about the consequences of one's death, and we often tell ourselves that it's too early to think about such things. Nevertheless, everyone wants to prevent their family from having to suffer financial hardships, as well as bereavement. This is where life insurance comes in!

There are just as many insurances as there are insurers, each with their own particularities. So, how do you choose one? We've identified the most important knowledge to have in order to determine which contract to choose.

Life insurance: what is it?

Life insurance is a contract that guarantees the payment of an indemnity to a person designated as a beneficiary in the event of the death of the insured. It is possible to name several beneficiaries (e.g. spouse, children, parents, etc.)

Purchasing life insurance can help ensure that your loved ones have some financial protection after your death. This indemnity can thus help to repay debts, make up for lost income or leave an inheritance.

To be covered by a life insurance policy, the subscriber pays premiums to the insurer, the amount of which varies according to the level of coverage chosen. The acceptance of the application for insurance is generally subject to a medical questionnaire that certifies the state of health of the insured.

There are two types of life insurance:

• term life insurance, taken out for a fixed term;
• and permanent life insurance (whole or universal), which covers the insured until their death with no time limit.

Permanent policies usually include a cash surrender value. This is the amount paid by the insurer in the event of cancellation.

Life insurance policies may also include health-related protections, including disability insurance.

Term insurance, full insurance or universal insurance?

While life insurances all have the same purpose, regardless of the type of insurance chosen, they each have their own characteristics.

Term life insurance

Term life insurance provides the insured with protection over a limited time period. It can be renewed or converted into permanent life insurance. It is generally taken out so as not to leave its successors with a clearly identified financial burden over a given period (e.g. company debt, mortgage repayments, etc.)

Its cost is more affordable than that of permanent insurance, but increases in the event of renewal.

Term life insurance has no cash surrender value.

Whole life insurance

This is a permanent life insurance policy which remains in force until the death of the insured, with no age or duration limit. It can be used to cover the payment of expenses related to your death or even to leave an inheritance.

This type of insurance offers a more advantageous cost in the long term. The premiums may be fixed, evolving or payable for a certain number of years only.

It is possible to withdraw funds from a whole insurance policy in the form of a loan against the cash surrender value. However, this sum must be repaid with interest in order to prevent the insurer from terminating the contract.

Universal life insurance

Contrary to what its name may suggest, universal life insurance is far from suitable for everyone.

These contracts offer both a life insurance solution and a savings account with investment options. They are best suited for well-informed investors.

The insured may pay more than the amount of their insurance premiums. The surplus is placed in an accumulation fund. The sums available in this fund are not subject to tax until they are withdrawn.

This can be a good option if you intend to:

• build a legacy to pass on;
• top up your RRSP or TFSA once you reach the contribution limit;
• protect the value of a business.

Criteria for choosing life insurance

1. Assess your situation

While there is no recommended minimum age for purchasing life insurance, needs may vary over time. To determine the insurance that will best suit your needs, you must consider:

• your age;
• your state of health;
• your family situation;
• your outstanding debts;
• your short or long-term projects (creation of a business, purchase of a house, imminent retirement);
• the duration of protection you want (temporary or unlimited).

2. Calculate the amount of compensation needed

After taking stock of your situation, you must then calculate the costs that your family would be left to face in the event of your death.

Obviously, there are funeral expenses to consider. But there are also the debts that you could leave them (car loan, mortgage and credit card repayments…) You must also determine the amount needed for living expenses, and the length of time for which you will need to be compensated in light of the loss of income. If you have children, the costs related to their future studies should not be neglected either.

It is recommended that you choose insurance that will allow your family to obtain compensation covering 7 to 10 times your annual income. Of course, the resources that will continue to be available within the household must also be taken into consideration. A calculation tool available on the Government of Canada website will help you calculate the amount required.

3. Choose a contract with medical examination

Some insurance companies have no requirements regarding the state of health of their policyholders. However, it is important to note that you will obtain a higher level of coverage, and for a better price, with a life insurance policy that necessitates, as a minimum requirement, a medical questionnaire.

Indeed, insurers who accept unrestricted applications are targeting people with a low level of insurability. They most often have a poorer state of health and may have been refused by other companies. Most often, the premiums are less advantageous, as they guarantee limited coverage that varies between $5,000 and $25,000.

4. Shop around for available products

The level of compensation guaranteed by a life insurance policy varies from one company to another. Some may include exclusions to its execution, while others may increase the amount of premiums annually. It is therefore important to read your contract carefully before committing to anything to understand the conditions of application.

You can search online to compare the amount of the premiums, the benefits offered, any additional benefits, such as disability insurance, the reliability of the insurer, etc. Note that an insurance salesman must be authorised by the AMF (Financial Markets Authority). Do not hesitate to carry out an audit through a simple call to their services before signing a contract.

Facilitating your choice of insurance

If you are not sure that you can make the right choice on your own, or if you are short on time, an insurance broker can accompany you throughout the process. As an impartial expert, they will be able to find the product that best meets your needs.

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