How does life insurance work in Canada?

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Talking about life insurance can be a bit dull or morbid, depending on your point of view. But it doesn’t have to be complicated.

And it’s important to grasp the basics, especially if you have a partner or kids who depend on your income.

The truth is you don’t really need life insurance while you’re single — at least not very much — but once you start a family, it’s time to get into the game. That’s when you should plan a gift that will help your loved ones pay the mortgage, make car payments, afford daycare and save for university, just in case you pass away sooner than you expect.

Sure, you won’t get a shopper’s high from buying life insurance, but there’s a more important perk to consider: peace of mind. Like a new roof, you’ll never touch or see your policy, but it’s always there to protect your family when they need it.

Life Insurance 101

Here’s the deal: In exchange for regular payments during your life, the company of your choice will guarantee that a predetermined sum will be paid out to your loved ones after your death.

Formally called a death benefit, this payout will help cover the cost of living for your loved ones after you pass away.

Life insurance is mostly designed for people with dependents, but single people can buy some, too. You might need $10,000 or more on hand to pay for a proper funeral and save your parents, friends and siblings from bearing the burden of your last hoorah.

And rest assured, your loved ones won’t have to report life insurance payouts as taxable income, so they’ll get to keep every cent.

Decoding the lingo

Before you buy a policy, online or in-person, these are the buzzwords you need to know:

  • The policy is your agreement with the insurance company.

  • The policyholder is you, or the person who owns the insurance. You can buy policies on behalf of loved ones, too.

  • Premiums are the regular payments made to the insurance company to maintain your policy. They are generally paid monthly, quarterly, bi-annually or annually.

  • The beneficiary is the person who will receive your death benefit. You can also divide up the payout among several beneficiaries.

Now that you can speak the language, let’s look at the two main types of life insurance out there: term and “perm.”