Life Insurance

What life insurance is actually for

Life insurance replaces money that stops. That is the whole of it. Somebody contributes something a household depends on, whether a salary, a set of unpaid tasks that would otherwise be hired out, or a share of a business, and a policy converts that contribution into a sum paid when that person dies.

Two things follow. A household with nobody depending on it may need no coverage at all, and saying so is part of an honest conversation. Need is not feeling: the amount is measured by what would still have to be paid for, not by how much somebody is valued.

The most commonly missed case is the person who runs a household without a salary. Nothing stops arriving when that person dies, so the loss is invisible on a pay stub, but the work still has to happen and somebody is now paid to do it. Childcare, transport, meals: a real cost with a real local price.

On the tax side, a death benefit paid under a life insurance policy is generally received free of income tax by the beneficiary, and subsection 148(9) of the Income Tax Act keeps that payment outside what counts as a disposition of the policy. It is a general rule with exceptions attached, and how it lands in a particular situation is a question for a qualified tax professional.

How much, and how long

Sizing coverage from the mortgage is the most common error in the subject. The mortgage is one line on a longer list, and it is the line that shrinks on its own. Sizing starts from the household: the income other people live on and the years they will live on it, the cost of finishing the raising of any children, the debts that do not disappear, the final costs and the tax that arrives with a death, then a subtraction for what already exists.

The number that falls out of that is a need rather than a target. It moves as the household moves, usually downward as obligations are discharged, and occasionally upward when a business or a second property arrives.

How long has a cleaner answer than most people expect, because obligations come in two shapes. A dated obligation ends on a date you can name: an amortisation runs out, a child finishes school, a loan is repaid. A permanent obligation does not end: the tax that lands at death, the cost of a funeral, a dependant who will always need support, an estate that has to be divided fairly.

Match the shape and the choice mostly makes itself. Term insurance fits a dated obligation and permanent insurance fits one with no end date. Plenty of households carry both kinds of obligation, which is why plenty sensibly hold both kinds of policy.

Term, and the four shapes permanent coverage takes

Term insurance covers a stated number of years at a cost that stays level through them. At the end it renews at a much higher cost or it ends. Nothing is paid back if it ends unused, which is what makes a large amount affordable while it is needed. Two features matter more than the price. Guaranteed renewability continues the coverage without new medical evidence. Convertibility exchanges it for permanent coverage without proving health again, and that right has a deadline. A twenty year term is the common shape for a young family.

Permanent coverage lasts for life and comes in four shapes. Term to 100 is the plainest: permanent protection at a level cost, generally with little or no cash value, and the least expensive way to hold coverage that must not expire.

Non participating whole life fixes both the cost and a guaranteed cash value on a contractual schedule and adds nothing above it. What is guaranteed is all there is, which is a limitation and also the reason it is predictable.

Participating whole life carries the same guaranteed foundation and may credit a dividend above it. The dividend is declared annually at the insurer’s discretion and is not guaranteed, so every illustration of one is an assumption. It is the most expensive of these for a given amount.

Universal life separates the pieces and shows them: a cost of insurance, and an account invested according to the owner’s choices. Flexibility is the feature and the risk at once, because the owner carries the investment result and an underfunded contract can fail.

How underwriting works, and how long it takes

Underwriting is how an insurer decides what it will offer, and it begins with the application. The answers are not a formality: they form part of the contract, and an inaccurate answer is the commonest reason a claim becomes complicated years later. Answer accurately, including the parts nobody wants to write down.

Evidence is scaled to age and amount. Smaller amounts on younger lives are often decided from the application and database checks alone. Larger amounts, or older lives, bring in a paramedical visit, fluids, and often a report from the family doctor. That last item is the usual reason a file sits, because the delay belongs to a medical office rather than to the insurer.

Four answers are possible and they are genuinely different. Standard is an offer at the ordinary cost for that class. Rated is an offer at a higher cost because the file carries additional risk. Postponed is not now, with a reason and often a date. Declined is no offer at this time, which is not permanent and not a verdict from every insurer, since two carriers reading one file can reach two conclusions.

The honest timeline is weeks, sometimes a couple of months, rather than days. Once a policy is issued there is a contestability window at the start of the contract during which an insurer may revisit what was stated. How that window works is worth understanding, particularly by anybody who answered carefully.

Who owns it, who receives it, and what happens at a claim

Three roles exist in every policy and they are often confused. The owner controls the contract, pays for it and can change it. The life insured is the person whose death triggers payment. The beneficiary receives the money. One person can hold two roles, but once a business is involved the choice of owner carries tax and control consequences that deserve a decision rather than a default.

The beneficiary designation is the part most often wrong on policies that are otherwise fine. A former spouse still named years after a separation. An estate named by default when a person was intended. A minor named with no trustee, which puts the money under supervision until the age of majority. A designation assumed revocable when it is not. None of these appear until a claim, and by then nobody can correct them.

At a claim the difference is visible. Money payable to a named living beneficiary is paid directly once the forms and the proof of death are in, and it generally arrives faster than money travelling through an estate. Proceeds directed to the estate join everything else and wait for the representative to be appointed and the debts settled. That is the whole reason insurance is used for estate liquidity.

A policy is not a document to file and forget. Six events should send anybody back to it: a marriage, a separation, the arrival of a child, the purchase of a home, the start or sale of a business, and a death in the family. Each changes who depends on the income or who should receive the money, and often both.

Questions people ask