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How life insurance works: A step-by-step guide
A life insurance policy can help financially protect your beneficiaries after you die. Here's how it works.
Step 1: You choose a life insurance policy type
Life insurance starts with selecting the right coverage for your needs. You'll choose between term or permanent insurance based on your budget and long-term goals.
Term life insurance policies cover you for a set period, like 5 to 40 years. It's more affordable and works well if you need coverage for a specific time.
Permanent life insurance policies help protect you for your entire life. It costs more but can build cash value over time, which you can access while you're alive.
Step 2: You'll go through the application process and underwriting
Once you've chosen your policy type, you'll complete an application. Some policies require you to go through underwriting. This process helps the insurance company understand your health and lifestyle.
The application process includes:
- Answering questions about your health history
- Sharing details about your lifestyle and habits
- Providing information about your family's medical background
- Disclosing any medications you take
Underwriting determines your premium
After you apply, underwriters review your information. They assess your risk level to set your premium price.
This may include:
- A medical exam (e.g. blood test, urine sample, height and weight check)
- Review of your medical records
- Background checks on your lifestyle
The process typically takes a few weeks. Some policies offer simplified underwriting with fewer requirements.
Keep in mind, your coverage typically starts once approved and you've made your first payment - not from when you apply.
Step 3: You pay premiums for life insurance
Your premiums keep your policy active. You'll pay regularly to maintain your coverage.
Monthly or annual payments
You can pay your premiums monthly or annually. Monthly payments offer flexibility, while annual payments may save you money.
Most people choose monthly payments because they fit better into their budget. Annual payments often come with a small discount.
Flexible costs
Term life insurance premiums stay fixed during the coverage period, but premiums will increase upon renewal. Permanent life insurance premiums can be flexible depending on the policy type you choose.
Step 4: You name beneficiaries for your life insurance policy
Your beneficiaries receive your death benefit. Choosing the right people helps ensure your money goes where you want it.
Who can you name?
You can name anyone as your beneficiary. Common choices include:
- Your spouse or common-law partner
- Your children
- A trust
- A business
- Your estate
You can also name multiple beneficiaries and decide how much each person receives.
Making changes to your beneficiaries
You can update your beneficiaries at any time. Review your choices regularly as your life circumstances change.
Major life events are good times to review your beneficiaries. These include:
- Getting married or divorced
- Having or adopting a child
- Losing a loved one
- Changes in your financial situation
Read more:
Step 5: How life insurance pays out
Your beneficiaries receive financial support when you pass away. The payout process can be straightforward.
When benefits are paid
Your beneficiaries receive the death benefit when you die. They need to file a claim with your insurance company. The insurance company reviews the claim and verifies all information. Once approved, they release the funds to your beneficiaries.
Tax-free lump sum
Most life insurance payouts are tax-free in Canada. Beneficiaries typically receive the full amount as a lump sum payment.
This means your loved ones get the complete death benefit. They can use the money however they need – paying bills, to help cover funeral costs, to help secure their future, etc.
How to receive a life insurance payout
- Submit a claim. The designated beneficiary reaches out to the insurance company following the insured person’s death. More on how to submit a claim
- Provide required documents. The insurer needs documentation such as the death certificate to validate the claim.
- Review period. The insurance company processes the claim, typically taking a few weeks to a few months. They confirm policy information and verify beneficiaries.
- Receive payment. After approval, the death benefit is distributed according to the selected payment method.
Types of life insurance in Canada
| Insurance type | Coverage duration | Key features |
|---|---|---|
| Term life insurance | Specific period |
|
| Permanent life insurance | Entire life |
Three types available: whole life, participating life, and universal life |
| Whole life insurance | Entire life |
|
| Participating life insurance | Entire life |
|
| Universal life insurance | Entire life |
|
How much does life insurance cost in Canada?
Life insurance costs vary based on several factors:
- Your age
- Your health
- The coverage amount
- The policy type
- Whether you're a smoker
- Assigned sex at birth
Understanding your costs
Several things affect what you'll pay for life insurance. Younger, healthier people typically pay less. The more coverage you need, the higher your premiums will be.
Your lifestyle matters too. Smokers pay more than non-smokers. Risky hobbies or jobs can also increase your premiums.
Term life insurance costs
Term life insurance is typically more affordable. For example, a healthy 30-year-old may pay $20 to $40 per month for $500,000 in coverage.
This makes term life a good choice when you're on a budget.
Permanent insurance costs
Permanent insurance costs more but provides lifetime protection. Your premiums stay in place for life. The policy may build cash value, which you can access later.
While you'll pay more upfront, permanent insurance offers long-term benefits that term policies don't include.
Get an accurate life insurance quote
The best way to know your cost is to get a personalized quote. Your specific situation determines your exact premium. Get a quote online or connect with an advisor near you.
Read more:
How much life insurance do you need?
It really depends on your unique situation. The amount of recommended coverage varies from person to person depending on their annual income, debts, net worth, and more.
To get an estimate of how much life insurance is right for you, try our free life insurance calculator. You only have to answer a few questions to help us figure out how much coverage you may need to help financially protect your beneficiaries.
Who needs life insurance in Canada?
Life insurance isn't one-size-fits-all. Different people need coverage for different reasons. Here's who benefits most from having a policy or multiple policies in place.
Life insurance for parents
If you have children who rely on your income, life insurance can help financially protect their future. Consider this – if a parent were to die, their beneficiaries (spouse or children) can use the death benefit to help:
- Pay for education
- Cover childcare and daily expenses
- Protect their family's lifestyle
- Ensure bills and mortgage payments continue
Your children depend on you for more than just love and support. They need financial stability too. Life insurance helps give you peace of mind knowing they'll be cared for no matter what.
Life insurance for homeowners
Life insurance can help pay off your mortgage. If you were to die, your beneficiaries can use the death benefit to help:
- Pay off your remaining mortgage balance
- Prevent forced sale of your home
- Keep your family in familiar surroundings
- Reduce financial stress during difficult times
Mortgage protection solutions, which includes term life insurance and critical illness insurance, helps provide financial security for homeowners by ensuring their mortgage can be paid if unexpected events occur, such as death or a critical illness. Mortgage protection solutions can help protect your family's home by covering mortgage payments or paying off the remaining balance, preventing forced sale of the property during difficult times.
Life insurance considerations for businesses
You can help finanically protect your business or your most essential employees with key person insurance.
This type of insurance can help keep your business running and your cash flow consistent after a key person dies. This way, you can remain on track even if you lose an essential member of your team. Or if you suddenly need cash for a buy-sell agreement if a partner dies.
Life insurance for singles
Life insurance isn't just for families – it's a smart move for single people too. Even without dependents, you likely have debts like student loans, a car payment, or credit cards that someone would need to handle if you were to die.
Singles might consider life insurance coverage to help:
- Pay off a mortgage after death
- Pay off student loans and credit card debt after death
- Cover final expenses and funeral costs
- Protect co-signers from your debts
- Prevent burden on parents or siblings
- Provide peace of mind for loved ones
Life insurance for seniors
Life insurance remains valuable in your senior years for reasons that go beyond supporting dependents. It can help cover final expenses like funeral and burial costs, ensuring these significant bills don't burden your family during an already difficult time.
Seniors can benefit from life insurance as it helps:
- Cover funeral and burial expenses
- Pay off remaining debts or medical bills after death
- Leave a legacy to children or grandchildren
- Support causes and charities you care about
- With estate planning
Life insurance for people with shared financial obligations
When you share financial responsibilities with someone – whether it's a mortgage, car loan, business debt, or co-signed student loans – life insurance can help protect the people who count on you.
Common shared obligations:
- Joint mortgages or rent agreements
- Co-signed car loans or student loans
- Shared credit cards
- Business partnerships and debts
- Household expenses and bills
If you were to die, your debts don't disappear – they fall to your co-borrower or loved ones to handle alone. Life insurance helps ensure that shared obligations like joint credit cards, household expenses, or business partnerships won't become an overwhelming burden for the person left behind.
When you share financial responsibilities, you share the risk too. Life insurance can help you honour your commitments even after your death.
Common life insurance myths debunked
Many people avoid life insurance because of common misconceptions. Let's clear up these myths so you can make informed decisions about protecting your loved ones.
Myth 1: It's too expensive
Life insurance is more affordable than most people think.
The reality:
- A healthy 30-year-old can get $500,000 in coverage for $20-$40 per month
- You have flexible payment options to fit your budget
- Some policies like term life insurance can offer protection at a low cost
- You can adjust coverage as your needs change, depending on your policy
Don't let cost concerns stop you from protecting your family. You might be surprised at how affordable coverage can be.
Myth 2: I'm too young
Younger applicants get lower premiums. Buying early locks in affordable premiums. It also helps ensure you have coverage before health issues develop.
Why buying young makes sense:
- You'll pay less for the same coverage
- You lock in lower premiums for your policy
- You're more likely to qualify with better health
- You can protect your future insurability
- You can build financial protection early
The best time to buy life insurance is when you're young and healthy. Waiting only costs you more.
Myth 3: Work insurance is enough
Group coverage through work is a good start. But it's rarely enough. It also disappears if you change jobs or lose employment.
Problems with relying only on work coverage include:
- Coverage amounts are often limited
- You lose protection when you leave your job
- You can't take the policy with you after you leave your job or retire
- Coverage may not match your family's needs
- You have no control over policy changes
An individual life insurance policy gives you control and portability. It stays with you no matter where you work. You can also get multiple life insurance policies to meet all your needs.
Myth 4: I'm too old to get life insurance
For older adults ages 65+, coverage remains valuable for final expenses, estate planning, and leaving a legacy.
If you’re an older adult, life insurance can still help:
- Cover funeral and burial costs ($10,000-$15,000 on average)
- Pay final medical bills and debts after death
- Leave a legacy for your loved ones
- Support your favourite charities or causes after death
- Help with estate taxes and planning
- Provide peace of mind for your family
Age shouldn't stop you from getting coverage. Options exist for people at every life stage.
Myth 5: The medical exam is too invasive or time-consuming
Many policies now offer simplified or no medical exam options. The process is often quicker and easier than people think. Here’s what you can expect:
- No-medical exam policies available for eligible applicants
- Simplified underwriting policies with basic health questions
- Quick approval processes (sometimes within days)
- At-home medical exams if required
- Convenient scheduling that fits your life
Typical medical exam includes:
- Basic measurements (height, weight, blood pressure)
- Sample blood and urine tests
- Often done at your home
The application process is simpler than you think. Don't let exam concerns hold you back.
Myth 6: My debt dies with me
Your debts don't disappear when you die. Someone will need to handle them. Here's what you should know:
- Co-signers and joint account holders become responsible after you die
- Outstanding debts can reduce what's left for your beneficiaries
- Your estate must pay debts before distributing assets
- Creditors can make claims against your estate
- Family members may feel obligated to pay
Common debts that continue:
- Joint credit cards
- Co-signed loans
- Mortgages with another person's name
- Business debts with partners
- Car loans with co-signers
Life insurance helps protect your loved ones from inheriting your financial obligations. It ensures your debts won't burden the people you care about most.
Medical exams for life insurance
Traditional policies may require a medical exam. This includes blood tests, urine samples, and health questions. The exam helps insurers assess your risk.
Simplified and no-medical options
Many insurers offer simplified issue policies. These require only health questions and no medical exam. No-medical options are faster but may cost more.
How to get life insurance
Getting life insurance is simpler than you might think. Follow these five steps to protect your family's financial future.
1. Decide on your coverage amount
Start by figuring out how much coverage makes sense for your situation.
Consider these factors:
- Your annual income (multiply by 10-15 years as a starting point)
- Outstanding debts (e.g. mortgage, car loans, credit cards)
- Future expenses (e.g. children's education, cost of living, etc.)
- Final expenses (funeral and burial costs)
- Your spouse's income and ability to cover expenses alone
- Existing savings and assets
Quick calculation example:
- Annual income: $75,000 x 10 years = $750,000
- Mortgage balance: $300,000
- Other debts: $25,000
- Children's education fund: $100,000
- Total coverage needed: $1,175,000
Don't worry if the number seems high. Coverage is more affordable than you think.
2. Choose one or multiple life insurance policies
Pick the insurance type that matches your needs and budget. Depending on your circumstances, you might need more than one type of policy.
| Term life insurance | Permanent life insurance |
|---|---|
|
|
3. Apply for coverage
You have choices when it comes to applying.
Application options:
- Traditional application with medical exam
- Simplified issue (answers health questions only)
- No-medical policies for faster approval
- Online applications for convenience
- Phone or in-person applications with an advisor
Information you'll need:
- Personal details (e.g. age, address, contact info)
- Health history and current medications
- Family medical history
- Lifestyle information (e.g. smoking status, hobbies, etc.)
- Financial information
- Beneficiary details
Be honest on your application. Accurate information helps ensure your family gets the benefits they need.
4. Wait for approval
Your application may have to go through underwriting, in which case, the insurer reviews your information to determine your premiums.
What happens during underwriting:
- The insurer reviews your health, lifestyle, and financial information
- They assess your risk factors
- Medical exam results get processed (if required)
- They verify information you provided
- They determine your premium
5. Receive your policy
Once approved, your coverage begins. Here's what happens next.
Final steps:
- Review your policy documents carefully
- Make your first premium payment
- Your coverage starts
- Keep your policy in a safe place
- Share policy details with your beneficiaries
- Review coverage annually to ensure it still meets your needs
Important reminders:
- Keep your beneficiaries updated
- Pay premiums on time to keep coverage active
- Consider how major life changes may affect your coverage
- Keep emergency contact information current
You've taken an important step to help protect your family's future. Your loved ones can now have peace of mind knowing they're financially protected.
Get life insurance
You can get started in the way that works best for you:
Get a quote from an advisor
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Get a quote and buy online
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This information is meant for educational and illustrative purposes only. Some conditions, exclusions and restrictions apply.
Reviewed by Jean Turcotte