Do you need life insurance? A primer for Canadians

This article has been updated from a previous version.

Life insurance isn’t like auto insurance. It’s not mandatory, nor is it advised for every Canadian. The purpose of life insurance is to provide a financial cushion for those who depend on your income. If you already have significant wealth built up or no one depending on your income, you probably don’t need life insurance.

That said, for certain people, life insurance is essential. Canadians carrying big loans and/or those who have dependents, like kids or elderly parents, will need that financial safety net if the worst occurs and you end up passing away. That way, your family won’t have to worry about finances during an incredibly difficult time.

Who needs life insurance?

According to the latest data from the Canadian Life & Health Insurance Association, 22 million Canadians have life insurance in place, with an average of $458,000 in coverage per household.

If you’re one of the many Canadians who don’t yet have life insurance, you might be hesitant that it’s an expensive financial commitment that won’t fit into your budget — especially if you’re raising kids, have a mortgage, or are paying off large debts.

However, you should consider what would be a bigger burden: the amount you’d pay in monthly life insurance premiums, or the financial hardship that your passing would mean to those who depend on you.

Fortunately, life insurance doesn’t have to be expensive. The type and amount of coverage you need will depend on your unique situation, but term life insurance is a great option for those looking to protect their loved ones without breaking the bank. This type of policy provides coverage for a fixed period of time — usually 10, 20, or 30 years — and is typically more affordable than other types of life insurance, such as permanent life insurance.

Here are some different examples of who needs coverage most and what kind of life insurance might best suit those circumstances.

Couples: Married and common-law

Life insurance is an important financial safety net for your family, even if your family is just you and your partner at the moment.

Whether you’re married or common-law, it’s important to have coverage in place to protect your partner from financial hardship if you are no longer around to support them.

Even if both partners are working, life insurance gives your partner the financial breathing room to take extra time off work during this difficult time. It also allows your partner to continue enjoying the lifestyle you’ve built together without financial sacrifice.

When considering a life insurance policy, ask yourself:

• If you were no longer there to help pay the bills, how would your partner manage financially?
• Would your partner be able to maintain their current lifestyle, or continue to pursue financial goals you were working toward together?
• Do they have enough savings to pay off jointly held debts and manage their own living expenses?

As the beneficiary of your policy, your partner can use your tax-free life insurance payout to:

• Take time off work
• Pay off your mortgage or other debts (if co-signed)
• Manage day-to-day expenses
• Save for retirement
• Pay for final expenses

With coverage in place, you can breathe a sigh of relief knowing that you and your spouse’s financial security is one less thing for you both to worry about.

Mortgage holders

A mortgage is one of the most expensive financial commitments most Canadians will make in their lifetime. Though mortgage life insurance is an option that lenders may offer you, it’s not well suited for most mortgage holders. That’s because it can only be used to pay off the remaining balance of your mortgage, which decreases over time as your premium remains the same. The payout goes directly to the lender, so the beneficiary can’t decide how it will be used.

On the other hand, the death benefit from a life insurance policy goes directly to your beneficiaries. They can then choose how they want to spend the money.

Perhaps they want to pay off the mortgage and cover other expenses. Life insurance gives your family more flexibility in their time of need, and the option of more coverage so they can cover all the costs they need or want to. This way, if something happens before your mortgage is paid off, your spouse or family won’t be saddled with the difficult decision to sell or refinance their home.

Parents of minors

New parents and parents with young kids most especially need life insurance. You’re facing down 18+ years of raising small folks who are financially dependent on you.

Whether you’re a single parent or coupled up, you already know that raising kids is expensive in Canada, with costs that include childcare, food, summer camps, extracurriculars, saving for their future education, and clothing.

Life insurance coverage allows the surviving partner or the designated guardian to have the means to maintain the lifestyle your kids are used to and minimize disruption in their lives. Debts can be paid off, income can be replaced, and the remaining guardian can continue planning for the future.

Term life insurance is typically the best option for families with kids as it covers you for the amount of time you’ll need it most — when your children are young and your expenses are high. It doesn’t cover you later in life when you have fewer dependents, more savings and more income at your disposal.

Related: Why life insurance should be part of estate planning for new parents

Business owners

If you’re a business owner, you’ll want to protect your hard work and the people who depend on it, including your business partners, employees, and loved ones.

It’s no secret that running a business is expensive and comes with large startup costs. Between inventory, payroll, loans, and other expenses, business owners have a lot to account for.

Life insurance can help your business withstand the change if you were to pass away, as well as cover any partners dependent on your contributions to the business.

Having life insurance in place also means your customers likely won’t face business interruptions. This is especially important if your business is still in its infancy, so that even if you’re no longer there, it still has a chance of success.

Couples close to retirement without solid savings

We all know we should be saving for retirement. But for some, retirement looms larger, and the funds may not be in place to make it a reality yet.

Couples who are employed, close to retirement, and who depend on each other to contribute to a retirement savings plan that’s not yet fully funded should consider getting life insurance.

In this case, life insurance can guarantee a comfortable retirement if one partner isn’t around to help make that a reality.

Individuals with a high net worth

Term life insurance will meet the needs of most Canadians. But there’s an exception to every rule.

Permanent life insurance is actually the best option for high-net worth individuals, like those with large estates and other assets that can’t be easily liquidated. These assets — like property, or businesses — may not easily be converted to cash, and a life insurance policy can provide that cash infusion.

Then there’s the complex estate planning needs of high-net-worth Canadians. Whether or not these wealthy individuals have financial dependents, they may need to cover estate and inheritance taxes, or otherwise pass down their assets tax-free.

Though permanent life insurance premiums are typically much more expensive than term life insurance, this type of policy covers you for your entire life.

There are two types of permanent life policies: Whole and universal life insurance.

Permanent life insurance isn’t the best option for most families, as it covers you for longer than you’ll likely need it. But if you are very wealthy or have a complex financial situation, permanent life insurance can be critical to preserve your assets after you pass away.

However, you don’t need permanent life insurance to fund your retirement. Permanent life insurance prices are high because fees (like commission) are rolled into them. In short, a big part of your premiums in the early stages of your policy goes towards these fees, and you’ll never really make up the difference.

Remember: life insurance exists to replace income, not to generate income.

Who probably doesn’t need life insurance?

While life insurance can be a great financial tool for protecting your loved ones, it’s not for everyone.

Here are some examples of those who don’t need life insurance:

Single people without dependents

It might seem like a good idea to prepare for your future family early. But if you're single and don’t have anyone who relies on your income, you probably don’t need to worry about life insurance yet.

While financial foresight is important, purchasing coverage before you have financial dependents can cause unnecessary strain on your budget.

If you’re single and are considering purchasing whole life insurance because of the investment component, consider other ways to invest your money to get better returns. After all, the primary purpose of life insurance is to financially protect your loved ones, not serve as an investment vehicle.

Instead, you’re better off taking what you would have paid into a whole life insurance policy and putting it into your TFSA and/or RRSP. Only when you’ve maxed out these accounts and still have significant funds to manage should you consider purchasing a whole life insurance policy.

Retired people without debt or dependents

If you’re retired and don’t have debts or dependents, you probably don’t need life insurance.

If your children are financially independent by this point, and you don’t have to worry about a mortgage or other big expenses, like paying off student debt or saving for retirement, life insurance is an expense you just don’t need.

Your retirement savings will likely be enough to help your family with final expenses and other costs.

How to find life insurance

When searching for coverage, consider the needs of your unique family and financial situation. Choose the policy that best suits you — whether you’re a busy parent who wants enough coverage to get your kids through school, or you want lifetime coverage to pass down your assets tax-free.

Regain some control over the cost of premiums by comparing life insurance rates online from multiple providers.

Whatever the case, you can relax knowing that whoever you’re financially protecting, you’ve got them covered.