Replace income
Help dependants manage the loss of earnings or unpaid work.
Insurance 101
Life insurance starts with the people you want to protect.
Think about who would need financial help if you died, how much they might need and how long they would need it.
What problem is life insurance intended to solve?
Life insurance pays a death benefit when the insured person dies while coverage is in force and the contract’s requirements are met.
Address debts
Provide funds for a mortgage, loans or other obligations.
Fund future goals
Support education, childcare or another identified family need.
Create liquidity
Help with final expenses, taxes, estate or business obligations.
Three common types of life insurance
Open each card to see how it works, where it may fit and what to check before buying.
Coverage for a set timeTerm lifeUsually chosen to protect a family during years when the financial need is highest.
How it works
Coverage lasts for a set term, often 10, 20 or 30 years. Premiums are commonly level during that term and usually rise if the policy is renewed.
Where it may fit
It can help cover temporary needs such as income replacement, a mortgage, childcare or the years while children depend on you.
Cost and cash value
It usually starts at a lower cost than permanent insurance for the same death benefit. It normally has no cash value, so cancelling it does not create a payout.
What to check
Review future renewal costs, the age when coverage ends, any conversion option, exclusions and the deadline for changing to permanent coverage.
Permanent coverageWhole lifeCoverage intended to last for life, with guarantees and cash values set out in the contract.
How it works
Coverage can last for life when the required premiums are paid. The contract explains which premiums, death benefits and cash values are guaranteed. Participating policies may also pay dividends, but dividends are not guaranteed.
Where it may fit
It may suit a lifelong need such as final expenses, estate costs or leaving money to someone, when the higher long-term cost fits the budget.
Cost and flexibility
It usually costs more at the beginning than term insurance for the same death benefit. Early cash values may be small, and the policy may offer less flexibility than other options.
Using the cash value
Cash value may be accessed through a withdrawal, surrender, policy loan or a separate loan from a third-party lender secured by the policy. Depending on the method and timing, this can reduce the cash value and/or death benefit, create taxable income, add interest charges or put the policy at risk if a loan is not managed.
What to check
Separate guaranteed values from projections. Review dividend assumptions, surrender values, loan rates, paid-up options and the tax impact before taking money from the policy.
Permanent and flexibleUniversal lifePermanent insurance with a policy account whose value can change with deposits, costs and investment results.
How it works
Part of each deposit pays insurance costs and policy fees. The rest may go into investment options available in the policy. Insurance costs may be level or may increase with age. Depending on the contract, the death benefit may also include the accumulated cash value.
Where it may fit
It may suit a long-term insurance need when the owner wants more choice over deposits, death benefits or investment options and is prepared to monitor the policy.
Cost and investment risk
Returns are not guaranteed unless the contract says they are. Fees and insurance costs continue to be deducted. If the policy account cannot cover them, more money may be required to keep the coverage in force.
Using the policy value
Withdrawals or loans may reduce the policy value or death benefit, involve fees or interest, and create taxable income. Taking money out also leaves less to cover future policy costs, which can increase the risk of the policy ending.
What to check
Review the insurance-cost schedule, guarantees, fees, investment choices and what happens under lower-return scenarios. Ask how withdrawals, loans and missed deposits affect the coverage.
A note about the application: Simplified-issue and guaranteed-issue policies use fewer or no health questions. They are not separate coverage types and may cost more, offer less coverage or include waiting periods.
Three ways cash value may be accessed.
Whole life and universal life policies may build cash value. What you can access—and what it costs—depends on the contract, the policy’s values and Canadian tax rules.
Withdrawal
Money is taken directly from the policy. A withdrawal may permanently reduce the cash value and death benefit, and it can leave less money to pay future policy costs. Depending on the timing of the withdrawal, part or all of the amount may be taxable.
Policy loan
The insurer lends money under the policy’s loan terms. Interest is charged, and unpaid amounts can reduce policy values or the death benefit. A policy loan is treated as a disposition for Canadian tax purposes, so part or all of the loan amount may be taxable, depending on the timing.
Collateral loan
A bank or other lender provides the loan and takes an assignment of the policy as security. Approval, interest rates and repayment terms come from the lender. The lender may ultimately be repaid from policy values or the death benefit.
ACB
What is ACB—and why does it matter?
The adjusted cost basis (ACB) is a tax figure used to help determine whether accessing a life insurance policy’s cash value will create taxable income. The insurance company calculates and tracks the ACB. It changes over time and may eventually fall to zero.
When a policyholder withdraws money from the cash value, surrenders the policy or takes a policy loan, any amount received above the ACB is generally taxable at their marginal tax rate.
A collateral loan from a third-party lender generally does not create taxable income by itself because the policy is used only as security for the loan. However, interest, lender approval and repayment requirements still apply.
Before accessing cash value: Ask the insurer for the current cash value, death benefit and ACB, along with an illustration showing how the transaction could affect the policy. Tax results depend on the contract and the policy owner’s circumstances; consider obtaining tax advice.
Simple life insurance needs calculator
Use the calculator to organize the financial responsibilities that may remain—not to select a policy or replace a complete needs assessment.
Life insurance needs
Build a starting estimate from family obligations.
This simple method adds potential needs and subtracts assets or existing coverage identified for those needs.
Income replacement$800,000Debts and other goals$440,000Less savings and coverage− $300,000
General starting estimate$940,000
This is not a recommendation or quote. A full assessment may consider survivor income, taxes, inflation, benefits, childcare, business needs, policy duration, budget and underwriting.
Questions worth asking
Before applying or replacing coverage
Replacing or cancelling insurance can create new underwriting, contestability, cost and coverage risks. Compare the full contracts before acting.
- What exact need and timeframe does this coverage address?
- Which values or premiums are guaranteed, and which are not?
- Can the premium change at renewal or because of policy funding?
- What exclusions, waiting periods or limitations apply?
- What happens if I stop or reduce payments?
- What compensation or conflicts should be disclosed?