Life Insurance: Are Canadians Under-Covered?

Life insurance is a financial safety net for your loved ones when you die. It is a contract between you and an insurance provider that ensures your dependents are financially protected. While it is not a necessity for everyone, it is beneficial for those with dependents, debts, or shared expenses.

In Canada, there are two basic types of life insurance coverage: term and permanent. Term insurance is typically more affordable and provides coverage for a set period, whereas permanent insurance offers lifelong protection and often includes a cash value component.

Despite a rise in ownership, a significant number of Canadians are underinsured or lack adequate coverage, leaving them vulnerable to financial shocks. This situation is attributed to various factors, including a reliance on insufficient group plans, a lack of understanding of insurance needs, and the perception of life insurance as expensive and inaccessible.

As such, it is essential for individuals to assess their unique circumstances and financial priorities to determine if they have sufficient life insurance to provide for their loved ones in the event of their death.

Canadians' financial priorities and concerns

Canadians have various financial priorities and concerns that can impact their decision to purchase life insurance. While life insurance is important for financial planning and protecting loved ones, other financial commitments may take precedence for some individuals.

One of the primary financial concerns for Canadians is saving enough for a comfortable retirement. According to a study by LIMRA and Life Happens, more than 4 in 10 Canadians (43%) express extreme worry about having sufficient funds for retirement. This concern is so significant that half of Canadians anticipate relying on their retirement savings to cover bills if the primary wage earner passes away. Adequate life insurance coverage could alleviate this concern by providing financial security for their later years.

In addition to retirement savings, Canadians have several other financial worries. Paying for long-term care (35%), building an emergency fund (34%), supporting oneself in the event of disability or illness (31%), and managing emergency medical expenses (27%) are among the top concerns. These financial priorities can sometimes delay or prevent individuals from purchasing life insurance, as they may feel the need to allocate their funds to more immediate worries.

Another factor influencing Canadians' financial priorities is their reliance on group insurance plans provided by employers. While these plans offer some coverage, they often fall short of providing adequate protection. Over the years, companies have downgraded their group plan offerings to offset rising premiums, resulting in insufficient coverage amounts. As a result, many Canadians find themselves with a life insurance coverage gap, feeling unprepared to withstand a financial shock, especially if the primary wage earner passes away.

Furthermore, Canadians may underestimate the importance of their income over the long term and the full range of expenses that life insurance should cover. An adequate policy should not only cover funeral expenses and pay off debts but also replace lost income, provide for children or dependents, and allocate funds for their children's education. Failing to consider these factors can lead to a coverage gap and financial insecurity for loved ones.

Lastly, cost is a significant concern for many Canadians when considering life insurance. Some individuals may view life insurance as an unnecessary expense, especially when they are young and healthy. However, waiting to purchase life insurance can result in higher premiums in the future, as age and health status significantly impact the cost of coverage. Industry experts recommend obtaining life insurance early, when premiums are more affordable, and regularly reviewing and adjusting policies to ensure they align with changing life circumstances and expenses.

Group life insurance plans

In Canada, group life insurance plans are part of the Government's total compensation package for public service employees. They can also be combined with retirement and savings plans to help employees reach their financial and retirement goals. Group plans often include health and dental care benefits, disability insurance, and life insurance.

While group life insurance plans offered by employers can provide some coverage, they may not always be sufficient. Over the years, companies have downgraded their offerings to offset rising premiums. As a result, many plans now offer a flat amount of coverage, which may not be enough to cover all expenses, such as mortgage payments or funeral costs.

Additionally, employees do not own the group life insurance policy, and if they leave the company, they will lose their coverage. Therefore, it is important for individuals to assess their unique circumstances and consider purchasing additional coverage through an individual policy to ensure they have adequate protection.

When deciding on the right group life insurance plan for your business, it is essential to consider the specific needs and preferences of your employees. By tailoring the plan to their requirements, you can maximise the benefits for both your employees and your company.

Calculating the cost of life insurance

Life insurance rates are quoted based on an individual's coverage requirements and lifestyle, and no two people have the exact same needs. The amount you pay for life insurance is based on factors such as how much coverage you need and the type of policy, or package, you select.

Coverage

The average Canadian life insurance policy pays out $200,000, but many life insurance professionals suggest that this may not be enough to cover the average person's needs. The rule of thumb is that individuals should have coverage equivalent to roughly 10 times their annual income. The ideal amount is specific to you, your family, and your lifestyle.

LIFE INSURANCE POLICY AMOUNT = Outstanding debt + (Net annual income X number of years you want to provide for the family) + Mortgage still owing + Children's education costs

Type of Policy

There are two major categories of life insurance in Canada: term and permanent. Term life insurance is purchased for a set period of time, such as 10, 20, or 30 years, and tends to be cheaper than permanent life insurance. Permanent life insurance, on the other hand, provides long-term protection and is usually more expensive.

Lifestyle and Health

Your health, lifestyle, and age can also impact the cost of life insurance. For example, hobbies like skydiving or piloting a plane can affect your rates because insurance companies might see you as a higher insurance risk. Additionally, the cost of life insurance increases by 4.5% to 9% every year you age, so it's advisable to purchase a policy when you're younger and at lower risk for illness.

Additional Coverage or Riders

You may also want to consider adding extra coverage or riders to your policy, such as disability insurance or critical illness coverage. These add-ons provide additional protection in the event of an accident, illness, or disability.

Quotes and Comparison

To get an accurate estimate of the cost of life insurance, it's recommended to request quotes from multiple insurance providers and compare their rates and offerings. You can do this through an insurance broker, an online broker, or directly through an insurance provider.

By considering these factors and doing your research, you can calculate the cost of life insurance and choose a policy that best suits your needs and budget.

Trust in the insurance industry

Trust is a fundamental aspect of the relationship between insurers and their customers. Customers put their faith in insurance companies to act in their best interests, promptly pay out claims, and ensure solvency. In return, insurers trust that policyholders will minimise their risks and make genuine claims. However, certain factors, such as digitalisation, can threaten this delicate balance. Here's a closer look at the issue of trust in the insurance industry and its relevance to Canadians:

The State of Trust in Insurance

The insurance industry faces a challenge when it comes to building trust with its customers. According to research, only one in five customers across several developed countries, including the United States, the United Kingdom, and Germany, consider insurers trustworthy. This mistrust is also evident in Canada, where a significant number of Canadians feel they have inadequate life insurance coverage. According to a study by LIMRA and Life Happens, 31% of Canadians, amounting to 8.4 million adults, believe they need more life insurance coverage. This coverage gap leaves many Canadians feeling vulnerable to financial shocks, especially if the primary wage earner passes away unexpectedly.

Factors Affecting Trust

So, what contributes to this apparent lack of trust in the insurance industry? Here are some key factors:

• Lack of Clarity in Policies: Often, insurance policies are filled with industry jargon and complex bureaucratic processes that confuse consumers. This "fog" of complicated language and procedures makes it difficult for customers to understand what they are signing up for.
• Privacy Violations: Data breaches and privacy violations can quickly erode trust in insurance brands. Even well-intentioned attempts to use social media data for personalised policies, such as Admiral Insurance's attempt to use Facebook posts to analyse user risk, can backfire due to privacy concerns.
• Impersonal Products: Consumers want to feel that their insurance provider understands their unique needs. However, insurance products often lack flexibility and personalisation. For example, travel insurance policies may offer only one-month or annual coverage options, failing to cater to those seeking coverage for a different duration.
• Issues with Payouts: One of the biggest concerns among policyholders is the fear that insurers won't honour the policy when it comes to payouts. While statistically, the majority of claims are paid out, the process can be lengthy and cumbersome, contributing to a perception of distrust.

Building Trust in the Digital Age

With the rise of digitalisation, the insurance industry faces new challenges in maintaining customer trust. Concerns around data privacy, the misuse of information, and potential bias or discrimination have the potential to erode trust. At the same time, digitalisation can also offer opportunities for greater transparency and personalised products. For example, the use of data from Internet of Things (IoT) devices and telematics can enable insurers to offer more tailored policies to customers. However, this shift also gives insurers access to more customer data, potentially upsetting the balance of information asymmetry between policyholders and insurers.

In conclusion, while Canadians may have varying levels of life insurance coverage, the issue of trust in the insurance industry is a broader concern. Building and maintaining trust is essential for insurers to foster long-term relationships with their customers. By addressing the factors that contribute to mistrust and adapting to the digital age in a way that prioritises transparency and data privacy, insurance companies can work towards strengthening the foundation of trust that is vital to their industry.

The importance of early planning

Life insurance is a crucial aspect of financial planning, and early planning can have significant benefits for individuals and their loved ones. While it may not be the most exciting topic to consider, taking the time to understand life insurance options and secure adequate coverage can provide peace of mind and financial security. Here are some reasons why early planning for life insurance is essential:

Financial Protection for Loved Ones

Life insurance is designed to provide financial protection for your loved ones in the event of your death. By planning early, you can ensure that your family, partner, or other dependents will have the financial resources they need to maintain their standard of living. This includes covering essential expenses such as funeral costs, outstanding debts, and ongoing bills. Additionally, life insurance can help fund your children's education and provide financial support during their formative years.

Locking in Affordable Rates

The cost of life insurance premiums is typically lower when you are younger and healthier. By planning early, you can take advantage of more affordable rates and lock them in for the long term. As we age, our health status can change, and premiums tend to increase accordingly. Early planning allows you to secure coverage at a lower cost, providing long-term savings and ensuring that you don't overburden your budget in the future.

Customizing Your Policy

Life insurance policies can be customized to fit your unique needs and financial goals. By planning early, you have the time to thoroughly assess your situation, including income, expenses, and future plans. This enables you to tailor your policy to match your specific requirements, ensuring that your coverage is adequate and aligned with your long-term objectives.

Peace of Mind

Early planning for life insurance provides the peace of mind that comes with knowing your loved ones will be taken care of financially. It removes the uncertainty and worry about their future well-being, allowing you to focus on the present and make the most of it. This sense of security can be invaluable, reducing stress and improving your overall quality of life.

Long-Term Financial Planning

Life insurance can be a crucial component of your overall financial plan. By planning early, you can integrate it into your long-term financial strategy. This includes considering how life insurance interacts with other aspects of your financial life, such as retirement planning, savings goals, and estate planning. Early planning allows you to make informed decisions and optimize your financial future.

In conclusion, early planning for life insurance is essential to ensure that you have the right coverage in place to protect your loved ones and secure your financial future. By taking the time to understand your options and secure adequate coverage, you can benefit from more affordable rates, customize your policy, and gain peace of mind. Don't delay in taking this important step towards financial security for yourself and your loved ones.

Frequently asked questions