How Does Life Insurance Work – And Why You Need An Independent Agent

How Does Term Life Insurance Work

How does life insurance work? Well, that’s a simple question with a complicated answer. But to avoid confusion, I am starting with the most affordable and straightforward form of coverage: term life insurance.

For most people, term life insurance works a charm. It provides temporary protection to cover income in the event of a worst-case scenario. Think about it: “term” is the root of “terminate.” By its nature, this protection is designed to expire. If you have kids or debt and your paycheck is needed to keep the show on the road, term insurance protects you over the 10, 20, or 30 years your dependents are most vulnerable.

While most people live until the end of their policy, some don’t. Sadly, I have friends and family who have died without life insurance. This sort of situation is tough for families to handle.

The loss of a primary breadwinner often results in the loss of a family home and inconceivable lifestyle changes.

The 2020 pandemic pushed that reality home for most of us. If you’re like me, your business either stopped or stalled, and that was just a tiny taste of what happens when your income ceases to return.

“Term life insurance can help you bridge that gap for decades at a relatively low cost. If you die while the policy is in force, you’ll leave behind a lump sum of cash for whomever you choose. Since term life insurance doesn’t last forever and has no investment component, it’s typically much cheaper than whole life insurance.Find the Best Term Life Insurance, Nerd Wallet

Term Life Insurance: Traditional Coverage

Term life insurance is available in various packages, and I’ll begin by discussing the traditional version. The great news is, it’s affordable, which means most families I work with can purchase sufficient coverage.

When clients contact me, we initially review their financial situation to calculate the amount of coverage required to maintain their family’s current standard of living. This figure often surprises people.

Some Canadians prefer to familiarize themselves with basic term life insurance concepts before speaking with an advisor. For readers who want a neutral, plain-language overview of how term insurance works in Canada, including terminology, coverage lengths, and underwriting basics, TermCanada publishes educational content designed for general understanding rather than purchasing decisions.

How Much Money Do You Need: Face Value

The industry standard for income replacement is 7 – 10 times your gross salary in protection (this is known as the face value). When you crunch the numbers, you realize that $100,000 of coverage may seem substantial, but this amount can be quickly depleted after a person’s death.

Once we determine the policy’s face value, typically in increments of $100,000, $250,000, $500,000, and $1 million, we assess how long the coverage is needed.

Ivari “(Formerly Transamerica Canada), has a compelling online insurance calculator that can give you insight into how much coverage you really might need.”

How Long Do You Require Coverage: Term

The length of time you need coverage is called the term. Typically, clients select 10, 20, or 30-year periods. Choosing your term is very important. Unfortunately, I have witnessed clients choosing a shorter term, such as 20 years, because they think their needs won’t change over time. However, sometimes the need for life insurance surpasses your initial estimate. What then?

If you are younger and in great shape, it’s not too much of a worry. You pay LESS than you did 20 years ago because the risk to insure you is now lower. Why? People living longer, advances in healthcare, and more competition have made life insurance more affordable than ever!

The real issue arises if you are sick or older; life insurance may become much more expensive or even unobtainable. If in doubt, select a longer term. Remember, you can cancel your coverage if you no longer need the protection.

The Medical Review is Your Next Step

The next step is the medical questionnaire that your agent reviews with you.

Whether you do this over the phone or in person, this question-and-answer session with your independent agent is critical. It helps the life insurance company determine your accurate rating class and price. Your rating is the risk a life insurance company assigns your particular medical situation, and it determines your premiums (how much you will pay monthly, yearly, or in a lump sum).

To give you an idea, approximately 80% of all life insurance applicants in Canada will receive standard rates or better. A standard rate is reasonable; that’s what I have. To be eligible for Preferred or Elite rates, you must be healthy and have no family history of serious disease before age 65.

Typical ratings are standard, preferred, and preferred plus. The better your rating, the cheaper your premiums.

Take me, for example. I’m healthy; I go to the gym regularly, jog outside when the weather’s good, and don’t take any medications for any health issues. Wouldn’t you consider me a good candidate for a preferred health rating? Not so fast. Because there’s a history of cancer in my family (my mother and sister), I can never achieve better than a “standard” health rating when I apply for life insurance. This would be true even if I were an elite athlete on a strict vegetarian diet.

Remember, if an agent quotes your preferred life insurance rates, there’s no guarantee you’ll get them. It’s entirely up to the underwriters, so don’t let anyone tell you otherwise. Not to mention, preferred or elite rates are offered on minimum coverage amounts depending on the carrier. For example, the standard rate may be best if you apply for $250,000 for the 20-year term.

One more thing I would like to mention – it’s SUPER important for you to be as truthful as possible about your medical issues. Hiding or misrepresenting anything is a fraud, which means when you die, your beneficiaries (person/people you select to benefit from your policy) won’t get a dime.