You are on track to reaching your goals in life. You may have landed your first full-time job, moved out of your parents’ home and purchased your own home, be thinking of getting married or just landed a big promotion. You might also be thinking of getting life insurance to protect yourself, your loved ones or your assets. Life insurance can help you protect your family and dependents from financial hardship and debt when you are no longer there to provide for them.
How does it work?
Life insurance, like all types of Insurance, works by spreading financial risk among a large group of people, who pay into a pool or fund. This minimizes costs for an unexpected event like death. Think of it like depositing money into a safety net that will safeguard your loved ones and your assets and repay your debts when you no longer can.
You may have heard from your family and friends that getting life insurance at a younger age is a benefit to you. But why? Because when you apply for term or permanent life insurance, the insurer assesses the degree of risk that you represent. They look at things like your age, gender, weight and medical history and then place you into risk categories which help determine your premiums and your coverage. Usually, the younger and healthier you are, the lower the risk and the lower the premiums.
Your life insurance policy is a contract between you and an insurer. You agree to pay a fee called a premium, and the insurer agrees to pay your beneficiaries or your estate an amount of money upon your death. The payout to your beneficiaries, known as the death benefit, is a tax-free lump sum which can be used to pay for your funeral. It can also be used to pay off student loans and other debts, provide for your loved ones, donate to charity or set up a trust.
Your Estate
When you die, all of the assets and debts you leave behind (except your primary residence) are called your ‘estate’. Before your loved ones can inherit any money or property, your estate must pay for:
- Any debts you left behind.
- Capital gains tax (you are considered to have disposed of all property at fair market value immediately before death, and the value of your estate is taxed accordingly).
- Estate administration tax, formerly known as probate fees (a tax applied to your estate to cover administration fees such as checking your will and paying creditors).
Your estate will have to pay off your debts with whatever assets you had. Your house, cottage, car or other investments could be used to pay off your debt. If your estate doesn’t have enough assets to pay off your debt, it will be considered insolvent, meaning your debt cannot be paid. Unpaid debt does not get transferred to your family.
Easy answer provided by FSCO (Financial Services Commission of Ontario)