We have compiled a list of the most common life insurance questions we encounter:

1. Can a corporation own a life insurance policy?

Yes, corporate-owned insurance is incredibly common for a wide variety of risk management and tax planning reasons. See our case study on corporate-owned life insurance HERE.

2. Are life insurance premiums tax deductible?

No, life insurance premiums are not tax-deductible.  However, the death benefit is paid TAX-FREE to the beneficiary.

NOTE: the above applies to personally-owned life insurance. Corporate-owned life insurance carries a few scenarios in which a portion of the insurance premium may be tax-deductible. For more information on this, please contact us.

3. What is the difference between term insurance and permanent insurance?

Canadians can choose from a variety of different lengths of life insurance, but the most common ones are Term-10, Term-20, and Term-75. If someone owns a renewable Term-10, after 10 years the policy will automatically renew (at a much higher cost) for another 10 years, assuming the policy is still in-force.  Most term policies will continue to renew until the insured reaches age 75. Term insurance is designed to cover a temporary need.

In contrast, permanent insurance does not expire as long, regardless if the person lives until age 50, 80, or 120. Regardless of age, having a guaranteed, tax-free cash infusion at death can help cover taxes at death, provide gifts to charity, protect the lifestyle of loved ones, or leave a lasting legacy.  Furthermore, there is an equity component attached to most permanent insurance policies called cash value – this makes the product an asset. Cash value is characterized as an asset because it is accessible for the policy owner and can be used as collateral for loan or withdrawn (partially or fully). Lastly, there are options to pay premiums for life or for a limited time (5, 10, 20 years, etc.).

When comparing the two, term insurance will be less expensive in the early years, other factors being equal. However, permanent insurance becomes much more cost effective if someone continues to purchase term insurance for an extended period. To use a housing analogy, term insurance is “renting” where as permanent insurance can be viewed as “owning” because the policyholder is building equity and owns an asset in the form of the cash value. Renting is purely an expense; owning is a blend of expense and equity-building.

Like all financial products, different people have different needs and both of these products can be valuable in the right circumstances (and can work in tandem). Many term insurance policies will allow conversion to a permanent policy. If someone wants to cover their mortgage or protect their family’s lifestyle over “x” amount of years, term insurance provides a great, cost-effective option.  If the need is for long-term tax, estate, and wealth planning, permanent insurance may be the desired route.

4. Why do I need additional life insurance when I already have coverage through my employer?

Many group benefit plans offer some form of life insurance coverage for the employee and possibly their spouse. However, just because someone may have some insurance coverage through their workplace does not mean they are fully protected.  Based on the majority of workplace benefits we have seen, the coverage offered often leaves employees significantly under-insured.  Additionally, this coverage (term insurance) will cease upon termination of employment or retirement.  Life insurance is not a one-size-fits-all; we specialize in personalized options tailored to specific circumstances.

5. What medical requirements are needed to be approved for a life insurance policy?

Medical requirements are an integral part of the underwriting process undertaken by the insurance company upon receiving the application.  Requirements will depend on the applicant’s age and amount of insurance applied for, but typically blood, urine and a series of medical, financial, and lifestyle questions will be required. However, insurance carriers are continually raising the threshold for age and insurance amount in which they do not require any blood or urine samples.  For applicants with a prior medical history, further questionnaires and tests could be required. While this can be strenuous for the applicant, going through extensive underwriting at the time of application is advantageous to the alternative found with mortgage insurance and group benefit plans, which is typically underwritten at time of claim.  This opens the door to potential uncertainty with pre-existing conditions and other components the insurance company was unaware of, leading to a higher risk of a denied claim.

6. How long does it take to get approved for life insurance?

The process of approving or denying an insurance application is called underwriting.  We have seen applications approved in as quickly as 48 hours, but on average, underwriting takes about a month.  However, with the emergence on online insurance applications, we have noticed the timelines being reduced significantly in the last year. If additional requirements are needed, the insurance company can take up to 6 months to render a decision.

7. Can the insurance company raise my premiums or cancel my insurance?

Yes and No, depending on the type of insurance policy (contract).

• Term insurance will automatically renew at the end of the specified term up to a certain age (usually 75), at which point the premiums will increase.  Term insurance is typically for a temporary need, so the policy owner will sometimes elect to cancel the policy when the term renews. Or, if they are still in good health, they can opt to re-apply and go through the underwriting process in hopes of securing a better rate. NOTE: the in-force policy should never be cancelled prior to approval for a replacement policy.
• Some insurance policies are called Guaranteed Renewable, which means every few years, the insurance company has the right to increase premiums. Insurance policies that are Non-Cancellable have guaranteed premiums for the entirety of the policy length, whether that be permanent or the initial term length. The majority of policies we implement for our clients are Non-Cancellable.
• Insurance contracts are unilateral – the insurance company cannot cancel a policy as long as the premiums remain paid and the application was not completed with fraudulent misrepresentation.  The policy owner can choose to stop paying premiums at any time if they no longer want the policy, thus effectively cancelling it.

8. Can minors own life insurance?

No, individuals cannot own an insurance policy until they have reached the age of majority (19 in British Columbia), however minors can be insured as young as 2 weeks old. See our article on a legacy planning strategy called “Gift for Life” HERE.

9. Can more than one person be insured under one policy?

Yes, these policies are called Joint-First-To-Die (“JFTD”) or Joint-Last-To-Die (“JLTD”) and are commonly used for spouses. JFTD policies work well for couples who want to provide income replacement and lifestyle protection for the surviving spouse and/or children. JLTD policies are an excellent tax-planning tool; the death of the 2nd spouse tends to trigger significant tax liability, so the JLTD policy can be used to offset that tax burden. See our case study on taxes at death HERE.

10. Will I be considered a smoker if I smoke only marijuana (no tobacco)?

No.  Marijuana usage does not typically cause a smoker rating; however, various insurance companies view this differently because cannabis legality is a relatively new and evolving situation.  If an individual is smoking marijuana every day, there will be the potential for a “rating,” which means an increase in the cost of the insurance premium.  Again, there are other factors that go into the underwriting for marijuana, but someone smoking infrequently in small amounts will not typically be “rated” or labelled a smoker. Read our article on this topic HERE.

11. Are smoker ratings permanent?

No.  If an individual can abstain from all tobacco usage for a length of time (usually one year), they can apply to have their smoker rating removed (and reduce their premium).

12. I currently have no dependents; why should I buy life insurance?

Although there is not anyone who currently relies on you financially does not mean that will be the case in the future.  By securing insurance coverage now, you are locking in your insurability on a go-forward basis and paying lower insurance premiums than if you were to seek coverage in the future. Health buys insurance, money just pays for it.  Also, for individuals looking to build their wealth and diversify their asset mix on a tax-sheltered basis, permanent life insurance can be an alternate asset class worth exploring.

If you have questions you want answered, or want to apply for life insurance, please contact Jeff Graham at (604) 363-7549 or jeff@firstoakfinancial.ca.

DISCLAIMER: this commentary is provided for general informational purposes only and does not constitute financial, insurance, investment, tax, legal or accounting advice.

Author: Jeffrey J. Graham, CFP

Are life insurance premiums tax deductible?

No, life insurance premiums are not a tax-deductible expense.  However, when life insurance proceeds (the death benefit) are received, it is TAX-FREE to the beneficiary.

NOTE: the above applies to personally-owned life insurance. Corporate-owned life insurance carries a few scenarios in which the insurance premiums may be tax-deductible, such as if a business is paying premiums on behalf of employees or a key-person within the company.  For more information on this, please contact us.

What is the difference between term insurance and permanent insurance?

There are different lengths of term insurance offered across the industry, but the common lengths of term purchased are Term-10, Term-20, and Term-75. If someone owns a Term-10, after 10 years the policy will automatically renew at a much higher cost for another 10 years (assuming the policy is still in-force).  Most term policies will continue to renew until the insured reaches age 75. Term insurance is for a temporary need.

In contrast, permanent insurance will never expire as long as the premiums remain paid up, whether you live until 50, 80, or 120. There is an investment component attached to most permanent insurance policies that make it enticing to individuals who want to cover taxes on death, leave a legacy, or allocate assets to an alternative-class. There are options to pay premiums for life or for a limited time (5, 10, 20 years, etc.).

When comparing the two, term will initially be significantly less expensive, other factors being equal. However, permanent becomes much more cost effective if the owner continues to purchase term insurance. Term can be viewed as “renting” and permanent can be viewed as “owning.”

Like all financial products, different people have different needs and both of these products can be valuable in the right circumstance (and can work in tandem). Many term insurance policies will allow a conversion to a permanent policy. If someone wants to cover their mortgage or protect their family’s lifestyle over “x” amount of years, term provides a great, cost-effective option.  If the need is for long-term tax, estate, and wealth planning, permanent insurance may be the desired route.

Why do I need additional life insurance when I already have coverage through my employer?

Many Group Benefit plans offer some form of life insurance coverage for the employee and possibly their spouse. However, just because you may have some insurance coverage through your workplace does not mean you are fully protected.  Based on the majority of workplace benefits we have seen, the coverage offered often leave employees significantly under-insured.  Additionally, this coverage (term insurance) will cease upon termination of employment or retirement.  Life insurance is not a one-size-fits-all; we specialize in personalized options tailored to your specific circumstances.

What medical requirements are needed to be approved for a life insurance policy?

Medical requirements are a part of the underwriting process undertaken by the insurance company upon receiving the application.  Requirements will depend on the applicant’s age and amount of insurance applied for, but typically blood, urine and a series of medical questions will be required.  For applicants with a prior medical history, further questionnaires and tests could be required. While this can be strenuous for the applicant, going through extensive underwriting at the time of application is advantageous to the alternative found with mortgage insurance and Group Benefit plans, which is underwriting at time of claim.  This opens the door to uncertainty with pre-existing conditions and other components the insurance company was unaware of, leading to a higher risk of a denied claim.

How long does it take to get approved for life insurance?

The process of approving or denying an insurance application is called underwriting.  We have seen applications approved in as quickly as 48 hours, but on average, underwriting takes about a month.  If additional requirements are needed, the insurance company can take 6 months or longer to render a decision.

Can the insurance company raise my premiums or cancel my insurance?

Yes and No, depending on the type of insurance policy (contract).

• Term insurance will automatically renew at the end of the specified term up to a certain age (usually 75), at which point the premiums will undoubtedly be increased.  Term insurance is typically for a temporary need, so the policy owner will often elect to cancel the policy when the term renews.
• Some insurance policies are called Guaranteed Renewable, which means every few years, the insurance company has the right to increase premiums. Insurance policies that are Non-Cancellable have guaranteed premiums for the entirety of the policy length, whether that be permanent or the initial term length.
• Insurance contracts are unilateral – the insurance company cannot cancel your policy.  The policy owner can choose to stop paying premiums at any time if they no longer want the policy.

Can minors own life insurance?

No, minors cannot own an insurance policy until they have reached the age of majority (19 in B.C.), however they can be insured at any age.

Can more than one person be insured under one policy?

Yes, these policies are called Joint-First-To-Die or Joint-Last-To-Die and are commonly used for spouses.

Will I be considered a smoker if I smoke only marijuana (no tobacco)?

No.  Marijuana usage is not typically cause for a smoker rating, however different insurance companies view this differently because cannabis legality is a relatively new situation.  If an individual is smoking marijuana more than a few times per week, there will be the potential for a “rating,” which means an increase in the cost of the insurance premium.  Again, there are other factors that go into the underwriting for marijuana, but someone smoking infrequently in small amounts will not typically be “rated” or labelled a smoker.

Are smoker ratings permanent?

No.  If an individual can abstain from all tobacco usage for a length of time (usually one year), they can apply to have their smoker rating removed (and reduce their premium).

I currently have no dependents; why should I buy life insurance?

Simply because there are not currently individuals who rely on you financially does not mean that will be the case in the future.  By securing insurance coverage now, you are locking in your insurability on a go-forward basis and paying lower insurance premiums than if you were to seek coverage in the future. Your health buys life insurance, money just pays for it.

For individuals looking to build their wealth on a tax-sheltered basis, permanent life insurance can be an alternate asset class worth exploring.

Author: Jeffrey J. Graham, CFP

Are life insurance premiums tax deductible?

No, life insurance premiums are not a tax-deductible expense.  However, when life insurance proceeds (the death benefit) are received, it is TAX-FREE to the beneficiary.

NOTE: the above applies to personally-owned life insurance. Corporate-owned life insurance carries a few scenarios in which the insurance premiums may be tax-deductible, such as if a business is paying premiums on behalf of employees or a key-person within the company.  For more information on this, please contact us.

What is the difference between term insurance and permanent insurance?

There are different lengths of term insurance offered across the industry, but the common lengths of term purchased are Term-10, Term-20, and Term-75. If someone owns a Term-10, after 10 years the policy will automatically renew at a much higher cost for another 10 years (assuming the policy is still in-force).  Most term policies will continue to renew until the insured reaches age 75. Term insurance is for a temporary need.

In contrast, permanent insurance will never expire as long as the premiums remain paid up, whether you live until 50, 80, or 120. There is an investment component attached to most permanent insurance policies that make it enticing to individuals who want to cover taxes on death, leave a legacy, or allocate assets to an alternative-class. There are options to pay premiums for life or for a limited time (5, 10, 20 years, etc.).

When comparing the two, term will initially be significantly less expensive, other factors being equal. However, permanent becomes much more cost effective if the owner continues to purchase term insurance. Term can be viewed as “renting” and permanent can be viewed as “owning.”

Like all financial products, different people have different needs and both of these products can be valuable in the right circumstance (and can work in tandem). Many term insurance policies will allow a conversion to a permanent policy. If someone wants to cover their mortgage or protect their family’s lifestyle over “x” amount of years, term provides a great, cost-effective option.  If the need is for long-term tax, estate, and wealth planning, permanent insurance may be the desired route.

Why do I need additional life insurance when I already have coverage through my employer?

Many Group Benefit plans offer some form of life insurance coverage for the employee and possibly their spouse. However, just because you may have some insurance coverage through your workplace does not mean you are fully protected.  Based on the majority of workplace benefits we have seen, the coverage offered often leave employees significantly under-insured.  Additionally, this coverage (term insurance) will cease upon termination of employment or retirement.  Life insurance is not a one-size-fits-all; we specialize in personalized options tailored to your specific circumstances.

What medical requirements are needed to be approved for a life insurance policy?

Medical requirements are a part of the underwriting process undertaken by the insurance company upon receiving the application.  Requirements will depend on the applicant’s age and amount of insurance applied for, but typically blood, urine and a series of medical questions will be required.  For applicants with a prior medical history, further questionnaires and tests could be required. While this can be strenuous for the applicant, going through extensive underwriting at the time of application is advantageous to the alternative found with mortgage insurance and Group Benefit plans, which is underwriting at time of claim.  This opens the door to uncertainty with pre-existing conditions and other components the insurance company was unaware of, leading to a higher risk of a denied claim.

How long does it take to get approved for life insurance?

The process of approving or denying an insurance application is called underwriting.  We have seen applications approved in as quickly as 48 hours, but on average, underwriting takes about a month.  If additional requirements are needed, the insurance company can take 6 months or longer to render a decision.

Can the insurance company raise my premiums or cancel my insurance?

Yes and No, depending on the type of insurance policy (contract).

• Term insurance will automatically renew at the end of the specified term up to a certain age (usually 75), at which point the premiums will undoubtedly be increased.  Term insurance is typically for a temporary need, so the policy owner will often elect to cancel the policy when the term renews.
• Some insurance policies are called Guaranteed Renewable, which means every few years, the insurance company has the right to increase premiums. Insurance policies that are Non-Cancellable have guaranteed premiums for the entirety of the policy length, whether that be permanent or the initial term length.
• Insurance contracts are unilateral – the insurance company cannot cancel your policy.  The policy owner can choose to stop paying premiums at any time if they no longer want the policy.

Can minors own life insurance?

No, minors cannot own an insurance policy until they have reached the age of majority (19 in B.C.), however they can be insured at any age.

Can more than one person be insured under one policy?

Yes, these policies are called Joint-First-To-Die or Joint-Last-To-Die and are commonly used for spouses.

Will I be considered a smoker if I smoke only marijuana (no tobacco)?

No.  Marijuana usage is not typically cause for a smoker rating, however different insurance companies view this differently because cannabis legality is a relatively new situation.  If an individual is smoking marijuana more than a few times per week, there will be the potential for a “rating,” which means an increase in the cost of the insurance premium.  Again, there are other factors that go into the underwriting for marijuana, but someone smoking infrequently in small amounts will not typically be “rated” or labelled a smoker.

Are smoker ratings permanent?

No.  If an individual can abstain from all tobacco usage for a length of time (usually one year), they can apply to have their smoker rating removed (and reduce their premium).

I currently have no dependents; why should I buy life insurance?

Simply because there are not currently individuals who rely on you financially does not mean that will be the case in the future.  By securing insurance coverage now, you are locking in your insurability on a go-forward basis and paying lower insurance premiums than if you were to seek coverage in the future. Your health buys life insurance, money just pays for it.

For individuals looking to build their wealth on a tax-sheltered basis, permanent life insurance can be an alternate asset class worth exploring.