Key points
- The death benefit is generally a one-time, tax-free payment to your beneficiaries.
- Term insurance covers a set period and usually has no cash value; permanent insurance (whole or universal life) covers you for life and usually builds a cash value.
- Premiums you pay for personal cover are not deductible. A limited deduction exists when a lender requires the policy as collateral for a loan.
- The amount of cover is a needs question: debts, income to replace, final costs and taxes, and goals, less what you already have.
- Your beneficiary choice affects who gets the money, how fast, and whether it passes through your estate.
Why people buy life insurance
Life insurance turns one uncertain event, a death, into a known sum of money paid to the people or organisations you choose. The Financial Consumer Agency of Canada lists the usual reasons: to replace your income so your family can keep its standard of living, to provide for children or other dependants, to pay funeral costs, to pay off debts, and to make a gift to charity. Business owners add their own reasons, such as funding a buy-out between shareholders or paying the tax that arises on death, which our estate planning guide explains.
The government's own death benefit is small by comparison. The Canada Pension Plan death benefit is a one-time payment of $2,500, with a possible top-up of $2,500 for some contributors who die on or after 1 January 2025, so at most $5,000. Survivor's pensions and children's benefits may also be paid, but they are not designed to replace a working income. Our guide to the Canadian protection gap sets out what the government programs do and don't cover.
Term and permanent insurance
Every life insurance policy sold in Canada is either term or permanent, with many variations inside each.
| Feature | Term | Permanent (whole or universal) |
|---|---|---|
| How long it lasts | A fixed period (often 10 or 20 years) or to a set age such as 65 | For life, as long as the policy stays in force |
| Cash value | Usually none: nothing back if you cancel, nothing to borrow against | Usually builds a cash value you can borrow against or receive if you cancel |
| Premiums | Usually lower when you first buy; often rise at each renewal | Higher to start; level for whole life, adjustable within limits for universal life |
| Common uses | Needs that end: a mortgage, children growing up, a business loan | Needs that last: tax on death, leaving an inheritance, funding a gift |
Term life
Term insurance pays the death benefit only if you die within the term. When the term ends, the cover ends and nothing is paid. Some term policies can be renewed, usually at a higher premium based on your age at renewal; on a 5-year renewable policy, for example, the premium generally goes up every five years. Some can be converted to permanent cover without new medical evidence, within limits the policy sets.
Permanent life: whole and universal
Whole life covers you for your whole life. Premiums usually don't change as you get older, and the policy often has a minimum cash value. Participating whole life policies may also pay policy dividends, which are not the same as share dividends and are never certain.
Universal life combines insurance with an investment account inside the policy. You choose how the account is invested, and the cash value and death benefit can rise or fall with those returns. You can usually change your premiums within the limits of the policy, but if returns fall, the premium needed to keep the cover in force can rise.
With either kind, you may be able to take a policy loan or use the policy as collateral for a loan. A loan that isn't repaid reduces what your beneficiaries receive and what you get back if you cancel, and taking money out of a policy can create taxable income, so it is worth asking how a withdrawal or loan will be taxed before you make one.
Options for couples
Couples usually choose between a joint first-to-die policy and two single policies. A joint first-to-die policy insures both partners under one contract and pays when the first dies; it usually costs less than two identical single policies, but the survivor then needs new cover and the policy is less flexible if the couple separates. Two single policies cost more but give each partner their own cover and make it simpler to change beneficiaries after a separation.
A third option, joint last-to-die, pays only when the second partner dies. It is usually discussed for estate planning, because the largest tax bill on an estate often arrives at the second death, when property can no longer pass to a surviving spouse without tax.
How much cover: a needs question
There is no correct multiple of salary. Insurers and advisors usually work through a needs analysis, which in plain terms adds up what your family would need and subtracts what they would already have.
- Debts to clear: the mortgage, car loans, lines of credit, student loans and any business loans you signed for personally.
- Final costs and tax: funeral costs, legal and probate fees, and the income tax on your final return, which can be large if you hold investments, a rental property or shares of a corporation, because CRA treats them as sold at death (a deemed disposition).
- Income for a period: how many years of your after-tax income your family would need to adjust.
- Goals: children's education, care for a parent, a gift to charity.
- Less: savings and investments, group life cover through work (which usually ends when the job ends), and government survivor benefits.
To put rough numbers on each line, try the insurance needs calculator. It is a general estimate, not a recommendation.
A family with a mortgage. A couple with two young children owes $400,000 on their mortgage and has $50,000 in savings. One partner earns $90,000 and has group life cover of one year's salary through work. If that partner died, the family might want the mortgage cleared, about $30,000 for final costs, and help with living costs while the children are young. The work cover and savings meet part of it; the rest is what a needs analysis would look at. The figures are round and illustrative, not a recommendation.
Naming beneficiaries
The beneficiary is the person or organisation who receives the death benefit. You can name a spouse, another family member, a friend or a charity, name several people and split the benefit between them, or name your estate.
- Revocable or irrevocable. A revocable beneficiary can be changed at any time without telling them. An irrevocable beneficiary must give written permission before any change.
- Children under the age of majority. A minor can't receive the money directly. Without a trustee named, the province holds it until the child reaches the age of majority, so many parents set up a trust or name a trustee.
- Naming your estate. The money then passes under your will and may be counted in the estate's value for probate, can be reached by the estate's creditors, and usually takes longer to pay out. Naming a person directly usually avoids that, but it should match your will.
Review the beneficiary after a marriage, separation, birth or death in the family. Beneficiary designations and wills interact under provincial law, so this is a question for your lawyer as well as your agent.
Life insurance and tax
| Item | General treatment |
|---|---|
| Death benefit paid to a beneficiary | Generally a one-time, tax-free payment. Income earned after the money is invested is taxable to whoever then owns it. |
| Premiums for personal or family cover | Not deductible. |
| Policy assigned as collateral for a loan | Where a lender requires the policy as collateral for a borrowing whose interest is deductible, the lesser of the premium and the net cost of pure insurance, for the part relating to the loan, may be deductible (Income Tax Act s. 20(1)(e.2)). |
| Group term life paid by an employer | The premiums are a taxable benefit to the employee and appear on the T4. See our group benefits guide. |
| Cash value withdrawals, loans or surrender | Can create taxable income where what you take out exceeds your cost in the policy. Ask before you withdraw. |
| Policy owned by a corporation | Its own rules, including the capital dividend account. See our corporate-owned life insurance guide. |
Who owns the policy, who pays the premiums and who is the beneficiary all change the result. A policy bought personally and paid for by your corporation, for example, can be a taxable benefit to you. These are the questions to settle with your accountant before a policy is put in place, not after.
Where Finvo fits
We look after the tax side of insurance decisions: whether a premium is deductible or a taxable benefit, how a corporate-owned policy shows up in your corporation's books and its capital dividend account, how much tax your estate may owe on death, and how a policy fits your tax-side financial plan and your tax return.
Finvo itself does not sell insurance. If you need insurance advice, we can connect you with a licensed agent from our partner network; the agent advises on products and coverage, and we cover the tax side. Insurance and other specialists are joining Finvo as contractors, so a group of consultants can work on your file together and you don't have to go from place to place. How it works.
Whoever you buy from, you can check that the agent is licensed: in British Columbia with the Insurance Council of BC licensee directory, and in Alberta with the Alberta Insurance Council agent lookup.
This guide is general information, checked against the Financial Consumer Agency of Canada, the CRA, the Income Tax Act and Service Canada on 4 Nov 2026. Every policy has its own terms; it isn't insurance, tax or legal advice for your situation.