Table of Contents
1.1 Risk of Death
One of the main reasons people delay purchasing life insurance is their reluctance to think about their own death. Many believe death is too far in the future to be a current concern. However, the reality is that everyone is continuously exposed to the risk of death, regardless of age. While the likelihood of dying at a younger age is lower than at an older age, the risk is never zero and must be addressed.
In insurance terminology, the probability of dying at a specific age is known as the mortality rate.
An individual’s risk of death is influenced by several factors, including:
- Age
- Gender
- Family health history
- Personal health status
- Smoking habits
- Occupation
- Income level
Life insurance companies use these factors to classify individuals into groups with similar risk profiles. Insurers then analyze historical mortality data for each group to estimate an individual’s likelihood of death. This classification process is a key part of underwriting and is discussed further in Chapter 9 – Application and Underwriting.
There are two primary ways to measure and evaluate the risk of death: life expectancy and probability of death.
Life expectancy is the average number of years a person of a specific age and group is expected to live. It is based on past mortality experience and assumes those patterns will continue in the future.
For example, according to Statistics Canada data (2020–2022), Canadian males aged 65 have a median life expectancy of 19.3 additional years. This means that:
- 50% are expected to live to age 84.3 or older
- 50% are expected to die before age 84.3
Probability of death refers to the statistical likelihood that a person of a certain age and group will die before reaching their next birthday. Using the same Statistics Canada data, 1.116 out of every 100 Canadian males aged 65 will die before turning 66. This represents a 1.116% probability of death. Insurers rely heavily on this statistic when underwriting life insurance policies and determining premium rates.
Life expectancy and probability of death data are commonly presented in life tables, also called mortality tables. These tables show how mortality risk changes with age. Generally, the probability of death:
- Is very low in early life
- Increases slowly until about age 40
- Rises more rapidly after age 40 due to age-related health conditions, such as cardiovascular disease
Life tables also demonstrate that females typically have a lower risk of death than males at the same age. As a result, gender is an important factor in underwriting and can influence life insurance premiums, as discussed further in Chapter 9.
The practical use of this information depends on the client’s needs. When developing retirement savings or income plans, an agent focuses primarily on life expectancy to determine an appropriate planning horizon. When performing an insurance needs analysis, explaining the probability of death can help clients understand that the risk is real and that life insurance is a necessary risk-management tool.
1.2 Potential Financial Impact of Death
Death is always associated with loss, and when a loved one dies, that loss often includes significant financial consequences for survivors. These consequences may be negative or positive, depending on the situation, but they must always be considered when assessing the risk of death.
This section introduces the main types of financial impacts an insurance agent considers when discussing life insurance with a client. It provides context for understanding why life insurance is needed. A more detailed analysis of these impacts is covered in Chapter 10 – Assessing the Client’s Needs and Situation.
1.2.1 Loss of Income
The death of an income earner can be one of the most financially devastating events for a family, especially when dependants rely on that income for:
- Daily living expenses
- Housing costs
- Education
- Long-term financial security
Life insurance can help replace lost income and allow survivors to maintain their standard of living.
1.2.2 Loss of Caregiver
Even if the deceased was not an income earner, their death can still create a major financial burden.
If the deceased provided:
- Childcare
- Elder care
- Care for dependants
the surviving family may need to pay for replacement services, increasing household expenses significantly.
1.2.3 Debt Repayment
Upon death, one of the executor’s primary responsibilities is to settle outstanding debts, such as:
- Mortgages
- Car loans
- Credit cards
In some cases, lenders may allow a surviving spouse or beneficiary to assume the debt, but only if they can demonstrate sufficient income. If the lender believes the risk of default is too high, it may demand immediate repayment, potentially forcing the sale of assets.
Life insurance can provide liquidity to ensure debts are paid without financial hardship.
1.2.4 Income Taxes
Income tax liabilities triggered at death can significantly reduce an estate.
Key tax consequences at death include:
- A deemed disposition of most assets at fair market value, potentially triggering capital gains tax (unless a rollover applies)
- Deregistration of registered plans such as:
- Registered Retirement Savings Plans (RRSPs)
- Registered Retirement Income Funds (RRIFs)
Unless a rollover applies, the full value of registered plans becomes taxable in the year of death.
The deceased’s marginal tax rate at death applies, which in 2024 ranges approximately from:
- 44.5% (Nunavut)
- 54.0% (Nova Scotia)
If the estate lacks sufficient cash to pay these taxes, the executor may need to sell assets intended for beneficiaries.
1.2.5 Estate Creation
Many clients want to ensure that they leave something behind after death. For individuals with little or no accumulated wealth, life insurance may be the only practical way to create an estate.
Common estate objectives include:
1.2.5.1 Income Tax Owing
Life insurance proceeds can be used to:
- Pay income taxes triggered at death
- Allow beneficiaries to receive inherited property free of tax-related liquidation
1.2.5.2 Education Funds
Parents may want to ensure that their children can:
- Attend college or university
- Complete their education
even if the parent dies prematurely.
1.2.5.3 Legacies
Some individuals wish to leave a financial gift to:
- A specific person
- Someone who provided meaningful support
- Help a beneficiary get started financially
1.2.5.4 Charitable Giving
Many people want to support a charitable organization upon death, sometimes in amounts they could not afford during their lifetime. Charitable gifts may also provide tax benefits, which are discussed further in Chapter 7.
1.2.6 Business Impacts
The death of a key employee, partner, or shareholder can seriously harm a business and may even cause it to fail.
Life insurance can be used to:
- Protect the business from financial instability
- Fund buy-sell arrangements
- Replace lost expertise or leadership
This concept is explored further under key person life insurance.
1.3 Risk Management Strategies
Regardless of the type of risk, there are four general risk management strategies that can be used to deal with risk. These strategies may be used individually or in combination, depending on the client’s situation.
The four strategies are:
- Risk avoidance
- Risk reduction
- Risk retention
- Risk transfer
An insurance agent helps clients determine which strategies are most appropriate to manage the risk of death or the financial risks faced by beneficiaries when the life insured dies.
1.3.1 Risk Avoidance
Risk avoidance means choosing not to expose oneself to a risk at all.
Example:
- A person avoids the risk of a car accident by choosing not to drive and relying on public transportation.
However, risk avoidance is not possible for death. Simply by living, every person will eventually die. The real concern is whether death occurs earlier than expected.
Death that occurs earlier than statistically predicted is called premature death. Because premature death cannot be avoided, other risk management strategies are required.
1.3.2 Risk Reduction
When a risk cannot be avoided entirely, it may be possible to reduce either its probability or its severity. This strategy is known as risk reduction.
Example:
- A person who must drive can reduce the risk of an accident by:
- Following traffic laws
- Maintaining the vehicle
- Taking defensive driving courses
Similarly, a person can reduce the risk of premature death by:
- Maintaining a healthy lifestyle
- Avoiding hazardous activities
Risk reduction lowers the probability of premature death but does not eliminate the risk entirely, so additional strategies are still necessary.
1.3.3 Risk Retention
Risk retention occurs when a person accepts the risk and its potential consequences.
This strategy is most appropriate for risks with:
- Low severity
- Manageable financial impact
Example:
- Choosing not to purchase an extended warranty on an appliance and accepting the cost of repairs if it breaks.
The risk of death, however, is considered a high-severity risk because of the potentially severe financial consequences for dependants and beneficiaries. Clients who lack sufficient financial resources to absorb this impact generally cannot rely solely on risk retention.
1.3.4 Risk Transfer
Risk transfer involves shifting the financial consequences of a risk to another party.
Insurance is the primary method of risk transfer for the risk of death. By purchasing life insurance:
- The individual transfers the financial risk of premature death to an insurance company
- The insured pays premiums in exchange for a guaranteed death benefit
Life insurance allows a person to trade:
- The possibility of financial catastrophe
for - The certainty of financial protection
Insurance is sometimes referred to as risk sharing, because the financial losses of the few who die prematurely are spread among the many people who purchase insurance.
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