Life Insurance Payout in Canada: How Does it Work?

[fs-toc-omit]What is a life insurance payout in Canada?

[fs-toc-h2]What is a life insurance payout?

The life insurance payout is a tax-free lump sum paid to your beneficiaries in the event that you pass away while your life insurance policy is active. This payout is also called a "death benefit."

The death benefit is meant to financially support the policyholder’s loved ones and relieve the financial burden of their passing.

Your beneficiary (or beneficiaries) can use the life insurance to cover whatever they see fit. This might include:

• Paying for final expenses
• Making mortgage payments
• Paying off other debts
• Childcare costs or post-secondary education for your kids
• Other day-to-day expenses

Looking for a policy that will protect your loved ones without breaking the bank? Term life insurance is one of the most affordable life insurance options—so you get more coverage for lower premiums.

PolicyMe offers some of the most affordable term life insurance rates in Canada.

[fs-toc-omit]How does the life insurance payout work in Canada?

[fs-toc-h2]How does it work?

The life insurance payout process is pretty straightforward in Canada. Here are the steps to follow if you need to make a claim.

1. Find the life insurance policy information

Ideally, the policyholder should have informed the beneficiaries about the policy and where to find relevant documents. In this case, the process is fairly simple.

If you know you’re a beneficiary of a policy but don’t have the documents or policy number handy, though, there are a couple of options.

2. Notify the insurance company

You’ll need to notify the life insurance provider of the policyholder’s passing to make a claim. This usually requires proof of death, like the death certificate. But in some instances, more than one document might be required, including:

• Death certificate
• Funeral director’s statement
• Coroner’s report
• Police reports
• Medical records

Most life insurance companies will have their contact information listed on their website to reach out to.

3. Complete claim forms and submit the required documents

Life insurance claim forms can often be found online on the insurance company’s website, but if not, a representative from the insurance company should be able to help you find them. Submit this, along with any required documents such as the death certificate showing cause of death and medical reports, to the insurance company.

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After this, your claim will go under review by the insurance company. If any additional information is needed, they’ll let you know at this stage.

The life insurance payout usually takes anywhere between two weeks to 60 days to be paid. This depends on the insurance company and the individual circumstances of your claim.

Types of life insurance payouts

Life insurance companies typically pay out the death benefit in a lump sum, but some life insurance companies offer other payment options, too. Let’s go through some of the more common types.

Lump sum payments

A lump sum payment is paid out in one go, so you receive all the funds at once, tax-free. Most people prefer this type of payment as it allows them to deal with the upfront costs of final expenses and gives them complete control over the payout.

This is the most common type of death benefit payout and may be the only one your life insurance company provides.

Specific income

This option allows you to receive the payout in instalments rather than one single payment. 

You can decide the amount of each payment and the time period over which it will be paid.

Example

If the policy coverage amount was $500,000, you could choose to receive $50,000 a year for 10 years.

Annuity payments

Like with a specific income payout, if you choose annuity payments, the payout will be paid over a set amount of time. But with annuity payments, any currently unpaid amount grows at a fixed interest rate determined by the insurance company.

[fs-toc-omit]4 factors that affect life insurance payouts in Canada

[fs-toc-h2]Factors that affect the payout

There are a few different factors that might affect your life insurance payout. Make sure to read your policy carefully to get a clear picture of any terms, clauses or exclusions that might be present in your contract. Here are a few to keep in mind.

1. Policy type

Different types of life insurance policies have specific rules that can affect the claims process. 

For example, if you have a mortgage life insurance policy, the payout will go straight to the policyholder’s mortgage lender rather than their loved ones like in a traditional policy.

Another example: A term life insurance payout, on the other hand, goes straight to your beneficiaries. 

Term life insurance is one of the most straightforward policy types available. It’s simple to understand and you won’t have to worry about hidden fees, cancellation charges, or other risks hidden in the fineprint.

2. Policy exclusions

Life insurance policies usually contain exclusions that outline situations where the policy won’t pay out. Common exclusions may include death by suicide in the first two years or deaths related to dangerous activities (think: skydiving!).

Mental health resources

If you or someone you know is struggling with suicidal ideation, contact Talk Suicide Canada at 1-833-456-4566 or text 45645.

3. Contestability periods

Most life insurance policies have a contestability period, typically the first two years after the policy is created. 

During this period, if a claim is made, the insurance company has the right to investigate the accuracy of the information provided during the application process. This is to protect the life insurance company against potential fraud. 

4. Accuracy of information during the application

It’s extremely important to provide accurate information when applying for a life insurance policy to avoid potential claims being denied.

Example

If during the life insurance application, the policyholder claimed that they were not a smoker but the insured passes from a smoking-related complication, the beneficiary may not receive the death benefit.

Tips for an easy claim process

Making a life insurance claim can be an emotionally difficult thing to do when a beneficiary has just lost their loved one. That goes double when there are added complications. Here are a few things policyholders can do to make the process as easy as possible for their beneficiaries.

1. Keep your policy up-to-date

Regularly review and update your life insurance policy to make sure it reflects your current circumstances. Let your insurance company know of any changes in contact information or if you’d like to change your beneficiaries.

2. Be honest during the application process

It bears repeating: honesty is the best policy when it comes to life insurance! Make sure you’re disclosing all relevant information at the time of application to avoid any unwelcome surprises when it comes time for your beneficiaries to make a claim.

Misrepresenting yourself on your life insurance application can lead to the policy becoming void. That means sacrificing the integrity of the safety net you’ve built for your loved ones.

3. Share policy details with your beneficiaries

It will be much easier for your beneficiaries to claim the policy if they have all the details handy. Inform them of the policy's location and give them the contact information for the insurance company.

This transparency will help your beneficiaries navigate the claims process with more ease during a difficult time.

[fs-toc-omit]What are the reasons life insurance won't pay out?

[fs-toc-h2]Reasons it might not pay out

It’s unlikely that a life insurance policy won’t pay out in Canada. That’s for one simple reason: death is hard to fake.

With that said, though, there are a few reasons life insurance might not pay out:

Main reasons life insurance claims are denied in Canada

• Inaccurate information on the application: Intentional misrepresentation on your life insurance application, like lying about your age, can result in the policy not paying out to your beneficiaries.
• Policy lapsed due to missed payment: Paying your premiums keeps your policy active. The insurer can deny your claim if the policy becomes inactive due to missed payments.
• The insured passes away during the contestability period: The insurer might re-evaluate your claim if the policyholder passes away during the contestability period. This is to protect them from potential fraud.
• Death by suicide in the first two years: Most insurers will not pay out the claim if the policyholder passes away within two years of activating the policy.
• Beneficiaries don’t know the policy exists: If the beneficiary isn’t aware that they’ve been named on a policy, they will not know the contact the insurer. Because of this, the policy could expire due to nonpayment.
• Beneficiary information wasn’t updated: If you haven’t named a beneficiary, the payout will likely go to pay your estate first. The remaining money, if any, may then be distributed to your family.
• Cause of death is excluded in your policy: Your agreement may exclude specific causes of death, such as death by homicide, death while doing illegal activities, or war-related deaths.

Be sure to read your policy carefully to see what other clauses may apply.

[fs-toc-omit]Bottom line: Life insurance beneficiary rules in Canada

• If you’re the policyholder, keeping your beneficiaries in the loop about your life insurance policy will make the claims process smoother for them later on. Make sure to do the same when creating a will.
• Be honest on your life insurance application so your policy stays in force and your beneficiaries can claim the payout.
• If you’re a beneficiary, make sure to have all the documentation you can on hand while making a claim for example the death certificate and medical reports.

[fs-toc-omit]FAQ: Life insurance payouts in Canada

Are life insurance payouts taxable?

No, life insurance payouts usually aren’t taxable in Canada, at least with a term life insurance policy. With permanent life insurance, however, your beneficiaries may be taxed on your policy’s cash value (if the policy has accumulated any).

There are some other circumstances when a life insurance payout may be taxable:

• A beneficiary isn’t named in the policy.
• Money is withdrawn or borrowed from the cash value of a permanent life insurance policy.
• A permanent policy is cancelled (in some cases).
• You sell your permanent life insurance policy while you're still alive.
• Your beneficiaries get interest earnings from your policy.

If you’re not sure whether or not your policy’s payout will be taxable, it’s a good idea to speak with a financial advisor who can walk you through the ins-and-outs.

What happens to unclaimed life insurance benefits?

If the insurance company is not made aware that the policyholder has passed away, the policy could expire also known as policy lapse due to non-payment. But if the insurance company somehow finds out that the insured has passed, they may attempt to reach out to the family. 

This is why it’s important for policyholders to discuss with their beneficiaries that there is a policy in force and where to find the documentation.

Can a life insurance claim be denied?

It’s pretty rare for a life insurance company to deny a claim, but it does happen. Most of the time, rejected claims are due to misrepresentation at the time of application. But a claim can be denied for other reasons, like policy exclusions, policy lapse or expiration, or suicide in the first two years.

Do I need to file my life insurance claim by a certain time?

The policy will typically include when a beneficiary needs to file a claim by. The typical range is between 90 days and 12 months, according to Canadian Life and Health Insurance Association. 

That said, if you’re submitting a claim later than the stated timeframe, it’s still worth trying. Depending on the circumstances, the insurance company may still consider the claim.