What is a life insurance death benefit in Canada?

What is a life insurance death benefit?

A life insurance death benefit is the one-time payment an insurer makes to the beneficiaries you name when the insured person dies while the policy is in effect. In Canada it is generally tax-free. The amount depends on the coverage bought, and riders or unpaid policy loans can change it.

The Financial Consumer Agency of Canada says beneficiaries may use the money to replace income, provide for children or dependents, pay funeral expenses, pay off debts or make a donation to charity. For the wider picture, see our life insurance overview.

Who receives the death benefit?

The beneficiary you name on the policy. According to the Financial Consumer Agency of Canada, you may name your spouse, another family member, a friend or a charity, and you may name more than one beneficiary and give each a different share. Our guide to naming a life insurance beneficiary covers the choices in more detail.

• Revocable beneficiary. You can change it at any time without telling them.
• Irrevocable beneficiary. You need their written permission before you change it.
• Quebec. If you name your spouse, they are presumed irrevocable unless you specify otherwise.
• Contingent beneficiary. This person receives the payment if your named beneficiary dies before you or at the same time as you.
• Minor beneficiary. Without a trustee or administrator, the province or territory holds the money until the child reaches the age of majority.

What happens if no beneficiary is named?

The Financial Consumer Agency of Canada says your insurer will assume your estate is the beneficiary by default. The payment then becomes part of the estate, which distributes it under your will. It is subject to estate taxes, and creditors may claim it to pay your outstanding debts. TD Insurance adds that the benefit may be subject to the probate fees of the estate.

Is a life insurance death benefit taxable in Canada?

Generally no. The Financial Consumer Agency of Canada describes the death benefit as a one-time, tax-free payment, and Canada Life says it is almost always tax-free. If the benefit goes to your estate, it is counted with the rest of the estate, as explained above. Your own situation can raise other questions, so ask a tax professional about the details.

Is the CPP death benefit the same thing?

No. In Canada, "death benefit" can also mean the Canada Pension Plan payment, which is a separate government benefit. A life insurance death benefit comes from a policy and an insurer. The comparison below uses figures published by Canada.ca and the Canada Revenue Agency.

How do you claim a life insurance death benefit?

The payment is not automatic. Canada Life says the beneficiary must file a claim with the insurer. Each insurer has its own process, so check the policy or call the insurer. The usual steps are:

1. Notify the insurer. If you cannot find the policy, Canada Life says the OmbudService for Life and Health Insurance can help you look for it. If there are several beneficiaries, each one may need to submit their own claim, according to TD Insurance.
2. Send the documents. Canada Life lists a completed claim form, a copy of the death certificate, and the policy number or a copy of the policy. TD Insurance adds government-issued identification and anything else the insurer asks for.
3. Wait for the review. TD Insurance says the insurer confirms that the policy was active at the time of death, that premiums were paid and that the claim meets the policy requirements.
4. Payment if approved. If the insurer approves the claim, it pays the named beneficiary. If no beneficiary is named, TD Insurance says the benefit is paid to the estate.

How long does it take to receive the death benefit?

It depends on the insurer and the claim. Canada Life says insurers are generally required, in most provinces, to pay within 30 days after receiving all the claim requirements. TD Insurance says claims are typically paid more quickly when they are straightforward, for example when the policy is active, the beneficiary is clearly named, every requested document has been provided and there are no questions about the cause of death.

Why might a death benefit be delayed or denied?

Canada Life lists these reasons a death benefit might not be paid:

• The coverage lapsed because it ended or premiums were missed.
• The cause of death is not covered by the policy, such as extreme sports, dangerous hobbies, illegal activities or suicide.
• False information was given on the insurance application.

TD Insurance adds that an incomplete claim form, missing documents, unclear or disputed beneficiary information, or a death soon after the policy was issued can delay a claim. It also notes that most Canadian policies have a period, during the first two years, in which the insurer may look more closely at the application if a claim is made. TD also says a policy will not pay out in some circumstances, such as fraud or suicide within two years of the policy issue date. Read your own policy for the exact terms.

Does the death benefit work the same way for term and permanent insurance?

The payout works the same way, but the coverage period does not. The Financial Consumer Agency of Canada explains the differences:

• Term life insurance pays only if you die within the term, such as 10 or 20 years. When the term ends, coverage ends and nothing is paid. Some term policies can be renewed.
• Permanent life insurance, such as whole life, covers you for life while the policy is in effect. If you borrow against its cash value and do not repay, the loan may reduce what your beneficiary receives.
• Universal life combines insurance with an investment account, so the death benefit and cash value may rise or fall with your investments.

If you are choosing an amount, see how much life insurance you need. Funeral costs are one common use of the payment; our page on funeral insurance compares that option.

Frequently asked questions

Does every Canadian get the $2,500 death benefit?

No. The CPP death benefit is generally paid only when the deceased contributed to the Canada Pension Plan for at least one-third of the calendar years in their contributory period (and no fewer than three calendar years), or for 10 calendar years. A top-up applies only in specific cases. It is separate from life insurance.

Does life insurance cover death benefits?

Yes. Life insurance is what pays a death benefit when the insured person dies while the policy is in effect, as the Financial Consumer Agency of Canada explains. The policy sets the conditions and exclusions.

How much money do you get from life insurance when someone dies?

The coverage amount in the policy. TD Insurance gives the example of a $500,000 term policy, where the beneficiary receives $500,000, not subject to income tax, once the claim is submitted and approved. Riders can change the amount, according to Canada Life.

What deaths will life insurance not cover?

It depends on the policy. Canada Life gives examples of causes that may not be covered, including extreme sports, dangerous hobbies, illegal activities and suicide. TD Insurance adds that a policy will not pay out in some circumstances, such as fraud or suicide within two years of the policy issue date. Coverage also depends on the policy being in force and on accurate answers on the application.

Can a death benefit be split between several people?

Yes. The policy owner can name several beneficiaries and set each share, according to TD Insurance. If no split is specified, TD says the benefit is typically divided equally.

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