Many people don’t think about life insurance. However, it’s not only about the inevitable; it’s also about making sure loved ones are financially secure after the policyholder dies.
This article explores the various aspects of life insurance payout, including how it works, how to make a claim, beneficiary rules, how long a payout takes, and more.
What is a Life Insurance Payout?
A life insurance payout is a one-time, tax-free lump sum that an insurance company pays to beneficiaries. Also called the death benefit, it is paid to the beneficiaries when the policyholder dies while covered by the policy.
Beneficiaries can use the money to replace the insured’s income, provide for the family or dependents, pay off debts, pay for funeral costs, leave to an estate or a trust, or allocate it as they see fit to meet their financial needs.
Depending on the life insurance company, the payout may be paid out as a lump sum or in monthly payments. Some insurers provide several options, and you may need to specify how you want to receive the benefit.
How to Claim a Life Insurance Payout
To speed up the payout process, it’s important to file a claim as soon as possible, right after the insured’s death.
If you’re a beneficiary, you should file a claim immediately and subsequently receive a notice from the insurer informing you that you’re a beneficiary and instructions on how to claim the death benefit.
Here are basic steps on how to claim a life insurance payout:
- File a claim. When the insurance company is informed of an insured person’s death, it will send a claims package to the beneficiary, with instructions on how to complete it.
- Fill out the required forms as requested by the insurer. The documents you need to provide include the death certificate, the insurance policy, and the claim form.
- Submit the required supporting documents. The insurer may also ask you to submit medical records or a police or coroner’s report.
- Wait for the payout. The insurance company may take a few days to issue the payment. To avoid unnecessary delays, you must submit all the documents and meet all the requirements described in the policy.
Life Insurance Beneficiary Rules in Canada
Life insurance policyholders can choose one or multiple beneficiaries when purchasing a life insurance policy. If you decide to have more than one, specify the percentages for each, and the insurer will write these into the policy.
Your beneficiaries must be aware of the insurance policy and the benefit amounts to make it easy for them to file a claim. If you have a beneficiary who’s not yet an adult, name a trustee who will administer the payout until the beneficiary comes of age.
Average Life Insurance Payout in Canada
According to MoneySense, the average life insurance policy payout in Canada is $200,000. However, industry experts suggest that such life insurance payout rates are not enough and should instead be 10x their annual salary.
Factors That Affect Life Insurance Payouts in Canada
Several factors can influence life insurance payouts:
- Cause of death. Depending on your policy, there may be exclusions or limitations based on an insured’s cause of death.
- Amount of coverage. This will directly influence the payout that beneficiaries receive. More coverage means a bigger payout.
- Payment of premiums. The validity of a policy and succeeding payouts can be affected by how prompt the premium payments are made.
- Designations of beneficiaries. The information about your beneficiaries must be kept updated to make sure that they receive the payouts intended for them.
- The health of the policyholder. An insured person’s health will be taken into account when they purchase a policy. It can influence the premium rates and terms of coverage.  Â
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How Long Does It Take for Life Insurance to Pay Out in Canada?
The length of time it takes to make a life insurance payout in Canada after a policyholder’s death depends on specific circumstances. It’s typical to receive it within several weeks to a few months. Many claims are resolved within 1 month to 60 days following submission.
When life insurance payouts are delayed, one possible reason is a contestability issue. A thorough investigation is needed to rule out misrepresentation, especially in suicide cases.
Another reason is the cause of death, particularly if it’s not considered a natural cause or accident. Unnatural deaths may also require legal or investigative processes, prolonging the payout process. Other reasons are incomplete or missing documents or the insurer’s procedures.
Do You Pay Tax On Life Insurance Payouts in Canada?
No, life insurance payouts aren’t taxable in Canada by the CRA. Beneficiaries can receive their death benefits tax-free and won’t need to report the amount as additional income on a tax return.
FAQs
Can a life insurance claim be denied?
A life insurance claim can be denied due to misrepresentation, misunderstanding of the policy terms, non-payment of premiums, policy lapses, or exclusions in the policy. Fraud or being engaged in fraudulent activity is another reason an insurer may deny a claim.
Can I take money out of my life insurance in Canada?
Most Canadian whole life insurance policies allow for withdrawals up to the amount you have paid in premiums without paying taxes. This will reduce the death benefit by the amount you take out.
Do you get the full amount on a life insurance payout?
A lump sum payout lets you get the full amount on a life insurance payout. This payment option allows you to receive the entire death benefit at once.
Do I really need life insurance in Canada?
Financial experts highly recommend that you purchase life insurance for the financial protection of your loved ones. This will ensure that your loved ones have a financial cushion after your passing and ascertain their financial security.
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