What Happens When a Canadian Life Insurance Policy Holder Dies

Life insurance provides financial security for the policyholder’s family or beneficiaries in the event of their death.

In Canada, when a life insurance policyholder passes away, several steps need to be taken before the beneficiaries can access the insurance payout. Understanding the process, the roles of various parties involved, and the legal framework that governs life insurance claims can help policyholders and their families navigate this difficult time.

1. Notifying the Life Insurance Company

The first step after the death of a life insurance policyholder is to notify the life insurance company. This should be done as soon as possible, as the company will need to begin the process of verifying the claim and determining the eligibility for the death benefit. Typically, the person who contacts the insurance company is the beneficiary or the person handling the deceased’s estate.

To initiate the claim, the insurance company will require certain documents. These include:

• Death certificate: An official document that confirms the policyholder's death.

• Life insurance policy: The original policy, or a copy, that proves the existence and terms of the insurance.

• Claim form: A form provided by the insurer that needs to be filled out by the beneficiary or estate executor.

• Proof of identity: Documents to verify the identity of the claimant, such as government-issued ID.

• Additional documents: Depending on the circumstances of the death, the insurer might request additional information or documentation.

2. Claim Processing and Investigation

Once the insurance company receives the required documents, it will begin processing the claim. This process involves verifying the cause of death, reviewing the terms of the policy, and ensuring that the death occurred within the coverage period.

In some cases, the insurance company may conduct an investigation to determine the cause of death. If the death was sudden, accidental, or occurred under unusual circumstances, the insurer may request a coroner’s report or investigate the cause to ensure there are no discrepancies with the policy’s terms.

For instance, if the policy includes exclusions for deaths related to specific activities (e.g., dangerous sports, drug use, or suicide within the first two years of coverage), the insurer may scrutinize the cause of death more carefully.

In Canada, life insurance policies are typically governed by provincial regulations, but most insurers follow similar procedures to assess claims. The investigation process can take anywhere from a few weeks to a few months, depending on the complexity of the case and the amount of information required.

3. The Beneficiary’s Role

The beneficiary, who is typically named in the policy, plays a crucial role in ensuring that the claim is processed smoothly. If the policyholder named multiple beneficiaries, each would receive a portion of the payout according to the terms specified in the policy.

In Canada, the beneficiary can be a person, an organization, or even a trust. If the beneficiary is an individual, they must follow the claims process to receive the benefits. The beneficiary’s role is to provide the necessary documents, such as the death certificate, the insurance policy, and any other required paperwork. In the case of a trust being named as the beneficiary, the trustee would handle the claim on behalf of the beneficiaries.

In some instances, disputes may arise regarding the beneficiary designation. For example, if the policyholder made changes to their beneficiary designation just before their death, or if there is confusion about who is entitled to the payout, the matter could become complicated. It is essential for the policyholder to keep their beneficiary designation updated to prevent potential conflicts.

4. Payout of the Death Benefit

Once the life insurance company has reviewed the claim and confirmed the policy’s validity, it will pay out the death benefit to the beneficiary. The payout can be made in several forms, depending on the policy terms and the beneficiary’s preference:

• Lump sum: This is the most common form of payment. The beneficiary receives the entire amount of the death benefit in one payment.

• Annuity: In some cases, the death benefit may be paid out in periodic payments over a specified period, typically to provide long-term financial support.

• Life insurance trust: If the policyholder set up a trust as the beneficiary, the payout may be directed to the trust, which is then managed by a trustee to benefit the named individuals.

The payout is typically tax-free in Canada, which is a major benefit of life insurance. However, there may be tax implications if the beneficiary chooses a specific payment structure, such as an annuity. It’s also worth noting that any unpaid premiums owed to the insurer at the time of death may be deducted from the payout.

5. What Happens if the Policyholder Dies During the Contestability Period?

Most life insurance policies in Canada have a contestability period, typically the first two years of the policy. During this period, the insurer has the right to investigate the circumstances surrounding the policyholder’s death more thoroughly. If the policyholder dies within the contestability period, the insurer may deny the claim if it finds that the policyholder misrepresented any information during the application process.

For example, if the policyholder failed to disclose relevant information about their health, lifestyle, or occupation that could affect their eligibility for coverage, the insurance company may refuse to pay the death benefit. If the insurer denies the claim during this period, it may refund any premiums paid, but the beneficiary will not receive the death benefit.

6. What Happens if the Policyholder Dies After the Contestability Period?

Once the contestability period has passed, the insurance company can no longer challenge the claim based on misrepresentation or omissions in the application. However, the insurer may still refuse to pay the death benefit if it determines that the death falls under an exclusion in the policy. Common exclusions in life insurance policies may include:

• Death due to suicide within a certain time frame (e.g., the first two years of coverage).

• Death resulting from illegal activities or criminal behavior.

• Death caused by participation in dangerous activities or high-risk hobbies, unless these are specifically covered by the policy.

If there is no exclusion that applies and the claim is valid, the insurer will pay the death benefit as outlined in the policy.

7. Handling the Deceased’s Estate

If there is no designated beneficiary, or if the beneficiary is deceased, the death benefit will be paid to the deceased’s estate. The executor of the estate will then manage the funds, which may be used to cover any outstanding debts, including taxes, mortgages, or loans. After these obligations are met, the remaining amount will be distributed to the heirs according to the deceased’s will, or according to the laws of intestacy if there is no will.

Conclusion

When a life insurance policyholder dies in Canada, the process of making a claim involves several steps, including notifying the insurance company, submitting the required documentation, and ensuring that the claim is processed correctly. The beneficiary’s role is critical, as they must provide necessary information and ensure that the policy’s terms are followed. Understanding the potential for delays or denials, particularly during the contestability period, and ensuring that beneficiary designations are kept up to date, are crucial for avoiding complications.

Overall, life insurance serves as an important financial safety net, offering peace of mind to the policyholder and their loved ones. When the process is understood and handled properly, it provides the financial security that can help the surviving family members move forward after the loss of a loved one.