Are Life Insurance Claims Always Paid Out?

Nobody likes to think about their own death, but when you buy life insurance, you want to know your family will actually receive the money. It’s a fair concern. After all, you’re paying premiums with the expectation that your loved ones will be protected when something happens to you.

The good news is that most life insurance claims in Canada do get paid. Insurance companies typically process payouts within a few weeks, and many aim to settle claims within 30 days. But the statistics tell us something worth knowing: about 4% of life insurance policies didn’t pay out in 2019 according to the Canadian Life and Health Insurance Association. Some reports suggest this figure may have increased during the pandemic.

It’s understandable that you’d want to know what could prevent your claim from being paid. The reality is that having an in-force life insurance policy that doesn’t pay the death benefit is quite rare in Canada. Most policies include specific exceptions, but these are clearly outlined in your contract. The key is understanding what those exceptions are before you need to make a claim.

If you’re worried about medical requirements affecting your coverage, there are options. Non-medical life insurance can provide protection for your loved ones without the usual health screening process.

When you know what can delay or prevent a payout, you can take steps to ensure your beneficiaries receive the tax-free lump sum they’re entitled to. That’s what this guide will help you understand.

What is a life insurance payout in Canada?

A life insurance payout is the money your beneficiaries receive when you pass away. This death benefit comes as a tax-free lump sum, which means your loved ones get the full amount without having to pay income tax on it. Think of it as your final gift to help them through both the emotional and financial challenges they’ll face.

The death benefit doesn’t just appear in your beneficiaries’ bank accounts automatically, though. There’s a process they’ll need to follow.

How life insurance works after death

When you pass away, your beneficiaries will need to contact your insurance company to let them know what happened. They’ll also need to gather some paperwork: a completed claim form from the insurance company, a copy of your death certificate, and your policy number. If they don’t have your policy details handy, they can usually find them in your financial records or ask your insurance broker.

Your insurance company will then review everything to make sure the policy is valid and verify the cause of death. Sometimes, especially if the policy is relatively new, they might ask for additional information like medical records or police reports. This isn’t necessarily a red flag – it’s part of their standard process.

Who receives the payout and how

The money goes to whoever you named as beneficiaries in your policy. You can choose your spouse, children, other family members, friends, charities, trusts, or even your business. If you’ve named multiple beneficiaries, the payout gets divided based on the percentages you specified in the policy.

Most Canadian insurance companies aim to pay out within 30 days of receiving all the required documents. Many actually work faster than that, with some processing approved claims within 2-5 business days.

Is the payout taxable in Canada?

Here’s one of the best features of life insurance: the payout is generally not taxable. Your beneficiaries receive the entire amount without having to report it as income. Canada doesn’t have death taxes or estate inheritance taxes that your beneficiaries would need to pay.

There are a few exceptions to be aware of:

• If you haven’t named a beneficiary, the money goes to your estate and could face estate taxes

• Any interest earned on delayed payouts might be taxed

• For permanent life insurance policies, if you’ve made withdrawals that exceed what you’ve paid in, those amounts might be taxable

This tax-free benefit makes life insurance particularly valuable for families who want to ensure their loved ones receive the maximum financial support possible.

How the life insurance payout process works

Filing a life insurance claim doesn’t have to be complicated, but knowing the steps ahead of time can help your beneficiaries when they’re dealing with a difficult situation.

Step 1: Policyholder passes away

The claim process starts when the insured person dies while their policy is active. The cause of death must be covered under the policy terms. Some policies have exclusions – suicide within the first two years is common, as are deaths from high-risk activities. Non-medical life insurance options often have fewer exclusions if you’re concerned about potential coverage limitations.

Step 2: Beneficiaries file a claim

Your beneficiaries need to contact the insurance company to submit a claim. The insurer will ask for several documents:

• A completed claim form (the insurance company provides this)

• A certified copy of the death certificate

• The policy number and contract details

If your beneficiaries can’t find policy details, they can search through financial records, contact your advisor, or have the executor reach out to the Canadian Life and Health Insurance Association.

Step 3: Insurer reviews the claim

The insurance company examines the claim to verify policy details and cause of death. This review involves cross-checking information and fact-checking the claim. For policies less than two years old, expect a more thorough investigation during the “contestability period”.

Step 4: Payout is issued

Once approved, the insurer issues payment according to the beneficiary’s preference, usually as a tax-free lump sum. Some policies offer annuity options where the benefit is paid in fixed instalments over time.

How long does life insurance take to pay out?

The timeframe varies depending on the circumstances. Most claims are processed within 30 to 60 days after all required documents are submitted. Straightforward claims can be settled much faster – some insurers aim to pay within 2-5 business days after approval. Foreign death claims or incomplete documentation may extend this timeline considerably.

What can delay or prevent your life insurance payout

While most life insurance claims get paid without problems, there are situations that can delay or stop a payout altogether. It’s important to know what these are so you can avoid them.

Policy exclusions and the contestability period

Every life insurance policy has exclusions. These are specific situations where the insurance company won’t pay out, and they’re clearly listed in your policy documents. Common exclusions include death from suicide within the first two years, deaths during high-risk activities, or deaths while committing illegal acts.

All policies also have what’s called a contestability period. This is typically the first two years after you buy your policy, during which the insurance company can investigate your claim more thoroughly. During this time, even small mistakes on your application could lead to your claim being denied.

The contestability period exists to protect insurance companies from fraud, but it also means you need to be especially careful about accuracy when applying.

Being dishonest on your application

The most common reason for life insurance claim denials is misrepresentation on the application. This happens when you don’t tell the truth about medical conditions, whether you smoke, or if you participate in dangerous activities.

After the contestability period ends, insurance companies have to prove fraud rather than simple mistakes to deny your claim. But why take the risk? Being honest from the start protects your family’s future payout.

Missing premium payments

If you miss premium payments beyond your grace period (usually 30 days), your policy will lapse and your coverage ends. Any death claims filed after a policy lapses will be rejected.

Many insurance companies do offer options to reinstate your policy within certain timeframes. You’ll likely need to pay overdue premiums plus interest, and you may need to go through health assessments again.

Problems with beneficiaries

Sometimes beneficiaries don’t even know a policy exists, which means benefits go unclaimed. Or if your named beneficiaries die before you do and you haven’t updated your policy, complications can arise. When this happens, the payout may go to your estate instead, which can create delays and tax issues.

The five main reasons claims get denied

Life insurance payouts are typically denied for five main reasons: death from excluded causes, dishonesty on applications, missed premium payments, issues during the contestability period, and beneficiary problems. The good news is that non-medical life insurance options often have fewer exclusions and simpler applications, which can reduce these risks.

Understanding these potential issues helps you avoid them. Most problems are preventable with proper planning and honest disclosure.

How to make sure your claim is paid

You can take steps now to ensure your beneficiaries receive the death benefit when they need it. The key is proper planning before a claim is ever filed.

Be honest on your application

The most common reason life insurance claims get denied is misrepresentation on the life insurance application. Insurance companies have multiple ways to verify the information you provide. It might seem tempting to downplay health issues or risky hobbies to get lower premiums, but dishonesty will likely result in claim denial.

Your beneficiaries would be left without protection at the worst possible time.

Keep your policy current

Life changes, and your insurance should reflect those changes. Most advisors recommend reviewing your policy annually, especially after major life events like marriage, divorce, or having children. If you don’t update your coverage regularly, you might find yourself underinsured or with outdated beneficiary information.

Tell your beneficiaries about the policy

Your beneficiaries need to know they’re named in your policy. Without this knowledge, they might not know to file a claim, and your death benefit could go unclaimed. Make sure they know how to contact your insurance company or advisor if something happens to you.

Consider non-medical life insurance

If you’re concerned about health questions or medical exams affecting your coverage, non-medical life insurance offers a simpler path. These policies typically have fewer health requirements and guaranteed acceptance if you meet the eligibility criteria.

Read the fine print

You need to understand what your policy covers and what it doesn’t. Familiarise yourself with policy exclusions and claim procedures before you buy. This prevents unpleasant surprises when your family needs to file a claim.

When you understand these basics, you’ll give your loved ones the best chance of receiving the financial protection you’re providing for them.

Getting the peace of mind you deserve

Life insurance works best when you understand how it works. Most policies in Canada do pay out, and when you take the right steps, your family will receive the financial support they need.

The most important thing you can do is be honest on your application. It might seem tempting to leave out a health condition or downplay your smoking habits, but this is the fastest way to create problems for your beneficiaries later. Insurance companies have ways of checking, and it’s not worth the risk.

Keep your premiums current. If you miss payments, your policy could lapse, and then your family gets nothing. Make sure your beneficiaries know about your policy too. What good is life insurance if no one knows it exists?

If you’re concerned about medical exams or health questions, non-medical life insurance might be the right choice for you. These policies have fewer restrictions and simpler applications, which means fewer chances for complications.

The reality is that 96% of life insurance claims get paid in Canada. When you plan properly, understand your policy, and work with experienced brokers, you can be confident your family will be protected.

At Maple Bay, we help Canadians find the right life insurance coverage for their needs. We understand how important it is to know your loved ones will be looked after, and we’ll make sure you get a policy that delivers on that promise.

Contact us today to discuss your life insurance options and get the peace of mind that comes with proper protection.