What Does Life Insurance Cover in Canada?

Life insurance in Canada is a contract between a policyholder and an insurer, providing financial security to designated beneficiaries upon the insured’s death. This involves regular premium payments in exchange for a lump-sum death benefit. The primary purpose of life insurance is to safeguard the financial future of beneficiaries, easing burdens such as outstanding debts, living expenses, or future financial needs.

Types of Life Insurance in Canada

Life insurance policies in Canada fall into two broad categories: term life insurance and permanent life insurance. Each is structured to provide coverage under different conditions and for varying durations.

Term life insurance offers coverage for a specific period, or “term.” Premiums for term policies are fixed for the chosen period and are more affordable than permanent options. If the insured individual passes away within the specified term, beneficiaries receive the death benefit. If the insured outlives the term, coverage ceases unless renewed or converted. Renewing a term policy results in higher premiums due to the insured’s increased age.

Permanent life insurance provides coverage for the insured’s entire lifetime, as long as premiums are paid. This type of insurance includes a cash value component that can grow on a tax-deferred basis. Policyholders may access this cash value through loans or withdrawals, though doing so can affect the death benefit and may have tax implications. Two main types of permanent life insurance are whole life and universal life.

Whole life insurance offers a guaranteed death benefit and level premiums that remain fixed for life. It builds cash value that is guaranteed and does not decrease, providing a predictable savings component.

Universal life insurance provides greater flexibility, combining a death benefit with an investment component where premiums can be adjusted. The investment component grows tax-deferred, and the policyholder may have some control over investment choices. This flexibility means the policy needs careful monitoring to ensure sufficient funding, as insufficient cash value could lead to a policy lapse.

Events Covered and Exclusions

Life insurance policies in Canada pay a death benefit upon the passing of the insured, regardless of the cause, unless specific exclusions apply. This coverage extends to deaths from natural causes, accidents, or illness. Policies include standard exclusions that can lead to a claim denial.

A common exclusion is the suicide clause, which stipulates a two-year exclusion period from the policy’s effective date. If the insured dies by suicide within this initial period, the insurer may deny the death benefit payout. After this two-year period, suicide is covered by the policy.

Material misrepresentation or fraud during the application process can result in a denied claim or policy voidance. Providing false or misleading information about health conditions, lifestyle, or other relevant details allows the insurer to contest the policy. Death resulting from the insured’s participation in criminal activity is excluded from coverage.

High-risk activities may also be subject to exclusions or require special underwriting and higher premiums if not fully disclosed during the application. Failure to disclose such activities can lead to claim denial. A contestability period, two years from the policy’s issue date, grants the insurer the right to investigate claims for misrepresentation or omissions.

Enhancing Coverage with Riders

Life insurance coverage can be customized and expanded beyond the basic death benefit through optional additions known as riders. These riders provide extra benefits or modify existing coverage for an additional premium, allowing policyholders to tailor their plans to specific needs.

One common rider is the Waiver of Premium. This rider ensures that if the insured becomes totally disabled, future premiums are waived, keeping the policy in force without further payment. Another option is the Accidental Death Benefit rider, which provides an additional payout to beneficiaries if the insured’s death results from an accident.

A Child Term Rider allows for term coverage on the lives of children under the main policy, providing a small death benefit if an included child passes away. The Guaranteed Insurability Rider offers the ability to purchase additional coverage at specific future dates without requiring a new medical exam or proving insurability. A Critical Illness Rider pays a lump sum benefit upon the diagnosis of a specified critical illness, providing financial support for medical costs or living expenses during recovery.

Receiving the Death Benefit

The process of receiving a life insurance death benefit in Canada begins when beneficiaries notify the insurer of the policyholder’s passing. They are required to submit specific documents, including the death certificate and the original policy information. The clarity of beneficiary designation is important, as it directly determines who receives the payout. Policyholders can name primary beneficiaries and contingent beneficiaries who would receive the benefit if the primary ones are unable to.

The death benefit is paid as a tax-free lump sum to the beneficiaries, though some policies may offer alternative settlement options like installments. The death benefit received by beneficiaries is not subject to income tax.

For permanent life insurance policies that accumulate cash value, any growth within this component is tax-deferred. Taxation on the cash value only occurs if it is withdrawn or accessed in a way that exceeds the adjusted cost basis of the policy, or if the policy is surrendered.