What’s the risk of a life insurance policy not paying out in Canada?
Life insurance can help financially protect your loved ones should you pass away. If you’re one of the 22 million Canadians who has life insurance protection, you may be wondering about the risk of your life insurance not paying out. While it can happen, it’s relatively uncommon in Canada.
Although it doesn’t happen often, the risk of your life insurance not paying out can depend on a few factors. Let’s find out why it happens and help make sure your loved ones get the benefits of a life insurance claim.
What are some reasons why life insurance won’t pay out?
1. Your policy lapses or ends
i) Your coverage ends when you still need it
There are different types of life insurance coverage. Typically, the most affordable is term life insurance, which gives you coverage for the length of time you choose. This can range from as short as one year to 50 years or even longer. The term you choose should work for your needs.
As your term life insurance reaches its termination date, you may have the option to renew your policy, convert it to a longer term or permanent life insurance policy. Should you pass away after your policy ends and you weren’t able to extend or convert it, your provider will deny the life insurance claim. It’s important to know until what age you’re covered and extend or convert your policy before it ends if you still need the coverage.
ii) Leaving your group plan
Most Canadians get their life insurance coverage through a group plan through their employment. If you leave your group plan – whether through retirement, starting up your own business or changing employers – you will generally lose that coverage.
Some group plans allow you to keep your coverage even after your workplace plan ends. Check if you have that option. Your rates can even be less than what you’d pay if you get a new individual policy.
iii) Missing payments
You need to pay your life insurance premiums regularly to keep your coverage active. If you miss your payments, your policy can lapse, meaning you won’t have coverage. If you die and your policy has lapsed, your insurance provider not pay the claim.
Policies have a grace period which guarantees coverage even if you missed a payment. Review the terms of your life insurance policy to check if you have this.
It’s important to make sure your payments are up to date. If you’re having difficulty paying the premium, contact your insurer. Adjust your coverage if you can.
2. Cause of death isn’t covered
i) Extreme sports or dangerous hobbies
When you signed up for your life insurance coverage, you agreed to certain conditions. Some of these conditions include situations not covered by your insurer. This list of exclusions may specify risky activities such as sky diving or car racing. If your cause of death is on the exclusion list, your beneficiaries may be denied the life insurance claim. In these cases, you may not even have been eligible for coverage to begin with.
If you frequently take part in extreme sports or belong to an occupation that has a higher mortality-risk, such as law enforcement, firefighting or aviation, you may still get coverage. Make sure to disclose this information at the start of your application. You may need to pay a higher premium to get approved for coverage.
ii) Illegal activities
Life insurance policies generally exclude coverage for death due to illegal activities. Examples include:
- Drug overdose
- Car accidents caused by driving under the influence
Your life insurance policy specifies which illegal activities aren’t covered. It’s important to understand these limitations.
iii) Death within the contestability period
Most life insurance policies in Canada have a two-year contestability period from the effective date of coverage. This means if you die within the first 2 years of signing up for the policy, the insurance provider has the legal right to investigate the claim and make sure you didn’t misrepresent yourself during the application process.
One cause of death that may outrightly get denied is death by suicide. Life insurance companies in Canada normally have a two-year suicide clause. In this case, the claim may not get paid if the insured person dies by suicide within the first 2 years of signing up for the policy.
If you or someone you know is struggling with suicidal thoughts, you’re not alone. Help is available. Call Talk Suicide Canada at 1-833-456-4566 or text 45645.
3. Giving false information or intentionally lying on the application
When you apply for a life insurance policy, you need to answer a few questions. This includes questions about your lifestyle, medical condition and medical history. Intentionally giving false information will void your policy and lead to your claim being denied.
For example, if you fail to disclose a history of smoking, drug or alcohol use, or pre-existing health conditions like diabetes or depression, your beneficiary may not receive your death benefit.
Accidentally making a mistake in your application is another matter. You should contact your insurer to correct the mistake as soon as you’re aware of it.
4. Beneficiary dies before the insured
There are times when the beneficiary dies before the insured. When this happens, if there is not an alternate beneficiary designated, the life insurance proceeds would be payable to your estate. Consider naming more than one beneficiary for your life insurance policy. You could have multiple beneficiaries who share the claim, or you can also designate an alternate or contingent beneficiary who will become the beneficiary if the first named beneficiary dies before the insured.
How can you avoid your life insurance claim being denied?
Knowing some of the reasons why life insurance claims get denied will help you avoid them. Here are a few simple steps to take to make sure your death benefit is paid to your beneficiaries:
- Be honest with your insurer. If you answer the application questions truthfully throughout the application process, misrepresentation likely won’t be an issue when the life insurance claim is filed.
- Make your premium payments on time.
- Be aware of what’s covered and isn’t covered in your policy. Understand the exclusions and avoid them.
- Make sure your beneficiaries are aware of your life insurance policy and how to make the claim when the time comes. This may be a difficult conversation, but it’s important to have.
How do you claim a death benefit?
When someone dies, their death benefit isn’t automatically paid. Their beneficiary must file a claim with the insurer to let them know the insured person has passed away.
The beneficiary will likely be asked for the following:
- A completed claim form.
- A copy of the death certificate.
- Your policy number or other documents, like a copy of the policy itself.
The beneficiary can contact the OmbudService for Life and Health Insurance (OLHI) if they need help looking for a life insurance policy.
Once all the information has been given to the insurer, the insurer will then process the claim. The benefit payment is almost always tax-free.
You can contact your provincial regulator if you’re having problems with your claim. They oversee the activities of insurance companies in their respective provinces. The OLHIOpens a new website in a new window can also give free information and help.
If your life insurance is with Canada Life, we have simplified steps to make it easy for you. You may also call us at 1-888-252-1847 (Canada and US) or at 1-416-597-6981 (rest of the world). We know this is a difficult time and we’re here to help.