How Does a Life Insurance Payout Work in Canada?

When you purchase a permanent life insurance policy or term life insurance policy, you can select a beneficiary, the person who gets paid after your death. You can name anyone as your beneficiary, a spouse or partner, any other family member, or even a pet to receive the death benefit.

You can also name more than one person as the beneficiary. If you have multiple beneficiaries, specify what percentage goes to each one. You can also name one or more contingent beneficiaries. If your primary beneficiary dies before you, the insurer will issue the proceeds to the contingent beneficiary.

If you have bought a term life insurance policy or permanent life insurance policy, let the beneficiaries know about it so that they can file a claim for the death benefit after your death. After all, the last thing you would want is to pay thousands of dollars as premiums only to have the policy go unclaimed when you die. Keeping up with life insurance premiums is crucial to ensure your policy remains active and your beneficiaries can claim the benefits.

If a loved one has named you as a beneficiary, you should know where the permanent life insurance policy or term life insurance policy is located or at least the name of the insurer and the policy number. This information will make it easier for you to make a claim when the time comes.

What can a life insurance claim payment be used for?

Your insurer will pay your beneficiary or beneficiaries after your death. The recipient is free to use the funds however they like. They can use it to pay monthly bills or expenses such as college tuition fees or a mortgage. They can also use it to pay down debt, like credit card bills. If your family does not need the policy proceeds immediately, they might opt to invest it — in part or in full — for potential growth.

Understanding your life insurance plan can help ensure that your beneficiaries can use the funds effectively to meet their financial needs.

Who can be a life insurance beneficiary?

Anybody can be your beneficiary, from a spouse or partner to other family members or even a pet. You may also name more than one person as the beneficiary as long as you specify how much each beneficiary gets.

If you are single, you can have the death benefit paid directly to an institution as a tax-free gift by naming it as a beneficiary. If your policy does not have a beneficiary, the proceeds will go to your estate and may get taxed.

Understand the different life insurance payout options

The insurer will ask the beneficiary how they want to receive the payout. There are several options available such as:

Lump sum

Most people prefer to receive the payout in a single payment because this option provides a lot of flexibility. You have complete control over the money and can use it as you want.

Specific income

You can choose to receive the payout in installments. This option lets you decide the amount of each payment and the time period over which you want to be paid.

Lifetime income

You can choose to convert a term life insurance or permanent life insurance payout to an annuity. The life insurance company will then pay guaranteed payments until you pass away. The amount of each payment depends on the death benefit amount, your gender and age at the time of the insured’s death.

Life income with a certain period

You can ask the insurer to make payments for life or over a certain period — five, 10, or 20 — whichever is longer. If you pass away within the specified period, the insurance carrier will make the remaining payments to beneficiaries designated by you.

Interest income

Some life insurance companies allow you to keep the term or permanent life insurance payout in an interest-bearing account and receive interest payments on a set schedule. The original death benefit can be paid to a secondary beneficiary after you are gone.

Life insurance policy's proceeds are usually not taxable, but any interest earned on them is. So, if you choose to receive the payout as a lump sum, it is not likely you will have to pay taxes. However, there may be tax implications if you opt to receive the proceeds in installments.

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Filing your claim

A life insurance company will not automatically pay the policy proceeds to the beneficiary after the insured dies. You will have to file a claim for the death benefits, which is an easy and uncomplicated process.

Here is how you can claim life insurance money:

Contact the insurer or agent

Get in touch with the life insurance company or agent after the death of the insured. They will explain the process of filing a claim to you.

Get copies of the death certificate

A death certificate is the standard form of document needed to file a life insurance claim. The funeral director can help you get certified copies. Try to get as many of them, since you will need it for various purposes besides the life insurance claim, such as for closing accounts, cancelling subscriptions, and filing income taxes.

Request claim forms

In most cases, you will be able to download the claim form from the insurer’s website. If forms are not available online, a company representative can help you obtain them. You will need to complete the claim forms and provide all the information asked by the life insurance carrier.

Decide how you want to be paid

Some life insurance companies pay the death benefit only in a lump sum. Others, however, offer several options. You will have to specify how you want to receive the proceeds on the form. If there is more than one beneficiary, each may have to file a separate form.

A permanent or term life insurance payout amount is not taxable — but any interest earned is. If you are not sure which payout option is best for you, speak to your financial advisor first. You might not be able to change the settlement option afterward.

Submit insurance claim forms

Send the completed paperwork and a certified copy of the death certificate of the insured.

Once that is done, you must wait. It can take anywhere between a few days to a few weeks to receive the payout. However, if everything is in order, the check should reach you reasonably quickly.

How quickly are insurance benefits paid?

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It may take no more than a few days to as long as a month to receive the payout. The amount of time it takes to receive the death benefit after submitting the claim depends on many factors, including the insurance company’s procedures and whether the policy is in the contestability period.

The contestability period typically lasts 24 months starting from the moment a permanent life insurance policy goes into effect. If the insured dies during this time, insurance carriers, like Manulife and Sun Life, have the right to delay the payout while it reviews the medical records of the deceased to rule out misrepresentation.  

However, when the claim is filed after the contestability period and everything is in order, insurance companies usually process it quickly — in a week or two. They can face penalties if they take too long, so it is not in their interest to slow things down.  

More often than not, delays result from improper documentation and incomplete information. Therefore, check the claim form a couple of times before sending it to ensure you have not missed anything.

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Are life insurance payouts taxable?

As a beneficiary of a permanent or term life insurance policy, you may wonder, “How do life insurance payouts work? Is it counted as a taxable income?”

Generally speaking, the death benefit amount does not get counted as taxable income. That means if you opt to receive the policy proceeds in a single payment, it is unlikely you will owe taxes.

However, any interest earned on the payout amount is taxable. So if you decide to receive the payout in installments, expect to pay taxes on some of that income.

If the insured’s estate is named beneficiary, the individual who inherits the estate may have to pay taxes on it.

What happens to unclaimed life insurance benefits?

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It may come as a surprise, but sometimes beneficiaries do not know a permanent or term life insurance policy exists in which they are named beneficiaries. In such cases, if the insurer comes to know that the insured has passed away, they will try to get in touch with the beneficiary.

Sometimes, however, that might prove very difficult. The beneficiary may have changed names or relocated several times, making it almost impossible to track them down. In those instances, the insurer will turn over the unclaimed death benefit amount to the state.

There is another scenario: The insurer does not know the insured has died. In such cases, the policy usually expires due to non-payment of premiums.

It is also possible that the beneficiary knows of an insurance policy in their name but, has no idea where the policy papers are.

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Conclusion

So, what happens when someone dies and they have permanent life insurance policies? The beneficiary of the policy is typically notified by the insurance company. If you are the beneficiary, it’s important to file a claim as soon as possible after the insured person’s death.

You will also need to decide which payout option you would like- lump sum or monthly payments. Proceeds from permanent or term life insurance policies can provide much-needed financial security for your loved ones in their time of grief.

Frequently Asked Questions

Where can I find my life insurance policy payout information?

If you are the named beneficiary on a life insurance plan, the insurance company is required to pay the death benefit to you. You should receive a notice from the insurance company indicating that you are the beneficiary, and the notice should include information on how to claim the death benefit.
If you are not the named beneficiary, you will need to contact the insurance company to find out how to claim the death benefit.

What are the tax implications of life insurance payouts?

When someone dies, their life insurance plan pays out a death benefit to the named beneficiaries. The death benefit is not considered taxable income to the beneficiaries.
However, the life insurance company may be required to pay taxes on the death benefit if the policy was sold by a life insurance agent. The agent may be required to pay taxes on the commission they earned from selling the policy.

How much are life insurance payouts?

The amount that life insurance pays out is fully based on the face value of the life insurance policy that the deceased payed for.

What happens if I do not name a beneficiary to my life insurance policy?

If you do not name a beneficiary, your policy will likely need to go through probate before anyone receives the payout.

What is the highest life insurance payout?

The highest life insurance payouts can vary widely, with large insurance companies in Canada like Manulife handling almost $40 billion in premiums annually. Some of the largest global claims have reached into the tens of millions of dollars.

What is the average life insurance payout?

The average life insurance coverage for a Canadian household is $423,000, but the monthly payout for a 10-year policy with $100,000 in coverage for a healthy 30-year-old is around $13. In 2019, life and health insurers in Canada paid a total of $12.1 billion in life insurance benefits.