Death benefit is the primary feature of a life insurance policy - amount of money that the insurance company pays to beneficiaries when the insured person dies
Death Benefit: Life Insurance In Canada Explained
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The term "Death Benefit" in the context of life insurance refers to the payout that beneficiaries receive upon the death of the insured person. This glossary article aims to provide a comprehensive understanding of the death benefit as it pertains to life insurance policies in Canada. It will delve into the specifics of the death benefit, its tax implications, and the factors that can affect the payout amount.
Life insurance is a contract between an individual and an insurance company, where the individual pays premiums in exchange for a lump-sum payment, known as the death benefit, to the beneficiaries upon the death of the insured. The death benefit is typically used to provide financial security to the insured's dependents, helping them cover expenses such as funeral costs, debts, and living expenses.
Understanding the Death Benefit
The death benefit is the primary feature of a life insurance policy. It is the amount of money that the insurance company guarantees to the beneficiaries when the insured person dies. The insured person chooses the death benefit amount when they buy the policy. It can range from a few thousand dollars to millions, depending on the policyholder's needs and financial situation.
The death benefit is usually paid out as a lump sum, but some insurance companies offer options for periodic payments. The beneficiaries can use the death benefit for any purpose, including paying off the deceased's debts, covering funeral and estate costs, replacing the deceased's income, or simply providing financial security for the future.
Types of Death Benefits
There are two main types of death benefits in life insurance policies: level and increasing. A level death benefit means the payout amount stays the same throughout the policy's term. An increasing death benefit, on the other hand, means the payout amount increases over time, usually at a fixed rate or based on the cash value of the policy.
Some policies also offer a return of premium death benefit, which means the insurance company will return all premiums paid if the insured person dies during the policy term. This type of death benefit is typically found in term life insurance policies.
Factors Affecting the Death Benefit
Several factors can affect the amount of the death benefit. The most significant is the insured person's age, health, and lifestyle at the time they buy the policy. For example, older people and those with health conditions or risky lifestyles typically pay higher premiums for the same death benefit compared to younger, healthier individuals.
The type of life insurance policy also affects the death benefit. Term life insurance policies, which only provide coverage for a specific period, usually offer higher death benefits for lower premiums compared to permanent life insurance policies, which provide lifelong coverage and have a cash value component.
Policy Exclusions
Life insurance policies often have exclusions that can affect the payout of the death benefit. Common exclusions include suicide within the first two years of the policy, death due to risky activities like skydiving or car racing, and death due to war or terrorism. If the insured person dies under these circumstances, the insurance company may not pay the death benefit.
Another common exclusion is misrepresentation or fraud. If the insured person lied or omitted important information on their insurance application, the insurance company can deny the death benefit. For example, if the insured person didn't disclose a pre-existing health condition or a risky hobby, the insurance company can refuse to pay the death benefit.
Tax Implications of the Death Benefit
In Canada, the death benefit from a life insurance policy is generally tax-free. This means the beneficiaries do not have to pay income tax on the money they receive. However, there are some exceptions to this rule.
If the policyholder transfers the policy to someone else for valuable consideration, the death benefit may be taxable. Also, if the policy has a cash value component and the cash value exceeds the policy's adjusted cost base, the excess may be taxable.
Probate Fees
While the death benefit itself is generally tax-free, it may be subject to probate fees if it's part of the deceased's estate. Probate is the legal process of validating a will and administering the deceased's estate. The probate fees, or estate administration tax, are based on the value of the estate.
To avoid probate fees, many people designate a beneficiary for their life insurance policy. When a beneficiary is named, the death benefit bypasses the estate and goes directly to the beneficiary, avoiding probate.
Claiming the Death Benefit
Claiming the death benefit from a life insurance policy in Canada involves several steps. First, the beneficiaries or the executor of the estate must notify the insurance company of the insured person's death. They must then submit a claim form and a certified copy of the death certificate.
The insurance company will review the claim and, if approved, pay the death benefit to the beneficiaries. The time it takes to receive the death benefit can vary, but it usually takes a few weeks to a few months.
Disputes Over the Death Benefit
Disputes over the death benefit can arise for various reasons. For example, the beneficiaries may disagree about how to divide the death benefit, or there may be a dispute about who the rightful beneficiaries are. In such cases, the dispute may need to be resolved in court.
Another common cause of disputes is when the insurance company denies the claim. This can happen if the insurance company believes the insured person misrepresented information on their application or if the death falls under a policy exclusion. If the claim is denied, the beneficiaries can appeal the decision or take legal action.
Death Benefit and Life Insurance in Canada: Conclusion
Understanding the death benefit is crucial when buying a life insurance policy in Canada. It's the amount of money that the insurance company guarantees to the beneficiaries upon the insured person's death, and it's typically used to provide financial security to the insured's dependents.
Several factors can affect the death benefit, including the insured person's age, health, and lifestyle, the type of policy, and any policy exclusions. The death benefit is generally tax-free in Canada, but it may be subject to probate fees if it's part of the deceased's estate. Claiming the death benefit involves notifying the insurance company, submitting a claim form, and providing a certified copy of the death certificate.
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Here are answers to frequently asked questions...
No, the only thing you will ever pay is a premium to the insurance company that provides the life insurance policy for you. We provide you quotes and advice on best options for your situation.
Yes, we have access to various discounts based on your health and the amount of life insurance you purchase. For example if you've never smoked in your life and are buying more than $1 million in life insurance
Rates are based on your age, health history, smoking status, gender and income. The insurance company also compares and makes assessments based on similar individuals with the same profile like age, gender, smoker status. Unlike workplace or association rates which are cheaper and based on you working at a particular company, being associate with an affinity group or the claims of the whole group i.e. your rate is affected by someone who smokes even if you don't smoke, or if you never claim and other claim multiple times, for example.
We simplify the process knowing how busy life gets. The first step is simply to request your quotes and getting a sense of the cost and coverage available. Next, we compare the policy options and other riders like guaranteed insurability and discuss what makes sense for you and answer your questions. Lastly, you apply and buy risk-free.
We are an independent life insurance broker, meaning that we do not have an affiliation with any one Canadian life insurance company. We are looking out for your best interests as we don’t have to meet any requirements to do business with any specific company. We actually get a finders fee from these insurance companies and they are all the same, so we don’t have any financial conflict of interest either.
In most cases, it can take between 2 weeks and 1 month from beginning to end. A lot of the time may depend on follow up information required by the insurance company. In our experience 1 month is usually a standard timeframe. Sometimes, depending on the amount you apply for and your age, for example children's life insurance or no medical, the approval is instant.
Underwriting is where the insurance company verifies your information that you submitted on the application your complete with us and gathers additional details such as health history, travel, and personal history to determine the best rate possible.
Any type of life insurance is great especially if you suddenly pass unexpectedly. However, just like getting a company car allowance, you only have it for as long as you work for that company because it's a benefit or "perk" of working there. When you leave you lose that perk. You are also limited to 2 or 3 times your salary which may not be enough. More importantly, how many times have you changed or will potentially change jobs?
When you buy your own personal private insurance you don't worry about losing it if you change jobs or your health changes.
As the name suggests, the AD & D policy will only pay if your death is caused by an accidental death or dismemberment of a body part. Personal private life insurance will pay regardless of the cause with the only exception being cases such as suicide.