How do life insurance claims work?

Many purchase life insurance for the protection it provides, but put less thought into how those it’s meant to protect can access the benefit. From another perspective, if you are someone seeking to make a claim on a loved one’s life insurance policy, you want to ensure you get the benefit they intended for you.

Thankfully, claiming a life insurance benefit is a fairly straight-forward process in Canada. Read on to find out exactly what you need to do to make a life insurance claim.

What is life insurance?

Life insurance is an agreement between you and a life insurance provider, where if you die, they will pay a lump sum, tax-free benefit to someone you choose – also known as your beneficiary. In exchange, you agree to pay your insurance provider a monthly or annual premium: a small amount of money over the length of your policy.. You can learn more about how life insurance works here.

How to file a life insurance claim

If you are the beneficiary on a life insurance policy, you will need to contact the insurance agent or the insurance company the policy is held by. They can then walk you through the process involved in receiving the insurance benefit which you are entitled to. This is commonly called filing a claim. Filing a claim involves a set of steps that are common among most Canadian insurance companies.

These steps are:

Submission of Proof of death of the person insured

The process starts with the submission of proof of death of the person insured. All claims require the submission of at least one document (generally a death certificate), however, the type of document required varies. Based on the dollar value of the death benefit payment, two separate documents may be required (such as the death certificate as well as a funeral director’s statement).

Fortunately, the claims packet sent to the beneficiary usually includes details on the form of proof one needs to file their claim.

Besides a certified copy of the death certificate or funeral director’s statement, other forms of proof of death can include a coroner’s report, an obituary, a funeral service program, or a funeral home bill. Depending on the circumstances, the insurance company may request an attending physician’s statement (APS) to certify the cause of death and to verify the medical information that was used to underwrite the policy.

Things to keep in mind: most insurance companies do not accept a death certificate where the cause of death is yet to be ascertained or is mentioned as “pending”. For foreign deaths, many companies require valid death certificates from the country where the death occurred. Lastly, the certificate should be translated into English (or the main business language of the carrier).

Submit policy contract if available

Along with the claim form, the submission of the original policy document can help speed up the process. This is the original document that contains all the information relating to the policy for the insurer to cross-check when they first enact the policy. In case you have lost or misplaced the original policy, you should contact the company for a digital retrieval of the document.

Filling out the death claim paperwork

This is where you need to provide all relevant information pertaining to your claim. This includes the policy number, the cause of death, the relationship of the beneficiary or claimant to the life insured, funeral home information, and more. They will also choose how they want the funds to be distributed once the claim is approved (more on that below).

Specifying how you want the amount to be paid

Once you submit the required documentation, the insurance company will cross-check the information and fact check the claim. The beneficiary can opt for a lump-sum payment, where they receive the entire death benefit at once. However, some insurance providers give the option of an annuity, where the death benefit amount is invested and paid out in the form of a yearly payment (for life or a predetermined number of years depending on the policy).

Wait for the claim to be processed

It takes time for the insurance company to process the claim before one receives the death benefit payment. However, it is in favour of the insurer to pay out the sum as quickly as possible upon receipt of bona fide proof of death and other required documents. Paying quickly helps avoid interest charges accumulating on unpaid death benefits. Depending on your policy, and if the claim is not subject to any investigation, the processing of the claim may take anywhere between a few days to as long as 30 to 60 days.

Once the processing is done, the beneficiary will receive the benefit in the payment method requested (lump sum or annuity).

Can a life insurance claim be denied?

There are multiple circumstances under which an insurance provider may choose to deny a life insurance claim.

Two-year contestability period

The contestability period of an insurance policy lasts two years from the date the policyholder was approved for coverage. This means an insurance company has two years after it issues the policy to void the coverage or adjust the premiums if it discovers an error in a material fact in the application.

A material fact is any piece of information that influences an insurance company’s decision about providing insurance coverage (such as smoking status, known health issues, age, etc) during the underwriting process. Once the two-year contestability period passes, the policy is incontestable. An insurance company can only void or cancel the policy if it can prove the policyholder committed fraud when applying for the policy or in the case of missed premiums.

For example, if, at the time of claim, an insurance company determines the life insurance applicant had misstated their age on the application, it can void the policy and deny the claim only if it can prove that the misstatement of age was fraudulent. If it was an honest mistake (the misstatement was not fraudulent) then the insurance company will pay the death benefit. However, it will adjust the amount of the death benefit to correlate with how much coverage the applicant would have been able to purchase with the premium they paid had the correct age been known.

If the policyholder passes away during the contestability period and any instances of fraud or misrepresentation come to light, the insurer may choose to cancel the policy, refuse to pay the benefit, or subtract money from the death benefit.

False or Fraudulent Information

False or fraudulent information can also result in a denial of a claim. Hiding smoking or drinking habits, or misrepresenting details like age, height, and weight could create problems when a claim is made.

Exclusions

The provider may deny the claim if the type of death was not included in the policy. Death due to suicide in the first 2 years of coverage, homicide*, or death due to engagement in illegal activities, drug abuse, dangerous activities, or the acts of war are some common exclusions.

*Note: typically if you are murdered it will still pay out, but if murdered by the beneficiary it will still pay out but to the estate.

Read more about life insurance coverage and death by suicide. 

Lapse of Policy

Missing a premium payment may lead to the cancellation of the policy. If you miss paying your premium on the specified date, take care to inform your insurance provider as quickly as possible. Usually, insurance companies grant a grace period of 30 days and one should settle all your pending payments within that time to ensure there is no lapse in their coverage. Otherwise, all the premiums you paid up to that point may go to waste, and it could prove costly to get coverage again at this later date.

What happens if a life insurance claim is denied?

If an insurance provider has denied your claim, it will generally provide a written explanation detailing the reason(s) the claim has been denied. Once the reason is known and the if claimant can effectively prove that the carrier’s decision to deny the claim is not justified or warranted, the issue could be cleared up.

This can be accomplished by writing an appeal letter for the denial or speaking with a designated representative of the company. If the carrier still denies the claim, at this point the claimant could consider legal recourse.

Can a life insurance claim be delayed?

A claim may get delayed for all the reasons mentioned above which can lead to the denial of a claim. Providing incorrect information, death during the contestability period, a delay in filing, and not making proper disclosures about other policies are all valid reasons for a delay of a claim. Additionally, there are some other reasons which can play a role in delaying claims:

• A minor beneficiary, without any trustee designated to their name, may witness delays in getting the proceeds of an insurance policy.
• If the policyholder mentions no beneficiary, the claim goes to the insured’s estate through probate.
• If the policyholder named their ex-spouse in the policy as the beneficiary and they did not update the policy the claim may get delayed (read more about life insurance and divorce settlements).

How long does it take to process a life insurance claim?

As mentioned earlier, processing a claim may take anywhere between a few days to as long as 60 days or more.

For example, if the insurance company suspects that the death happened due to suicide and the policy falls within the two-year suicide exclusion period, it may want to investigate the death more thoroughly and this could take time.

However, if there are no issues or cause to suspect the claim, they usually get processed within 30 to 60 days.

Is there a timeline for filing a claim?

While it is always prudent to file a life insurance claim as early as possible, there is no time limit for filing a claim. If the policy is active at the time of the life insured’s death, all premiums are paid on time, and there are no grounds for the provider to deny the claim, the beneficiary will get the death benefit they are owed in a timely fashion.

How can I use the proceeds from life insurance?

As mentioned before, the beneficiary may receive the payout in the form of a lump sum cash payment or choose for it to be paid as an annuity. In a case where the claimant chooses to follow the annuity route, the death benefit amount will be invested and paid back to the beneficiary in the form of a yearly payment for a predetermined number of years (or life, depending on the policy).

As for how those proceeds can be used, there are no stipulations. While many policyholders get coverage to soften the financial hardship their death may have on those they leave behind, those receiving the benefit from a life insurance payout can use the proceeds in any way they see fit.

Is interest paid on the proceeds of a life insurance death benefit?

An insurance provider is required to pay interest for the period it takes to process a life insurance claim. However, this may be subject to certain conditions. This period is generally counted as the interval between the date of death of the policyholder and the date of payment.

Are life insurance proceeds taxable?

Usually, the proceeds of a life insurance death benefit are not taxable. However, any excess interest earned on the death benefit while the insurance company held the funds would be taxable. This can happen if there are any delays in a claim being settled (especially after the receipt of all required documents), or if an insurance provider was directed by the policyholder to hold the proceeds for a period before transferring it to the beneficiary.

Also, if the policyholder has made an estate the beneficiary of their policy, the estate’s heirs might need to pay estate taxes.

The information above is intended for informational purposes only and is based on PolicyAdvisor’s own views, which are subject to change without notice. This content is not intended and should not be construed to constitute financial or legal advice. PolicyAdvisor accepts no responsibility for the outcome of people choosing to act on the information contained on this website. PolicyAdvisor makes every effort to include updated, accurate information. The above content may not include all terms, conditions, limitations, exclusions, termination, and other provisions of the policies described, some of which may be material to the policy selection. Please refer to the actual policy documents for complete details. In case of any discrepancy, the language in the actual policy documents will prevail.  All rights reserved.

If something in this article needs to be corrected, updated, or removed, let us know. Email editorial@policyadvisor.com.