Life insurance is a crucial safety net, ensuring financial security for your family during your untimely demise. However, there are circumstances where life insurance claims in Canada may be denied. Understanding these reasons is vital to ensure your policy serves its intended purpose. This article covers eight reasons why life insurance might not pay out in Canada and how to avoid it.
What Is a Life Insurance Payout?
In Canada, if you pass away while your life insurance policy is active, your beneficiaries, who can be revocable or irrevocable, receive a tax-free lump sum, known as the life insurance payout or death benefit. The average coverage for Canadian households is $458,000, but the ideal coverage varies based on individual, family, and lifestyle needs. Life insurance payouts are typically processed within a few weeks after a claim is filed. However, in rare instances, the payout might not be issued. About 2-4% of life insurance claims are denied, often due to misrepresentation on the application. Let’s review a few other reasons life insurance might not pay out.
8 Reasons Why Life Insurance Won’t Pay Out
- Policy Lapse Due to Missed Payments: If you fail to pay your premiums, your policy could lapse, leaving your beneficiaries without the expected support. It’s crucial to keep up with payments or communicate with your insurer if facing financial difficulties.
- Misrepresentation on the Application: Honesty is paramount when applying for life insurance. Concealing or misrepresenting facts, such as smoking habits or pre-existing health conditions, can lead to claim denial.
- Death During the Contestability Period: The first two years of your policy constitute the contestability period. If you pass away during this time, the insurer may scrutinize your application for accuracy, potentially leading to a denied claim if discrepancies are found.
- Suicide Clause: Most policies include a suicide clause, typically effective for the first two years. If the insured commits suicide within this period, the claim is likely to be denied. Read more about suicide and insurance coverage in our detailed article on the topic.
- Death After Policy Term Expires: For term life insurance, if the insured passes away after the policy term and hasn’t renewed or converted it, the beneficiaries won’t receive the payout.
- Failure to Update Beneficiary Information: If the primary beneficiary is deceased and there’s no secondary beneficiary, or there’s no designated beneficiary at all, the death benefit may go to the estate, complicating the payout process.
- Beneficiaries Are Unaware the Policy Exists: Beneficiaries are sometimes unaware of a life insurance policy in their name, leading to unclaimed benefits. It’s important to inform your loved ones if they’re your beneficiaries, ensuring they receive the intended financial protection.
- Your Policy’s Exclusions: Be aware that your policy might exclude certain causes of death that increase its likelihood. For instance, from January 2016 to March 2019, it’s estimated that around 12,800 Canadians lost their lives due to apparent opioid-related overdoses. Some of these causes include those arising from illegal activities (like drug overdose or DUI-related car accidents), high-risk hobbies like skydiving, homicide, or deaths during the war, which could result in a denial of the claim. Make sure you understand these exclusions to avoid surprises.
How to Prevent Your Claim from Being Denied
To ensure your life insurance claim is not denied, and your beneficiaries receive the death benefit, follow these key steps:
- Honesty in Application: Always provide truthful information during the application process. Misrepresentation, whether intentional or not, is a common reason for claim denial. Even if you opt for no medical life insurance, which doesn’t require medical exams but comes with higher rates, honesty remains crucial.
- Understand Policy Exclusions: Familiarize yourself with the specific exclusions of your policy. Common exclusions include suicide within the first two years and deaths related to high-risk activities. Each policy is unique, so knowing what actions might invalidate your claim is important.
- Timely Premium Payments: Keep up with your premium payments to prevent your policy from lapsing. Most insurers offer a 30-day grace period for missed payments, allowing you to catch up without losing coverage. However, if you exceed this period without payment, your policy may lapse, and you might face higher premiums or policy reinstatement challenges if your health has changed.
Following these recommendations can significantly reduce the likelihood of a claim denial, ensuring that your life insurance benefits your beneficiaries.
How Do Beneficiaries Make a Claim?
To claim a death benefit as a beneficiary, follow these steps:
- Contact the Life Insurance Advisor: Inform them of the policyholder’s death to initiate the claim process.
- Collect Necessary Documents: You’ll need the policy number, a death certificate, and a completed claims form detailing your relationship to the deceased and the cause of death.
- Submit the Claim: Provide all gathered information to the life insurance provider for verification and processing.
- Await Processing: The time for claim processing varies but typically ranges from a few days to 60 days. During this period, be prepared to answer any additional queries from the insurer. Remember, once you receive the death benefit payment, it is typically tax-free, but there are exclusions.
What to Do if a Life Insurance Claim is Rejected?
If your life insurance claim is rejected, here’s how to proceed:
- Understand the Reason for Denial: The insurance company must clearly explain the claim denial. Request an in-depth explanation and document all communications.
- Gather Evidence: Collect relevant documents to support your case, such as medical records, proof of premium payments, and an autopsy report, if applicable.
- Contest the Decision: Appeal the decision in writing to the insurer’s designated dispute resolution department or Complaints Liaison Officer. Ensure your appeal is clear, informative, and supported by documented evidence.
- Legal Consultation: If the insurer maintains its stance, consider consulting a lawyer specializing in financial disputes. Assess the potential benefits against the legal costs involved.
- Government Intervention: If unresolved claims persist, consider contacting a federal institution like the Financial Consumer Agency of Canada as a final option.
The Bottom Line
Life insurance is crucial for your family’s financial security. To ensure a smooth claim process, be honest in your application, understand your policy’s exclusions, and keep up with premium payments. If a claim is denied, review the reasons, gather evidence, and consider appealing the decision. Clear communication and proactive steps are key to fulfilling your commitment to your loved ones’ well-being.