What Does Life Insurance Cover?

No one likes to think about the unexpected, but preparing for it with the right life insurance can help you protect the people who matter most. And you’re in good company as a growing number of Canadians are realizing that life insurance isn’t only necessary later in life, rather it gives you peace of mind today. In fact, a record 23 million Canadians now have life insurance, according to the Canadian Life & Health Insurance Association (CLHIA).

With so many Canadians relying on life insurance, understanding both what a policy can and cannot cover. In this article, we’ll explain what life insurance covers, what life insurance doesn’t cover and how to choose a life insurance policy that covers your needs.

What life insurance covers

While the specifics of what life insurance covers varies depending on the type of life insurance policy you choose, life insurance provides your beneficiaries with a tax-free lump sum of money called a death benefit. That amount can vary greatly; depend on the policy and terms you choose.

There’s no restriction on how the death benefit can be used, but here are some of the things it can help cover:

Income replacement

When creating a family budget, you typically include the income sources of both you and your spouse or partner. If you were to pass away unexpectedly, that income would disappear. Life insurance can help replace lost income. Not sure protection you need? It’s a good rule of thumb to have at least five to 10 times your yearly income in life insurance coverage.

Debt and mortgage protection

When you die, your estate is responsible for paying off any outstanding debt, such as your mortgage, or consumer loans – like credit cards. If a loan is co-signed, such as a joint mortgage with a spouse, the surviving cosigner assumes full responsibility for the debt. A life insurance payout can ensure your family or estate is not burdened with debt obligations.

Funeral expenses

Life insurance can help cover end-of-life expenses, which can run into thousands of dollars. While funeral insurance is one option, guaranteed acceptance life insurance can be used other expenses in addition to funeral costs.

Estate planning

As long as you designate a beneficiary (or beneficiaries) on your life insurance policy, the death benefit is paid out tax-free, ensuring more of your inheritance goes to your loved ones. If your estate has a large tax bill, such as capital gains tax on a secondary residence, a life insurance payout can help cover that cost.

Business continuity

If you co-own a business with another partner (or partners), life insurance through a buy-sell agreement helps provide funds for the remaining partners to purchase your share, thereby ensuring business continuity and a seamless succession after your death.

Charitable giving

Life insurance can be an effective way to leave a charitable gift as part of your estate plan. You can either name the charity as both the beneficiary and owner or name the charity as beneficiary but retain ownership of the policy. If you choose to retain ownership, it provides your estate with a charitable donation receipt upon your death, which could help with reduce taxes owed by your estate.

What life insurance does not cover

As we’ve explained life insurance provides coverage in the form of a death benefit once you pass away. On the most part, life insurance companies do pay out a death benefit, however there are reasons why it could be declined.

That’s why it’s important to understand what life insurance does not cover, so you have peace of mind knowing you and your family are protected.

Fraud or misrepresentation

It is essential to answer truthfully and completely when applying for life insurance, even if it results in a higher premium. Failing to do so could result in your policy not being paid out upon your death, depending on the circumstances. Examples of insurance misrepresentation include:

Every cause of death

Life insurance policies typically will not pay out if the policy holder dies by suicide within two years of the coverage date. Accidental death benefits may not be paid out if you die while committing a crime or provoked assault, or if your death is related to chronic alcohol or drug use, such as driving while impaired.

Risky activities or hobbies

Extreme activities or hobbies, such as skydiving or scuba, or high-risk occupations, are often excluded. You may be able to secure life insurance, but pay a higher premium or have a lower coverage amount. A payout may also be denied if death is related to these types of risks.

Pre-existing conditions

Depending on the policy you purchase, pre-existing conditions may not be covered, particularly if you die within a certain period after purchasing the insurance, such as 12 months, and if your death is related to that condition.

Policy lapsed due to a missed payment

Your policy is in effect as long as you continue paying the premiums, typically monthly or annually. If you miss a payment, your insurer may allow a grace period (say, 31 days) to make the back payment before the policy terminates. If you died after that date without any attempts to reinstate the policy or take out a new one, then the death benefit will not be paid.

What factors affect what life insurance will cover?

When you purchase life insurance, it’s important to understand both the extent and limitations of coverage available.

Policy terms and conditions

While all life insurance policies pay out a lump sum upon your death, terms and conditions differ between insurers and the specific product you choose. It’s important to read the fine print (or work with a licensed insurance professional) to understand the coverage you’ll receive.

Riders and add-ons

Many life insurance policies allow you to add optional coverage, which can increase the scope of protection, for an additional cost. Common riders and add-ons include:

Your health and lifestyle

When assessing the risk of insuring you, insurance companies considering factors such as your age (the younger you are, the cheaper the policy), your health, and your habits and lifestyle (smoker versus non-smoker). The higher your perceived risk, the higher your premium tends to be.

How to choose life insurance that covers your needs

Making the decision to buy life insurance is sometimes the hardest part—but once you take that first step, finding the right coverage shouldn’t have to be complicated.

Here are some tips to get you started:

Assess your needs

Start by calculating how much coverage you might need. To do this, consider your current income, debt, and future expenses (such as buying a home, or paying for your children’s education). Online life insurance calculators can help you get started with an estimate. If you require more insurance than you can currently afford, you can always increase your coverage when your budget allows or layer more than one policy to protect you in the years when you need it most.

Compare policies

Compare different types of life insurance to assess coverage amounts, how the premiums work, and whether there is any cash value to the policy. If you have questions or are unsure, an accredited life insurance advisor can provide additional guidance and answer your questions.

Customize your policy

Riders and optional benefits, such as accidental death, total disability waiver, or a children’s term rider, help add an extra level of financial security based on your personal situation and needs.

Be honest

Be sure to answer all questions honestly, especially if you’re a smoker. If your insurer discovers that you incorrectly stated, misrepresented or failed to disclose what’s called a “material fact,” your policy can be considered void.

Review and update your policy

Your policy typically includes a money-back cancellation period (usually 10 or 30 days), giving you time to review the fine print. It’s also important to revisit your insurance coverage after major life events, such as getting married, buying a house, having a child or retiring, to ensure your coverage is still compatible with your lifestyle and needs.

Communicate with your beneficiaries

Your death benefit isn’t automatically paid out when you die; instead, your beneficiary must file a claim. Whether it’s your spouse, business partner or family member, tell them about the policy and share key details such as the type of life insurance (term or whole life), the insurer, policy number and how to contact your insurance advisor. While this may feel like an awkward conversation, it will make it easier for your beneficiary to access a payout when needed.

Make sure your life insurance covers what matters most

Taking a proactive approach to life insurance affords you the opportunity to build a plan now that will protect your loved ones in the future. While life insurance can cover a variety of needs –from paying off debt, funding everyday expenses, and saving for the future – there are some limitations for applicants with preexisting conditions or with risky hobbies or careers.

However, with many products on the market, there should be a life insurance policy to suit your needs and financial goals. A licensed life insurance advisor can walk you through your options to ensure you select a policy that aligns with your circumstances, budget, and long-term plans. By taking the time to choose the right coverage today, you can secure your family’s financial figure and enjoy greater peace of mind for years to come.