Are you considering buying life insurance but don’t know what it covers? This post is for you.
We’ll outline exactly what a life insurance does, and does not, cover in Canada. Plus, we’ll address some common misconceptions about life insurance.
So, whether you are a first-time buyer or just want to brush up on your knowledge, keep reading!
What does life insurance cover?
An insurance policy helps keep your family stay afloat after you are gone. In the short term, your loved ones can use the payout to cover funeral expenses, debts, and day-to-day expenses. Longer term, a life policy can help pay for college tuition fees and your spouse’s retirement.
- A life insurance policy is a contract between you and the insurer. The insurer pays your beneficiaries a death benefit if you die while the policy is active.
- Life insurance can help your loved ones cover everyday expenses, debts, education, and end-of-life costs.
- Life insurance will not pay out in certain circumstances, such as if the policy has lapsed or if the death is the result of criminal activity.
What expenses are covered by life insurance?
Your loved ones can spend the policy proceeds however they want. They can use the payout to cover:
- Everyday expenses: Such as groceries, monthly bills, and other day-to-day living expenses.
- Outstanding debts: This includes your home loan, auto loans, student loans, or credit card loans.
- Child or dependent care: Replacing services provided by the deceased spouse, like childcare.
- End of life expenses: Paying for end-of-life medical care and funeral expenses.
- College costs: Funding college tuition fees for children.
What types of death are covered by life insurance?
Life insurance covers almost all types of deaths. If the life insurance policy is in force, the insurer will process the death claims resulting from:
- Natural causes: For instance, old age or an illness.
- Accidental death: This includes accidental drug overdose
- Suicide: If the suicide exclusion period is over, the insurer will issue the death benefit to the beneficiaries.
- Homicide: As long as the beneficiary has no role in the murder, the insurance carrier will pay out the death claim.
If the insured is severely ill, the insurer may agree to pay a part of the benefits before their death.
What life insurance does not cover
Now that we have seen what life insurance covers, let’s find out what it does not cover.
Life insurance will not issue a death benefit payout to your loved ones in certain circumstances, such as the following:
Expired Life Insurance Policies
If you have let your insurance policy expire and you pass away, your family will not receive the life insurance death benefits.
Life insurance is a contract between you and the insurer. The insurer promises to pay your life insurance beneficiary a death benefit if you die while the life insurance policy is in force. If the policy lapses, the contract becomes void.
To prevent your life insurance policy from lapsing, you must pay your premiums on time. Additionally, if you have a term life insurance policy, be mindful of when the term ends. Equally importantly, decide whether you still require the protection that life insurance offers or not. If you have a whole life insurance policy then you will not have to purchasing a new insurance policy as long as you continue to pay your premiums.
If you do, it is usually possible to renew the coverage or convert term life policies into permanent life insurance policies. If neither of those options is available, you may consider buying a new policy. However, you will spend more on a new term life insurance policy than on the renewal of the old one. This is because, in the latter case, you will not have to take a medical exam.
Your insurer will not issue the death benefit to your beneficiary if you die while performing a criminal activity. For instance, if you pass away in a road accident while driving under the influence, your family will not receive the policy proceeds. Likewise, if you break into someone’s house and the homeowner shoots you in self-defense, then your loved ones will not get the payout.
Lying on your insurance application amounts to fraud. The same goes for withholding information. Let’s say you smoke but declare yourself as a non-smoker on your application. If you die within two years of taking out the policy, the insurer can investigate the death and check the application for misrepresentation. In this instance, the insurer will reject the claim if it finds out the truth. And if they learn about it while you are still alive, they may cancel your insurance policy or increase your premium rate.
What life insurance might — or might not — cover
Not all scenarios are black or white. Like most things in life, there are grey areas in life insurance as well.
If your insurance policy does not address a grey area, you may be able to cover that part by adding a rider. A policy rider is an additional feature that you can add, usually at a small fee to gain extra coverage for a certain area.
Speak to an independent broker like Dundas Life to find out what riders you need for comprehensive life insurance policy.
Death by Risky Hobby
In the eyes of life insurers, not all hobbies are equal. Any activity that increases the risk of injury or early death is a red flag for them. To compensate for this extra risk, the insurer may charge you a higher premium. However, sometimes, the insurer may even reject your request for coverage if you have a dangerous hobby.
So, what is a dangerous hobby in the first place?
The definition may differ from one life insurance company to another. However, most will classify activities such as bungee jumping, scuba diving, and sky diving as risky.
In most cases, you will manage to get a life policy with such a hobby, though you may have to pay a little extra. All the same, read the policy terms to ensure there are no additional exclusions.
Life insurance exclusions are circumstances or a situation that prevents your family from receiving the policy proceeds after your death. The last thing you would want is to assume your policy covers your favourite hobby and pay thousands of dollars in premiums over the years, only to have the death claim turned down when your family files it.
Death by Suicide
Suicide is the most common exclusion clause in a life insurance policy, but it comes with an end date. If the policyholder commits suicide within two years of taking out the policy, his or her family will not get the death benefit. The insurer, however, will pay the total premiums paid into the policy.
Medical Expenses While You are Still Alive
A free life insurance rider allows you to access some of your death benefits while you are still alive. The name of this benefit is accelerated death benefit, and it is usually included in your policy for free.
This life insurance benefits are triggered should you become terminally ill and have a life expectancy of 12 to 24 months. Some insurers, however, may issue an early payout only when your life expectancy is six months or less.
You can use the money to cover medical expenses and reduce the financial strain on your family in your final years. However, accessing your death benefit early will reduce the payout that your beneficiaries will receive upon your death.
Long Term Care
A long-term care rider is an optional add-on that you can add to your life policy by paying an additional fee. This benefit allows you to tap into your death benefit amount if you are no longer able to perform some of the activities for daily living. You can use the money to cover long-term care costs, like nursing homes, in-home services, etc.
Generally speaking, you will not be eligible for an early payout in the event of a short-term disability (lasting fewer than 90 days). In the case of a long-term disability, you may be able to use the accelerated death benefit rider to access a part of the death benefit early. You may use this money to cover medical bills or long-term care costs.
Life insurance protects your family’s financial security. It can keep them afloat after you are no longer there to provide for them. Before you sign up, take a moment to understand what life insurance covers and what it does not. And as far as finding the right policy for your family’s needs are concerned, you can count on Dundas Life to help you. We work with leading Canadian Insurers and can quickly provide you with multiple quotes. You can then pick the one that offers the best value and coverage for you.
Frequently Asked Questions
This is a difficult question to answer without knowing more about your personal circumstances. Some factors to consider include: whether you have dependents, your age and health, your income and debts, and your overall financial goals.
Generally speaking, you should have enough life insurance to cover your dependents' needs in the event of your death. This could include things like income replacement, paying off debts, and covering education costs. The amount you need will depend on your individual situation.
There are many benefits of life insurance, including providing financial security for your loved ones, helping to cover expenses in the event of your death, and giving you peace of mind.
If you have life insurance, your family will have one less worry to deal with in the event of your death. They will know that they have some financial security, and that they will be able to cover expenses such as funeral costs, outstanding debts, and everyday living expenses.
There are a few potential drawbacks of life insurance that are worth considering before purchasing a policy. First, life insurance can be expensive, especially if you are young and healthy. The premiums can also increase over time, which can make it difficult to keep up with the payments. Additionally, life insurance policies have a waiting period before they pay out, which means that if you die within the first few years of the policy, your beneficiaries may not receive anything.