Where are my life insurance premiums going?

Life insurance can cover a lot of things, from mortgage, everyday living expenses and college education. Learn more on the Dundas Life blog.

June 2, 2021

Life insurers issue a payout to your beneficiaries if you die due to a natural cause, an accident, suicide, or murder. In certain circumstances, involving misrepresentation or crime, the insurer may refuse to pay the death benefit. Once the insurer issues the death benefit, your beneficiaries are free to use the payout as they like. They can use this life insurance payout to cover such things as funeral costs, debts, or day-to-day expenses.

Continue reading to find out the advantages of life insurance, what life insurance covers, and more.

What does life insurance cover?

Hand signing a life insurance form

A life insurance policy provides a safety net that can last several decades. Its purpose is to help your dependents live comfortably after you are no longer there to provide for them. Proceeds from a policy can help ease the financial burden for your family in many ways. The payout can cover funeral costs, outstanding debts, tuition fees, and more.

What expenses are covered by life insurance?

Man making calculations using calculator on notepad and laptop

Your family is free to use the payout however they like. They can use it for:

Monthly bills and expenses

Whether you are the primary earner of your family or not, you probably help cover expenses such as rent, groceries, childcare, etc. That is why it is recommended you buy a policy that is equal to at least ten times your annual income.

Outstanding debts

Your debts, like a mortgage, do not simply disappear after you die. After your death, the responsibility of paying off these debts may fall on the shoulders of your loved ones. If you do not want that to happen, consider putting a life insurance plan in place.

Child or dependent care

Life insurance can cover all childcare expenses associated with services you do yourself or pay for.

End-of-life expenses

A burial can cost between $5,000 and $10,000 on average in Canada. If you do not want to burden your loved ones with the costs after you are gone, consider buying life insurance. A life insurance policy can cover all your end-of-life expenses, like medical care and funeral expenses.

College costs

The proceeds can help your family cover education costs in the event of your death.

What types of death are covered by life insurance?

What does life insurance cover? Does life insurance cover natural death?

This section answers all questions related to the types of death which standard life insurance covers.

Life insurance covers all deaths except a few. If your policy is in force at the time of your death, the insurer will pay out claims because of:

  • Natural causes – For instance, death due to stroke, cancer, or old age.
  • Accidental death – This includes death due to accidental drug overdose.
  • Suicide – Life insurance policies cover suicide only when the death occurs after the first two years of the policy.
  • Homicide – If your death is ruled as a homicide and your beneficiaries were not involved, your insurer will issue the death benefit.
  • Pandemic-related illness – If you die from a pandemic-related illness, like coronavirus, while your policy is in force, your family will receive the payout.

What does life insurance not cover?

Life insurance does not cover the following items.

  • Expired policies – Life insurance will issue the death benefit only if you die within the policy term or while the policy is active. Term life insurance, provides coverage for a specific period. So, if you purchase a 20-year term policy and die after the term ends, the insurer will not pay out. Likewise, if you let your term life or permanent life policy lapse due to non-payment and die while the policy is inactive, your beneficiaries will not get the death benefit.
  • Fraud – Life insurance policies include a contestability period — usually two years. If you die during this period, the insurer has the right to investigate the death. If your insurance carrier finds out that you lied on your policy application, they can refuse to pay. For this reason, ensure all information that you enter in your application is accurate.
  • Criminal activity – If you die during an illegal activity, the insurer will not issue the payout. For example, if you die in a car accident while driving under the influence, the insurer can deny the claim.
  • Exclusions – Some life insurance policies may contain certain exclusions — that is, events and conditions that are not covered. Exclusions, if present, will be listed in your policy. It is important you read and understand them; otherwise, your loved ones could be left without a payout. One of the most common exclusions is the aviation exclusion, which applies to private aircraft only. If the policyholder dies in a private plane crash, insurance companies generally do not pay out the death benefit. However, most (if not all) insurance carriers will issue the payout if you were flying on a public airplane.

What life insurance might — or might not — cover

Death by Risky Hobby

Do you love bungee jumping? Are you a scuba diver? Is flying private planes your passion? While these hobbies are adventurous and exciting, insurance companies are not their biggest fan. Such hobbies will increase your risk of accidental death, and thus increase your life insurance premiums.

Life insurance companies need to make a profit. Given this, it is only natural for them to want to limit their potential risks. So, your policy may say if you pass away while doing a dangerous activity — like bungee jumping — the insurer will not issue the death benefit to your family. That said, more often than not, you will be able to get coverage. But the insurer will charge you a higher rate to compensate for the extra risk.

Just ensure you inquire about what is included in your policy and what is not. You do not want to pay thousands of dollars in premiums, only for your loved ones to find out that your policy did not cover your hobbies at all.

Death by Suicide

Life insurers pay out the death benefit in the event of suicide unless the death occurs during the first two years of the policy. Life insurance policies come with a suicide class, which prevents beneficiaries from collecting the proceeds if the insured dies within a certain period — usually two years — after taking out the policy.

The suicide clause is there for a reason. Its purpose is to deter people who intend to commit suicide from buying a last-minute policy so that their loved ones can receive the death benefit.

Medical Expenses While You are Alive

An accelerated benefits rider allows you to access the death benefit while you are alive under certain conditions. Typically, the insurer pays a portion of the death benefit — usually 50% — if you meet certain criteria. For example, if you become terminally ill and have a life expectancy of fewer than 12 months, you may be able to access the death benefit to pay for medical care. Likewise, someone with a chronic illness may be able to tap into living benefits.

While a useful add-on, an accelerated benefits rider has a couple of drawbacks. One, this is a paid rider. That means if you opt for it, your cost of insurance will go up. Two, if you tap into your death benefit, there will be less for your loved ones after you die.

For example, let’s say Susan has a life insurance policy with a $1 million payout. Sadly, Susan recently was diagnosed with Stage 3 Pancreatic Cancer and has a life expectancy of 11 months or so. She takes out $400,000 from her policy to cover her treatments. When she passes away, her husband will receive the remaining $600,000.

Long-Term Care

A long-term care (LTC) rider is a paid add-on that allows you receive a part of your death benefit while you are alive. You can use the payout for long-term care expenses. Examples of long-term care include nursing homes, injury rehab centers, in-home services, and assisted living facilities.

The LTC rider is generally available with permanent life insurance policies. It is much rarer to find insurance companies that are willing to offer living benefits for term life insurance policies.

Needless to say, if you access the death benefit while you are still alive, there will be less for your beneficiaries after you pass away.

How quickly does a life insurance policy payout?

You can receive the payout within a few days, but sometimes the cheque may take as long as a month to reach you. How soon you receive the proceeds depends on several factors. These include the insurance company’s procedures and whether the policy is in the contestability period.

Generally, the contestability period lasts two years after your policy comes into effect. If you pass away during this period, the insurer can investigate the death, which in turn may delay the payout.

However, when a claim is filed after this two-year window, carriers usually process it quickly — within 15 days. Since insurers can face stiff penalties for delaying claims unnecessarily, they generally do their best to speed up things.

Quite frequently, delays occur due to improper documentation and incomplete information. Therefore, double-check the claim form before submitting it to ensure everything is in order.

Conclusion

Life insurance cannot replace you — but it can replace a part or all of your income if you were to die. The money can support your dependents in your absence. They can use it to pay off the mortgage, defray everyday living expenses, and fund college education. By working with an independent broker, you can buy a life insurance policy that is right for your needs at an affordable rate.

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