What Is a Life Insurance Death Benefit?

If you’ve been considering life insurance, it can be helpful to understand how the policy payout may work when a claim is made. A key part of a life insurance policy is the death benefit. The death benefit is the tax-free amount paid to the named beneficiary when the insured person passes away, as long as the policy is active and the terms of the policy are met.

In this article, we'll provide some information on how life insurance death benefits generally work in Canada, including how payouts are made, what beneficiaries may need to do, and what can affect the timing of a claim.

• When and how is a life insurance death benefit paid in Canada?
• How does the life insurance death benefit payout work?
• Who can claim a life insurance death benefit in Canada?
• What are the differences between term life and permanent life insurance death benefits?
• What steps are involved in the death benefit claims process?
• How quickly is the death benefit paid in Canada?
• What are some factors that can delay the timing of a death benefit payout?
• What is the difference between a death benefit and cash value?
• Learn more about TD life insurance
• Frequently asked questions
• Glossary of key terms

The death benefit is paid after the person whose life is insured passes away. The beneficiary contacts the insurance company and submits a claim. The insurer reviews the claim, and if approved, pays the death benefit to the beneficiary. If there are multiple beneficiaries listed on the policy, each beneficiary may need to submit their own claim.

Note: Contact your insurer to understand exactly how their process works, as it can vary depending on the insurer and the policy.

In Canada, the life insurance death benefit is typically paid tax-free as a one-time payment directly to the named beneficiary or beneficiaries when the insured person passes away. The death benefit amount is based on the coverage amount in the policy. So, for example, if there is a term life policy worth $500,000, the beneficiary would receive this amount (not subject to income tax) upon the insured's death, once a claim has been submitted and approved by the insurance company¹.

In Canada, common beneficiaries include:

• Spouse or common-law partner
• Children or grandchildren
• Other family members (siblings or cousins)
• A trust
• Charity
• The insured person’s estate (if no beneficiary is named)

Let’s take a high-level look at the differences between death benefits under term life insurance and permanent life insurance policies.

• Term life insurance death benefits: The death benefit amount generally remains the same for the duration of the policy.
• Permanent life insurance death benefits: The death benefit amount could be a fixed amount or may increase over time depending on the type of permanent life insurance policy purchased. To learn more about permanent life insurance, read our article on types of life insurance plans explained.

Let's go through the general steps involved in submitting a claim. This process will look different depending on the insurer. It's important to review your policy or speak with your insurer about how their specific claims process works.

Here are the common steps involved in the claims process:

1.    Notify the insurance company and submit a claim: When notifying the insurance company, the beneficiary typically provides a death certificate, any required documentation, such as government-issued identification, and any other documents requested by the insurer.

2.    The insurer reviews the claim: Once the necessary documents have been submitted, the insurer reviews the claim. This is to confirm that the policy was active at the time of the insured person’s death, that all premiums were paid, and that the claim meets the policy requirements. It is important to note that timelines for approval can vary depending on the complexity of the claim.

3.    The insurer approves the claim and pays the beneficiary: Once the insurer approves the claim, the death benefit is paid to the named beneficiary. If no beneficiary is named, the death benefit is paid to the insured person's estate.

The timeline will depend on your insurer and the details of the claim. However, claims are typically paid more quickly when they are straightforward. This may be the case when the policy is active (premiums were paid), the beneficiary is clearly named, all requested documents have been provided, and there are no questions surrounding the insured person’s cause of death.

• The claim form is incomplete
• The required documents are missing
• The beneficiary information is unclear or disputed
• The death happened soon after the policy was issued

Policies with a cash value component are available through certain types of permanent life insurance products, such as whole life insurance and universal life insurance. These permanent life insurance policies combine a death benefit with a cash value component. Cash value is built up over time as premiums are paid. Depending on the policy, cash value may grow through guaranteed interest, dividends, or investment returns.

• Beneficiary: This is the person or persons named to receive the death benefit on the death of the person whose life is insured.
• Policy: A contract between the policy owner and the insurer.
• Premium: Periodic payments that are made to an insurer in exchange for coverage.