What Does Canadian Life Insurance Cover?

What does life insurance cover in Canada? 

Life insurance provides a tax-free, lump-sum payment called a death benefit to your beneficiaries when you pass away. In Canada, life insurance is designed to offer financial support for your loved ones to help them maintain their standard of living, cover debts, and manage ongoing expenses. 

With very few exceptions, life insurance almost always pays out as long as the policy is active and premiums have been paid. Here’s what’s typically covered: 

• Death from natural causes: Life insurance covers most causes of death including illness, heart disease, cancer, and old age. 
• Accidental death: Unexpected or sudden fatalities, such as those caused by car accidents and slips, are generally covered. Some insurers offer an accidental death benefit rider, which provides an increased payout for accidental deaths.
• Death during natural disasters: Unless the event falls under a specific exclusion, most policies will pay out for deaths caused by natural disasters such as wildfires, floods, or earthquakes.
• Medically assisted death (MAiD): In accordance with Canada’s MAiD laws and a ruling by CLHIA, medically assisted deaths are typically covered. Payouts may depend on the insurer, the specific policy type, and completion of the policy’s contestability period.
• Recreation sports accidents: Fatalities from common activities like skiing, cycling, or hockey are generally covered. However, extreme sports such as rock climbing or motorsports may require a higher premium or rider, or be excluded altogether.
• Optional critical illness coverage: While still alive, this coverage can provide a lump-sum payment for treatment, household bills, or recovery support if you’re diagnosed with a serious condition such as cancer or heart disease.
• Coverage for children: Many life insurance policies, such as those offered by PolicyMe, include a small death benefit (e.g. $10,000) for dependent children aged 6 months to 18 years.

While the coverage described above can apply to both term and whole life insurance, there are some key differences. Term life insurance is the most affordable and flexible life insurance option for Canadians with temporary financial obligations. Whole life insurance, a type of permanent life insurance, may offer additional features, such as lifelong coverage or cash value, but typically comes at a significantly higher cost and incurs taxes for cash value payouts.

Life insurance is more reliable than you might think.

Over 99% of claims in Canada are paid out, according to the Canadian Life and Health Insurance Association (CLHIA).

Does life insurance cover natural death?

Yes, life insurance covers natural death, including those caused by illness or aging. In fact, this is the most common type of life insurance claim.

As long as your policy is active, your premiums have been paid, and the information you provided during your application process was truthful, your beneficiaries will receive the full death benefit. 

It’s important to note that some policies may have a waiting period to receive coverage if pre-existing conditions were not fully disclosed at the time of application. Otherwise, your loved ones are financially protected in the event of natural death. 

What is life insurance used for?

Life insurance provides a financial safety net to help your loved ones stay afloat after you’ve passed. The tax-free lump sum your beneficiaries receive can be used however they need, making life insurance a powerful tool for long-term planning. 

Here are the most common ways families use life insurance payouts:

• Final expenses: Life insurance can cover funeral expenses, the burial, cremation, or memorial. It can also help cover unpaid medical bills or palliative care costs.
• Outstanding debts: Your beneficiaries can use your death benefit to pay of mortgage payments, car loans, personal loans, or credit card balances.
• Replacing lost income: Your family can maintain their lifestyle and remain financially stable, especially in the early months or years following your passing. 
• Daily living costs: The payout can help surviving partners or caregivers cover rent, mortgages, groceries, transportation, utilities, childcare, and household expenses.
• Children’s education: From childcare costs to college tuition, life insurance helps ensure your kids’ future is still protected and planned for.
• Business expenses: If you’re a business owner, your life insurance payout can help maintain operations, pay staff, or settle outstanding business debts.
• Financial legacy: Many Canadians also use life insurance to leave behind a financial gift; whether it’s for their children, grandchildren, or a charitable organization.

Sample budget breakdown of a life insurance payout

Let’s say you have a $500,000 term life insurance policy. If you pass during the policy term, your beneficiaries will receive a tax-free lump sum of that amount.

While some insurers offer structured payment options (like monthly income or interest-only payouts), most Canadians choose to receive death benefits as a lump sum. A lump sum life insurance payment can offer your family more control over how and when they use it. 

Here’s how a $500,000 death benefit might be allocated to support a typical family:

These numbers will vary based on your family’s unique needs, lifestyle, and financial obligations. This example simply shows how a policy can cover both immediate and long-term costs after your passing.

What does life insurance not cover 

Life insurance is designed to be dependable, so the majority of claims are paid without issue. However, there are a few specific situations where your policy may not pay out.

These exclusions are designed to protect insurers from fraud and to ensure that policies are issued fairly. Here’s a closer look at what scenarios life insurance does not cover:

Suicide within the first two years 

Most life insurance policies in Canada include a two-year suicide clause, also known as the suicide exclusion period. If the insured person passes by suicide within the first two years of the policy’s start date, the insurer may deny the claim. Instead of the full death benefit, the insurer may refund the paid premiums. 

After the two-year exclusion period, suicide is generally covered if the application was truthful and complete at the time of approval.

Many life insurance companies now also include mental health questions during the underwriting process. It may impact how your policy is underwritten if you disclose a history of mental health challenges, but this doesn’t mean you won’t receive coverage.

Support

Mental health resources If you or someone you know is struggling with suicidal ideation, contact Talk Suicide Canada at 1-833-456-4566 or text 45645.

Risky hobbies (that are undisclosed)

Undisclosed high-risk hobbies or occupations can jeopardize your life insurance claim.

When applying for coverage, you are required to disclose any extreme or hazardous activities you engage in, such as skydiving, scuba diving, car racing, or mountaineering. Risky activities are often listed in the policy’s exclusion section, meaning your insurer won’t pay out if your passing is related to them and they weren’t disclosed during your application process.

If your lifestyle includes risky hobbies or you work in a high-mortality-risk profession (like firefighting, aviation, or law enforcement), you can still get life insurance. However, you’ll likely need to pay a higher premium or purchase an additional life insurance rider to ensure full coverage. 

Life insurance policies also typically exclude death caused by illegal activity, such as:

• Driving under the influencer
• Drug overdoses involving illegal substances
• Criminal involvement leading to fatal injuries

Insurance fraud 

Life insurance relies on honesty at the time of application. Providing false or misleading information, such as omitting a smoking habit, substance use, or pre-existing medical conditions, gives your insurer grounds to void your policy and deny your beneficiary’s death benefit claim. 

For example, not disclosing a diagnosis like diabetes or a history of depression may be considered misrepresentation, especially if the death is related to that condition. Insurance companies have the legal right to investigate and deny claims if fraud is suspected, especially during the contestability period (first two years of the policy). 

Take note

If you realize you’ve made a mistake after submitting your application, it’s best to contact your insurer immediately to correct the information. Transparency helps protect your loved ones from a claim denial down the line.

Non-payment/lapsed policies

To keep your coverage active, you must pay your life insurance premiums on time. If you miss payments and your policy lapses, your coverage ends and your insurer is not obligated to pay out the death benefit if you pass away with an inactive policy. 

If you’re struggling to make payments, don’t ignore it. Contact your insurance provider to discuss your options. For example, permanent life insurance plans are generally the most expensive. Term life policies, such as those offered by PolicyMe, can be more affordable, helping to keep your protection in place and within your budget. 

How much life insurance coverage do I need?

Your life insurance policy should provide enough coverage to meet your family’s financial needs, last as long as your major financial responsibilities, and fit comfortably within your budget. 

To estimate how much coverage you need, start by adding up your current and future financial obligations. Then subtract any assets or support your family could fall back on, like savings, or investments. The result is your target coverage amount. 

Here’s what to include in your calculation:

Once you’ve tallied this up, subtract your existing assets; like TFSAs, RRSPs, real estate, or life insurance from your job. Your coverage amount should align with the final number from your calculation.

Want to skip the math? Use PolicyMe’s life insurance calculator to get a personalized recommendation in minutes.

How much does life insurance cost? 

Term life insurance premiums in Canada can fall anywhere between $15-$300+ per month. While this may seem like a wide range, it’s important to note that several personal factors can influence how much you’ll pay in monthly or annual premiums.

What affects the cost of life insurance

• Age: The younger you are when you apply, the lower your premium will likely be.
• Gender: Women typically pay less than men due to longer life expectancy.
• Smoking status: Smokers pay significantly more than non-smokers.
• Health history: Chronic conditions like diabetes or high blood pressure may increase rates.
• Lifestyle risk factors: High-risk hobbies (like skydiving) or occupations (like firefighting) can raise your premium.
• Coverage amount: More coverage typically equates to higher premiums. 
• Type of life insurance: Term life insurance is generally more affordable than whole life policies or universal life insurance.
• Insurance company: Each Canadian life insurance provider uses its own underwriting guidelines and pricing structures to calculate life insurance premiums (e.g. some may require medical exams while others don’t). Be sure to compare quotes before you buy life insurance, or apply through a platform like PolicyMe for smart, fast, and affordable term life insurance.

To give you a better idea of how much a policy might cost you, here are sample monthly term life insurance rates for a 20-year term with $500,000 in coverage for non-smoking applicants of varying ages and gender: 

Breakdown of a life insurance contract 

Your life insurance contract outlines everything you need to know about your policy, including policy details, coverage, and exclusions. 

While details can vary slightly by provider, most contracts include the following information:

• Policy details: This section includes your personal details (name, age, gender at birth), death benefit amount, premium (monthly or annual), policy start and end dates, payment schedule, and smoking status.
• Coverage: Outlines the terms of your coverage, such as when your coverage begins and ends.
• Child coverage: Many insurance companies, such as PolicyMe, offer $10,000 in coverage for the policyholder’s dependent children aged 6 months to 18 years. 
• Exclusions: Outlines exclusions, including but not limited to suicide within the first two years (suicide clause).
• Beneficiaries: Lists your primary and secondary beneficiaries, who will receive the death benefit from your life insurance policy.
• Claims process: Explains how to claim the death benefit or child coverage, including required documentation for a successful payout.
• Policy conversion details: If applicable, this outlines how to convert your current policy into a longer-term policy while maintaining the same death benefit. 
• Payment, cancellation, and grace periods: Reviews the terms for premium payments, the cancellation process and refund policy, and the grace period for missed payments.
• General provisions: Covers the insurer’s right to contest your policy, adjustments to the death benefit due to errors in birth date or gender, reinstatement terms, and legal action limitations.

FAQs: What does life insurance cover?