Life Insurance: What to Do When a Policyholder Passes Away

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    Life insurance – like death and taxes – is one of those topics Canadians don’t like to think about. Not only does it force us to accept the reality that death is inevitable, it’s a complex product we can’t actually hold in our hands. As such, it can be difficult for many of us to understand its importance.

    But here’s the thing: As much as we don’t want to think about it, it’s a critical part of everyone’s financial plan. So, for Life Insurance Awareness Month, we’re here to break it down for you.

    What is life insurance?

    Life insurance is a promise that your loved ones will be taken care of financially in the event of your death. Whether you choose term insurance (to cover your income during your working years) or whole life insurance (permanent coverage that also acts as an investment tool), you can rest assured that your spouse won’t have to set up a GoFundMe account to cover any unpaid debt, including the mortgage on your home, if you were to pass unexpectedly.

    Does life insurance money have to be put towards the deceased's debt?

    No. When it comes to how a person uses life insurance money, the reality is that they have complete freedom over how and what they will use it for. So, while it can be a tremendous financial help if the person who died left behind a large amount of debt, the money can also be used for home renovations, a family trip, post-secondary education for the kids, or wherever there is a need.

    What are death benefits?

    Death benefits refers to the payout received upon a loved one’s death. This money is typically paid in a lump sum via e-transfer or cheque, depending on the recipient’s wishes. It is 100% tax-free.In cases where the policyholder purchased a participating* whole life policy, the recipients may find themselves in one of two situations:

    1. With extra earnings (on top of the death benefit) – In this case, the cash value** and dividends*** had time to grow, similar to an investment 
    2. With a loan to pay back (subtracted from the death benefit) – In this scenario, the policyholder borrowed from the cash value portion of their policy and didn’t pay it back while they were living

    Who gets the death benefit when someone dies?

    The recipient(s) the policyholder selected when they first purchased a policy are called beneficiaries. Typically, beneficiaries are close family members, like a spouse, children, or even siblings. In some cases, a policyholder may decide to donate some of the death benefits to a favourite charity or cause.

    Read more: 3 Life Events that Should Make You Think About Life Insurance →

    How do life insurers know when somebody has died?

    A beneficiary needs to initiate the claims process to alert the insurer. Typically, the first step is to call or email the life insurer to let them know. The insurer will then provide a claim form and a list of required documents (e.g., a death certificate) that the beneficiary must complete before receiving the death benefit.

    What if the life insurance policy can't be found?

    In an ideal world, the policyholder would have told the beneficiary where this important document was stored while they were still alive and well. But this doesn’t always happen. Sometimes, a beneficiary may only learn about their inheritance because their loved one included this information in their will. In this scenario, it may be a lawyer who directs them to the policy’s location. In the event that the policy cannot be found, the beneficiary can reach out to the life insurance organization or the advisor to ask for this information.

    Steps to take when a policyholder dies

    During this difficult time, it can be challenging to focus on everyday tasks – let alone the hassle of making a claim. Acquainting yourself with the process beforehand may result in less confusion or hardship later. Below are the five steps a beneficiary should take when their loved one passes away:

    1. Contact the insurer. 
    2. Collect all necessary documentation.
    3. File the claim.
    4. Decide how you would like to receive the payout – as a lump sum or in regular payments.
    5. Decide which timeline works best for you – e-transfer (1-2 weeks), cheque delivered by snail mail (2-3 weeks), or having a cheque hand-delivered by your advisor (2-3 weeks).

    What is the best way to receive the payout?

    This is dependent on each person’s individual situation. Some beneficiaries may prefer to receive the money as a one-time lump sum, while others may opt to receive the payout as a monthly “income.” In scenarios where the death benefit exceeds the beneficiary’s expenses, they also have the choice of re-investing some of the money into a low-risk Guaranteed Interest Annuity, or a GIA (the insurance version of a GIC).

    *A participating whole life policy comes with guaranteed premiums, cash values, and a death benefit, coupled with non-guaranteed annual dividends. 

    **Cash values are accessible via a withdrawal, policy loan, or surrender. These may be subject to taxation and a tax slip may be issued. Accessing the policy’s cash value will reduce the available cash surrender value and death benefit.

    ***Dividends are not guaranteed and are paid based on the overall experience of Serenia Life Financial, considering all risk factors. Dividends may be subject to taxation. Dividends will vary based on the actual investment returns in the participating account as well as mortality, expenses, taxes, lapses, withdrawals, and other experience of the participating block of policies. These factors have the potential to increase the value of your policy above the guaranteed amount, depending on the dividend option selected.

    Not sure when the right time to buy life insurance is? Read our quick guide →

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