What happens when you’re the beneficiary of a life insurance policy?

When my father died, there was a lot for me to deal with, on top of my grief. I had to notify a long list of people, companies and government departments. I had to confirm where his money was, when his bills were due and how much he owed. And I had the funeral to plan. Our dad named my sister and I as co-executors, but we agreed that I would take the lead.

It felt so complicated that it could have been overwhelming to figure everything out. But one necessary task turned out to be simple and straightforward: filing a life insurance claim. 

I’d never done it before, and I didn’t know what to expect. The whole thing felt so final, like one more reminder that he was truly gone. 

If you’re like me, and have never filed a life insurance claim before, hearing my experience may help. 

How did the life insurance company know that someone had died?

As the two living beneficiaries* on my father’s policy, it was up to me or my sister to tell the insurance company. You do this by filing a claim.  

Our situation wasn’t unique. It’s the same process even if the insured person is famous and their death is in the news. An insurance company won’t make a payment until the beneficiary files a claim.

How did I know I was a life insurance beneficiary?

Because I had been managing my father’s affairs for some time, I knew where to find his life insurance policy. 

But now that you’re thinking of it – and if you don’t already know – ask your spouse. Ask your parents. If they’re too sick to say, or they’ve died without telling you, do some hunting. It may feel morbid or greedy to look, but it’s not. They may have paid policy premiums for years to help protect you financially after their death. You’ll respect their wishes – and ensure their money wasn’t wasted – by finding the policy and filing a claim. An annual statement might be easier to find than the original document if the policy was issued long ago. 

Again, while you’re thinking about life insurance, make sure the beneficiaries on your own policy know who they are. 

Do you think a policy exists, but you can’t find it anywhere? Try your parent’s or spouse’s advisor, lawyer or banker. Perhaps you suspect they have a policy with a particular company. You might be able to track down the policy on the strength of their name and birthdate when you call. Don’t know the name of the insurance provider? You can search through the Canadian Life and Health Insurance OmbudService.

What did I need to file a life insurance claim?

To file a claim, you usually need to provide 3 documents to the insurance company:

1. A short, signed form with a seal called a death certificate. The funeral director provided several copies. If a funeral director isn’t involved in your case, your provincial or territorial government can provide copies.
2. The policy itself, or an annual policy statement. The key item on this document was the policy number. 
3. The claim form. I downloaded it from the insurance company’s website. Depending on the cause of death, you may need a signature from a medical professional. 

When did I file the life insurance claim?

As soon as I had the documents I needed, I filed a claim. (It felt soon, frankly, but we needed the money to pay for his funeral).

The filing deadline can vary from 90 days to 12 months, according to the Canadian Life and Health Insurance Association. 

It’s my understanding that most Canadian life insurance companies pride themselves on acting in good faith. That means that if you report a death more than 12 months later, they’ll likely still process the claim. The decision to pay the claim will depend on whether the death meets all the conditions of the policy, of course.

How long did it take the insurance company to pay the life insurance claim?

I filed the life insurance claim on February 14. And I received my share of the death benefit* on February 22.

Insurers will pay claims in anywhere from a few days to a few months. You may be able to ask for an electronic funds transfer, as I did. If not, watch for a cheque in the mail and deposit it right away. The cheque could be large enough for your bank to hold funds for a short time before you can access the cash. When you deposit a very large cheque like that you may also get a call from your bank with recommendations. Don’t feel the need to say yes or no to anything in the moment. It's best to talk to a trusted advisor before making any financial decisions. Especially as you’re grieving. 

Did I have to pay tax on the death benefit? 

No. The death benefit from a life insurance policy is tax-free. That’s true: 

• whether the payment is a few thousand or a few million dollars, and
• because I was a named beneficiary to the life insurance policy. If there wasn’t a named beneficiary, or if the beneficiary is the life insured's estate, probate* may be required. 

And unlike a bequest in a will, it didn’t have to go through probate. Having said that, even though the payment itself isn’t taxable, any income you earn by investing it is taxable. That’s also the case for any interest that builds up between the date of death and the payment date. 

As I said, my father’s policy was small and his estate simple, so I managed the process on my own. Had the policy been large or the situation complicated, I would have asked my advisor for help. If you don’t have an advisor, you can find a Sun Life advisor near you. 

What did I use the life insurance money for? 

I used some of the money for funeral expenses. Then, I cleared outstanding bills and debts, and reserved a bit to pay my father’s final income tax bill. Finally, I split the remainder between my sister and myself. These are common ways to use the proceeds from a life insurance policy. However, if you’re the beneficiary, that money is yours to use as you wish.

Once you pay the bills, you can use the balance for any number of important purposes:

• Pay off a mortgage.
• Send your child or grandchild to college or university.
• Put it in your RRSP or your TFSA (if you have contribution room).
• Invest it for ongoing income.

In my case, I decided to give my share to my grown children. 

For many people, a life insurance policy will be the most important legacy they can leave their family. With a little preparation, it can also be simple and straightforward.