What does life insurance cover in Canada?

When planning for the future, many Canadians inevitably reach a point where they must consider getting life insurance. It offers peace of mind by providing financial support for loved ones when something unexpected happens.

But figuring out what life insurance actually covers can be a headache. Coverage depends on your policy type, its terms, and any specific conditions set by the insurer.

Typically, life insurance covers natural death, accidents, and certain terminal illnesses, though there are exceptions. To complicate matters, each province and territory regulates insurance companies differently.

Additionally, tax treatment of life insurance benefits and premiums can differ by province, which may influence decisions on coverage.

However, for the most part, the coverage types remain consistent across Canada.

Let’s take a look at which scenarios you'll be covered in.

Accidental death

Your life insurance policy may pay out the death benefit if the insured passes away due to an unexpected, external circumstance, like car accidents, slips and falls, or other unforeseen incidents that lead to fatal injuries.

Both term and permanent life insurance policies typically cover these situations, as long as the cause of death is ruled accidental and aligns with the insurer's specific definitions and terms. If it doesn’t, you’ll need to purchase a standalone insurance product or added as an accidental death and dismemberment (AD&D) rider.

Many life insurance policies also offer an optional rider for additional accidental death benefits, which grants an extra payout if the insured dies as a result of an accident. This supplemental coverage is advised for individuals in high-risk jobs or for those who seek further financial security.

Accidental death coverage usually excludes deaths caused by high-risk activities (e.g., extreme sports) unless specifically added to the policy, and may also exclude deaths resulting from intoxication or drug abuse. Check the specific terms of the policy for what is and isn't covered.

Whether you’re new to life insurance or reviewing an existing policy, understanding the nuances of these situations can help you make informed decisions and better prepare for the future.

Critical illness

Typically, life insurance provides a payout to beneficiaries when and if the policyholder passes away. However, many policies offer optional critical illness coverage, which provides financial support if the policyholder is diagnosed with a serious health condition.

Critical illness coverage usually applies to serious conditions such as:

• Cancer (major types, but often not early stages)
• Heart attack and stroke
• Organ failure (like kidney or heart)
• Severe neurological conditions (like multiple sclerosis)

If diagnosed with a covered illness, the policyholder receives a lump-sum payment. In Canada, this can fall anywhere within the range of $25,000 to $2 million. This money can be used for any expenses, including medical bills, everyday living costs, or support for family during recovery. The maximum payout is influenced by your age, occupation, health and policy type.

Common exclusions to be aware of include, any illnesses diagnosed before taking out the policy, less severe illnesses or early-stage cancers, and conditions from self-harm or substance abuse.

Related: How does vaping and e-cigarettes affect life insurance?

Medically assisted death

Life insurance policies generally cover medically assisted deaths, provided the policy has been active for a specified period – often two years. This timeframe is known as the "contestability period" or "suicide exclusion period," during which insurance providers may investigate claims more closely and could deny coverage for self-inflicted death, including medically assisted death, if it occurs within this period.

Once the contestability period ends, medically assisted death is typically covered, aligning with Canada’s Medical Assistance in Dying (MAiD) laws. This coverage reflects Canada’s recognition of MAiD as a legal, compassionate option for terminally ill or suffering individuals who meet strict eligibility requirements.

Natural disasters

Most life insurance policies in Canada cover deaths caused by natural disasters, like earthquakes, floods, or wildfires. If a policyholder dies in a natural disaster, the insurer typically pays out the policy’s benefit to the beneficiaries.

Some important things to keep in mind:

• Exclusions: Some policies might have exclusions, especially if the policyholder was knowingly in a high-risk area without necessary coverage adjustments.
• Policy type: ‘Term life’ and ‘whole life’ policies usually cover natural disasters, but accidental death policies may not, as they often focus on specific types of accidents.
• Claims process: Beneficiaries may need to show proof that the death was due to a natural disaster and be prepared to fulfil any specific requirements of the policy.

Reviewing these details with your insurer ensures that your loved ones will be financially covered in case of a natural disaster.

Related: Why life insurance should be a part of estate planning for new parents

Serious sports injuries

If a policyholder dies due to a serious sports-related injury, coverage is generally provided, although it hinges on the specific activity involved and any exclusions outlined in the policy.

Recreational sports: If a policyholder participates in common sports like hockey, skiing, or cycling, standard life insurance policies typically cover these situations in the event of a fatal injury.

High-risk and extreme sports: For activities considered high-risk – like rock climbing, scuba diving, or motorsports – insurers may either exclude coverage, charge a higher premium, or require a specific policy rider. Some policies may require full disclosure of participation in these activities during the application process, or you may not be covered.

Professional athletes: Life insurance policies may also place exclusions or higher premiums on those involved in professional or semi-professional sports due to the higher risk of injury.

Suicide

Each insurance provider and policy will have their own unique terms regarding suicide. However, most policies include a standard suicide exclusion period – usually two years from the policy’s start date or reinstatement. This means, if the insured person dies by suicide within this initial exclusion period, the policy will not pay the death benefit, and premiums paid up until that time are usually refunded to the beneficiaries.

After the exclusion period, if the insured dies by suicide, the policy generally pays out the death benefit, provided there are no other policy violations. Mental health conditions can affect the terms of life insurance policies, potentially leading to higher premiums or specific exclusions.

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