We often think of life insurance as a safety net for our loved ones after we are gone. But could it provide you with a financial lifeline during a major health crisis? The living benefit of life insurance allows you to access a portion of your death benefit while you are still alive if you face a serious illness.
This guide will explore how life insurance with living benefits works in Canada, its pros and cons, the crucial tax implications, and how to choose a policy that truly protects you and your family.
What Are the Living Benefits of Life Insurance?
In Canadian insurance, living benefits are commonly used as an umbrella for coverage that can pay while you are alive.
The main types of living benefits offered in life insurance policies in Canada are:
- Critical Illness – The policyholder can access the benefit if diagnosed with a severe or terminal illness specified in the policy, such as cancer, heart attack, stroke, or other life-threatening conditions. This provides funds to help cover medical expenses.
- Terminal Illness – The policyholder can access benefits if diagnosed with an illness likely to result in death within a specified timeframe, usually 6-12 months. This provides financial assistance at the end of life.
- Long-Term Care Benefit – The insurer grants access to benefits if the policyholder cannot perform basic daily living activities due to chronic illness or aging. This covers costs for long-term care services.
Living benefits offer Canadian policyholders financial security during difficult times. However, it’s important to note that using these benefits reduces the death benefit that beneficiaries will receive later. One of the main ways Canadians can utilize life insurance while still alive is through these living benefits provisions.
What Types of Life Insurance Offer Living Benefits in Canada?
In Canada, term and permanent life insurance policies can provide living benefits, typically by adding optional riders.
Term Life Insurance
With term life insurance, living benefits are usually available through riders such as:
- Accelerated Death Benefit (ADB) – Allows accessing a portion of the death benefit if diagnosed terminally ill.
- Standalone Riders: You can often add more comprehensive Critical Illness or Disability Waiver-of-Premium riders. The waiver of premium ensures your life insurance policy doesn’t lapse if you become disabled and can’t work, as the insurer will cover your premium payments.
Permanent Life Insurance
With permanent life insurance, living benefits can be added through similar riders, such as:
- Critical Illness Rider – Pays a benefit if the policyholder is diagnosed with a major specified disease.
- Long-Term Care Rider – In addition to Critical Illness and Terminal Illness riders, you may find Long-Term Care (LTC) riders that provide access to death benefits to cover long-term care costs.
The availability of specific living benefit riders depends on the insurance company and policy type. The best way to determine your options is to check with your insurer.
What Are the Pros and Cons of Living Benefits?
Living benefits have several advantages but also some potential drawbacks to consider:
Pros of Living Benefits
- Financial protection for critical illnesses – Living benefits can pay for treatment costs if the policyholder experiences a major illness, such as cancer or a stroke. This provides crucial financial support during medical crises.
- Coverage for long-term care needs – Benefits can help cover expensive long-term care services to assist with daily activities like bathing, eating, and dressing. For elderly policyholders, this can significantly affect the quality of life and access to care.
- Access benefits while alive – Policyholders can tap into death benefits without having to pass away first. This provides options for using your life insurance coverage while living.
- Maintain financial stability – Being able to access funds if diagnosed with a terminal or critical illness helps policyholders maintain financial stability despite health challenges. Living benefits help minimize the economic impacts of serious diseases.
Cons of Living Benefits
- Reduced death benefit – Using living benefits lowers the payout that beneficiaries will receive later. This trade-off needs to be evaluated depending on factors like your dependents’ financial needs.
- Restrictive eligibility criteria – Strict rules may dictate who can access benefits and when. For instance, some critical illness riders only cover 4-5 specific conditions. Understanding restrictions is crucial.
- Increased Premiums: These riders are not free. Adding a comprehensive critical illness rider can increase your premium by a noticeable amount, depending on your age, health, and the coverage amount.
- Administrative hurdles – The paperwork and approval processing required to access living benefits can seem daunting when you’re already facing illness. Some find the claims process overly invasive.
- Not guaranteed – Insurers may deny claims or dispute diagnosis. Rejected claims lead to difficult appeals. Lack of guarantee creates uncertainty.
How Do Living Benefits Work in Practice?
When accessing living benefits in Canada, the claim processes can vary by insurer. But some general guidelines apply:
- Inform insurer – Contact the insurance provider and inform them you intend to file a living benefits claim. Then, complete the required forms provided.
- Provide documentation – Supply supporting medical evidence such as test results, doctor’s notes outlining diagnosis, clinical determinations of abilities, and prognosis estimates.
- Consent to records access – Sign consent forms allowing the insurer to access your relevant medical files and speak to your physicians to have supporting records released.
- Insurer assessment – The insurer will evaluate your claim evidence based on policy criteria to determine approval. They may request supplemental documentation.
- Benefits issued – Once approved, the living benefits are paid out in a lump sum to the policyholder. This may be paid in installments, depending on the insurer.
The timeline for a claim can range from a few weeks to several months, depending on the complexity of the case and the completeness of the initial documentation provided.
How to Add Living Benefits to Existing Life Insurance
Many existing life insurance policies can be enhanced with living benefits through riders added after the initial purchase. Here’s an overview of the process:
Applying for a Rider
Contact your life insurance provider to discuss adding a living benefits rider to your existing policy. Choose a benefit from your insurer’s available rider options, such as an Accelerated Death Benefit, Terminal Illness, or Critical Illness rider, then complete the rider application documents required by the insurer. You’ll need to provide your current medical history and consent for the insurer to access your records.
Insurer Evaluation
Even if your original policy didn’t require a medical exam, the insurer will likely re-evaluate your health before approving the rider. You may need to take new exams or take tests.
The insurer will review your finances to determine if you can afford the new rider premium amount on top of your existing policy premiums.
Details like your coverage amount, length, and type of existing policy also factor into whether a rider can be added. Permanent policies are often better suited for riders.
After underwriting you for the rider, the insurer will either approve and issue the living benefits addition or deny it if you don’t qualify medically or financially.
Costs of Adding Riders
Adding a rider can trigger more costs:
- Higher premiums – Supplementing your existing life insurance with new living benefits will increase your total premium costs. The exact premium increase depends on the rider’s details.
- Rider fees – Some insurers charge a flat dollar amount fee added to your premium when buying a rider. Others just increase the premium percentage.
- Older age premiums – If it’s been many years since you took out the original policy, higher premiums will apply for the rider since you are now older.
- Higher coverage amounts – If you choose a high dollar amount for the living benefits payout, this will raise premiums compared to a lower payout amount.
- Policy changes – You may need to upgrade your base policy before the insurer will allow you to add certain riders, which can increase overall costs.
Your insurance provider can give you the most accurate estimate of premium increases for adding specific living benefit riders to your existing coverage.
Questions to Ask Before Choosing a Living Benefit
When exploring life insurance policies with living benefits, keep the following important considerations in mind:
Living Benefit Details
- Which illnesses or conditions are covered by each benefit option? Know the definitions and criteria for accessing benefits.
- How much of the death benefit can you accelerate? Most policy amounts eligible range from 25-100%.
- What policies and riders does the insurer offer? Find comprehensive living benefits.
- What elimination periods or waiting periods apply before you can access benefits? Some have 0 days, others 90 days.
- Are there benefit maximums, or are only 1-time claims allowed? Understand any limitations.
Product Quality and Features
- Does the base policy also offer strong guarantees? Living benefits shouldn’t replace core protections.
- What is the financial strength rating and reputation of the insurance company? Opt for established insurers rated highly by third parties.
- How long has the insurer been providing living benefits on its policies? Look for extensive experience.
- Are premiums and details guaranteed for life? Non-guaranteed products involve more risk.
- Does the product offer built-in premium waivers for disability? This provides more protection.
Customization and Riders
- Can you customize the policy to include other helpful riders beyond just living benefits? Add-on riders improve utility.
- Does the insurer allow converting to permanent coverage in case your needs change? Conversion options provide flexibility.
- Can you increase death benefits and living benefit amounts over time? Growing coverage keeps pace with your income and assets.
Cost Considerations
- What are the monthly or annual premium costs? Get quotes from multiple insurers to compare.
- Will premiums increase over the years? Understand how costs scale over your lifespan.
- Does the insurer offer discounts for healthy lifestyles, group policies, or bundled products? Look into savings opportunities.
- How do living benefits premiums compare with basic life insurance policies without the added features? Gauge value.
How to Find the Best Life Insurance Living Benefits
Follow this process when researching and choosing a life insurance policy with optimal living benefits:
- Define Your Needs: Look at your family’s financial situation. Do you have significant debt? Young children? A spouse who depends on your income? This will determine how much coverage you need and how important living benefits are.
- Work with an Independent Advisor: An independent insurance broker can compare products from multiple companies objectively. They are not tied to one insurer and can help you find the best fit for your budget and needs.
- Ask Probing Questions: When speaking with an advisor, ask them to walk you through the definitions of the top 3-5 most common critical illnesses (cancer, heart attack, stroke). Ask them to explain the claim process for their recommended insurer.
- Compare Detailed Illustrations: Don’t just look at the premium. Review policy illustrations that show how the benefits work and what the impact of an acceleration would be on your final death benefit.
- Apply and Be Honest: Complete the application with full transparency about your medical history. Hiding a pre-existing condition is the surest way to have a future claim denied.
What Are The Top Sources for Living Benefits Life Insurance?
Canadians have many options when shopping for life insurance policies featuring living benefits. Some top insurers to consider include:
- Sun Life Financial
- Manulife
- RBC Insurance
- Great-West Life
- Canada Life
- Industrial Alliance Insurance and Financial Services
- Empire Life
- Equitable Life of Canada
Independent life insurance advisors and brokers can provide additional guidance on finding the optimal living benefits product for your specific needs and situation. An advisor works with you as a client rather than representing any single company.
The Bottom Line
Living benefits allow Canadians to access part of their life insurance death benefit while alive if diagnosed with a serious illness, but this protection also comes with critical trade-offs, including higher premiums and a reduced final payout for your beneficiaries.
The true value of a living benefit rider lies not just in its existence, but in its details. Engaging with a qualified advisor can help you secure a modern safety net for every stage of life, offering peace of mind for both you and your loved ones.
FAQs on Life Insurance with Living Benefits in Canada
What types of conditions are covered by critical illness riders in Canada?
Critical illness riders typically cover severe illnesses like cancer, heart attack, stroke, paralysis, major organ failure, ALS, advanced Alzheimer's, major burns, and coma. The exact conditions depend on each insurer's policy definitions.
Where can I find the best living benefits life insurance policies in Canada?
Top insurers for comprehensive living benefits include Sun Life, Manulife, Canada Life, RBC Insurance, Industrial Alliance, and Empire Life. An independent advisor can help you compare and find the best policy for your needs.
When can I file a claim for living benefits on my life insurance policy?
You can file a claim as soon as you have the doctor’s diagnosis for a covered terminal, critical, or chronic illness or disability. Living benefits allow accelerating the death benefit while alive.
Why might my living benefits claim be denied by a life insurer?
Reasons an insurer might deny a claim include lack of sufficient documentation, not meeting the policy definition for a qualifying condition, or failing to disclose pre-existing health issues on application forms.
Do living benefits reduce the death payout my beneficiaries will receive?
Yes, any living benefits paid out will reduce the remainder of the death benefit later paid to your beneficiaries. This trade-off should factor into your coverage decisions.
How much does adding living benefit riders increase my life insurance premium?
Premium increases vary by insurer and desired coverage amount, but expect at least a 10-30% increase. Those with health conditions may pay higher premiums for riders.
Can I get a tax break for buying a life insurance policy with living benefits?
If an illness makes you eligible for disability tax credits, any living benefits received from your life insurance may qualify as non-taxable income.
Is a life insurance living benefit better than critical illness insurance?
Living benefits offer advantages like wider eligibility and keeping your base death benefit. Critical illness policies pay faster but have narrower condition lists and no residual payout.
How quickly are living benefit claims paid out by life insurers?
Claims typically take 4-8 weeks for approval and payout. Quicker processing may occur if you provide sufficient medical documentation upfront to the insurer.
Can I receive living benefits more than once from my life insurance policy?
Most insurers only allow accelerating your death benefit once, but some policies allow multiple claims. Check your contract terms for limitations.
