Employee BenefitsGroup Life InsuranceDependent Life Insurance in Canada: All You Need To Know

Dependent Life Insurance in Canada: All You Need To Know

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What is Dependent Life Insurance?

Dependent life insurance is a type of group life insurance that provides a death benefit to the beneficiary if a covered dependent passes away. Unlike regular life insurance, which pays out upon the policyholder’s death, dependent life insurance pays a lump sum if a spouse, child, or other eligible dependent dies. It can help cover final expenses and debts and help family members financially.

Who Needs Dependent Life Insurance?

Who Needs Dependent Life Insurance
Who Needs Dependent Life Insurance

Dependent life insurance is recommended for anyone with family members who depend on their income and support. It ensures your loved ones are taken care of if the worst happens. Typical situations where dependent life insurance is valid include:

  • You are the primary breadwinner, and your family relies on your income. Dependent coverage provides money to maintain their lifestyle if they die.
  • You have young children. The payout can be used for college funds if a parent dies.
  • You have debt obligations like a mortgage that dependents would struggle to pay.
  • You want money to immediately pay for final expenses like funeral costs without tapping into savings.
  • Your dependents have special needs that require ongoing financial support.
  • You don’t need to have individual life insurance policies for dependents.

If your death would financially impact your family, dependent life insurance is worth considering.

How Does Dependent Life Insurance Work?

What Does Dependent Life Insurance Cover?

Dependent policies provide a death benefit payout if a covered dependent passes away. The coverage is usually much lower than individual life insurance – Dependent Life coverage typically includes options such as $5,000 for a spouse and $2,500 per dependent child, or $10,000 for a spouse and $5,000 per dependent child. It is meant to provide some financial assistance, not wholly replace income.

Source: https://www.groupbenefits.ca/group-insurance/products-and-services/dependent-life-insurance

Common dependents covered include:

Spouse: Married or common-law partners are eligible for coverage. Spouses tend to have the highest coverage limits.

Children: Biological, adopted, foster, and stepchildren qualify for coverage up to a certain age, typically 21-25.

Other dependents: Elderly parents, siblings, or anyone financially dependent on the policyholder may be eligible. But this is rarer.

The employee who purchases dependent life insurance is always the beneficiary. So, if their spouse dies, the employee receives the payout to cover funeral costs, debts, and other expenses.

Who Qualifies for Dependent Life Insurance?

Who Qualifies for Dependent Life Insurance
Who Qualifies for Dependent Life Insurance

Dependent eligibility requirements vary slightly between insurance companies and policies. However, most have similar definitions that dependents must meet.

Spouse Coverage

A spouse is the person the policyholder is married to or common-law with for life insurance purposes. In Canada, same-sex and opposite-sex couples have equal spousal rights. Common-law partners usually must live together for 12 consecutive months.

Source: https://www.smu.ca/about/optional-dependant-life-insurance.html

Child Coverage

Biological and adopted children typically qualify for dependent life insurance. Stepchildren also usually qualify if their primary residence is with the policyholder. Children are commonly covered from 14 days old until ages 21-25.

Older children may still be eligible if they are disabled or a student. Documentation is usually required to prove dependency in these cases.

Other Dependents

Some group life insurance plans allow coverage for other dependents like siblings, parents, grandparents, or in-laws. To qualify, they typically must reside with, be financially dependent on, and have an eligible relationship with the policyholder. But covering extended family is rare.

Getting Dependent Life Insurance

Two main ways to get dependent life insurance: are through an employer or buying an individual policy.

Employer-Sponsored Plans

Voluntary dependent term life insurance is usually offered as an optional add-on to group life insurance from an employer. Rates are lower than individual insurance since they are based on the employee group. Employees can elect coverage for dependents during open enrollment or after a qualifying event like getting married.

Premiums are paid through automated payroll deductions. Enrolling is easier since limited medical questions are asked. Dependent coverage typically ends if you leave your job, except for spouse conversion options.

Individual Plans

You can add a dependent life insurance rider to your life insurance policy. Unlike group plans, dependents must answer health questions and be approved to qualify for coverage. Premiums are higher, but the portable policy will continue if you switch jobs.

Some life insurers allow dependent riders, while others offer standalone dependent policies. You can also buy small guaranteed issue policies without medical exams.

The Pros and Cons of Dependent Life Insurance

Dependent life insurance can be a valuable addition to an overall financial plan by protecting your loved ones. But like any product, it has some disadvantages.

Advantages of Group Dependent Life Insurance

Provides Affordable Coverage

Group-dependent term life rates are inexpensive compared to individual insurance. This makes it easy to afford coverage even if dependents have health conditions.

Offers Peace of Mind

Knowing your family has a safety net if the worst happens can provide peace of mind. Dependent life insurance gives you confidence they will have support.

Protects Family Financially

A payout from dependent life insurance ensures your family has some financial resources after losing a loved one. It helps them maintain their lifestyle.

Covers Funeral Costs

Dependent policies usually pay enough to cover final medical bills and funeral costs so family members don’t have to pay out-of-pocket.

Easy Enrollment

Purchasing dependent life insurance through an employer is convenient. Limited health questions are asked, and enrollment is automatic.

Portable Coverage

If you leave your job, spouse coverage can often be converted to an individual policy. This allows them to maintain life insurance.

Disadvantages of Group Dependent Life Insurance

Limited Benefit Amounts

Payouts from dependent life insurance tend to be small – only thousands of dollars. This may not replace income or significantly impact finances in the long term.

Loss of Coverage When Leaving a Job

Since most dependent life insurance is through employers, coverage ends if you leave your job. The exception is converting spouse coverage.

Higher Premiums Than Individual Life Insurance

Group-dependent life rates are higher than if you purchased comparable individual coverage. But they still tend to be affordable.

Doesn’t Replace Income

The small payouts from dependent life insurance don’t replace income long-term like an individual life insurance policy would. Other planning is still needed to ensure financial security.

The Cost of Dependent Life Insurance in Canada

Like all life insurance, several factors impact your dependent policy premiums.

What Impacts Your Premiums

Age and Health

A spouse’s age and health status determine their rates. Premiums for children are low since they rarely die. However, adult costs rise as they age due to higher mortality rates. Any health conditions also increase prices.

Amount of Coverage

The death benefit amount directly impacts your premiums. More coverage costs more, while lower payouts have smaller premiums. But dependent policies max out around $30,000 anyway.

Type of Policy

Group policies offered through employers cost less than comparable individual dependent life insurance you buy directly. But you must qualify for group coverage based on employment.

Employer Contributions

Your premiums are reduced or eliminated if your company pays for your coverage.

Strategies to Reduce Costs

Aside from the above factors, there are some strategies to reduce your premiums:

  • Compare quotes from multiple insurers. Rates can vary significantly between companies.
  • Pick group coverage over individual policies when available. Group coverage costs less.
  • Opt for lower payout amounts if the maximums aren’t needed. This reduces premiums.
  • Take advantage of employer contributions towards premiums if offered. This saves you money.
  • Pay premiums annually rather than monthly to avoid fees. Annual payments mean lower overall costs.

Tax Considerations

Whether dependent life insurance premiums and payouts have tax impacts depends on who pays the premiums:

Employee-Paid Premiums

Coverage is non-taxable for both premiums and benefits if you pay your premiums. You don’t report anything for tax purposes.

Employer-Paid Premiums

Your employer contributing toward premiums makes that portion taxable income to you. However, the benefit payout remains tax-free for beneficiaries. Employer premium payments are deductible business expenses.

Claiming Group Dependent Life Insurance Benefits

Claiming a dependent life insurance payout involves contacting your insurer, submitting documents, and providing proof of claim details.

The Claims Process

The beneficiary (usually the employee who purchased group life insurance coverage) starts the claims process. First, contact the employee benefits providers in Canada, such as Industrial Alliance Financial Group, manulife employee benefits, Equitable Life, Wawanesa Insurance, etc… to inform them of the death and initiate a claim. You will need to provide:

  • Dependent’s full name, date of birth, and social insurance number
  • Beneficiary’s contact details and social insurance number
  • Relationship of the beneficiary and deceased
  • Policy details like numbers, effective dates, and coverage amount
  • Date and cause of death

The insurer then sends claim forms to collect documents verifying eligibility and death.

Documents Needed

Documents required to approve a claim typically include:

  • Claim form completed by the beneficiary
  • Certified death certificate indicating cause of death
  • Proof of dependent eligibility, like a marriage or birth certificate
  • The coroner’s report if the death was accidental or suspicious
  • Police report deaths from accidents or crime
  • Medical records related to death and illness history

The insurer reviews the claim evidence and notifies the beneficiary of approval decisions and next steps. Extra details may be requested before a final decision is made.

How Long It Takes to Receive Benefits

Claim processing times vary by insurer, but most pay approved claims within 1-2 weeks of receiving satisfactory claim documents. Quicker payments may be made if there is an urgent need.

More extensive or contested claims require more review, which extends timelines. However, insurers work swiftly since beneficiaries depend on the money. If claims are denied, the beneficiary is notified why and of any appeal options available.

What is Covered by the Death Benefit

The dependent life insurance policy outlines what types of deaths qualify for a payout. The death benefit is paid as long as the policy is active when the dependent dies and standard exclusions don’t apply.

Standard exclusions include suicide within 1-2 years of coverage starting and death during criminal activity. Hazardous hobbies, war, or epidemic illnesses may also preclude payment. But most natural deaths trigger the payout.

Any coverage limits, benefit maximums, and policy provisions impact the final amount paid. The insurer calculates the exact payout based on the policy details. Benefits received do not reduce or impact other insurance compensation.

Benefit Payment Methods

Beneficiaries can choose how they want to receive dependent life insurance payouts. Options usually include:

Lump-Sum Payment

The entire death benefit is paid at once by cheque or direct deposit, giving beneficiaries immediate access to money during their grief.

Installment Payments

The benefit amount is split into multiple scheduled payments over time, which provides beneficiaries with ongoing income and flexibility in using funds.

Interest-Bearing Account

Insurers pay the death benefit into an account that earns interest for beneficiaries. Funds can be withdrawn as desired. This earns interest while allowing flexible access to the money.

The method chosen depends on the financial needs and preferences of beneficiaries. The process is coordinated with the insurer to ensure the payout meets their requirements during a difficult time.

Alternatives to Group Dependent Life Insurance

While dependent life insurance is purpose-built coverage for dependents, some alternatives provide similar guarantees.

Individual Life Insurance

Purchasing individual life insurance on dependents provides more coverage with customizable payouts. However, individual policies cost more, require health exams, and may not be feasible if dependents have illnesses. They also do not offer group portability.

Savings and Investments

Self-funding a rainy day reserve account to cover final costs when dependents pass away is an option. But market drops may reduce balances, savings may need to be increased, and money isn’t immediate. It also takes discipline and effort compared to automatic insurance.

Final Expense Insurance

Small guaranteed-issue policies that pay for funeral costs are available to all ages. These policies provide a minimum payment upon death. However, payouts are usually under $20,000 and only cover immediate final expenses.

Frequently Asked Questions about Dependent Life Insurance

Does dependent life insurance cover death from any cause?

Dependent policies pay out upon death regardless of cause, except in cases of suicide, criminal activity, war, or if standard exclusions apply. The payout is made based on whether it is an illness, accident, crime, or natural cause.

Is dependent life insurance worth the cost?

The small premiums make dependent life insurance very valuable financially. Coverage costs a few dollars monthly but provides thousands in the event of an unexpected death. Given the costs a death can create, dependent insurance is usually a worthwhile investment.

When do benefits get paid out to beneficiaries?

Insurers make lump-sum payments within 1-2 weeks, typically after receiving a completed claim form, death certificate, and other documents verifying eligibility. The insurer calculates the amount owed based on the policy and pays via the beneficiary's chosen method.

Does dependent life insurance payout in addition to regular life insurance?

Yes, dependent payouts do not impact or reduce the beneficiary's receipt from any other life insurance on the dependent. All policies that the dependent held pay out independently based on their specific terms.

Can dependent life insurance be converted?

Child coverage cannot be converted in most cases. However, spouse-dependent life insurance can often be converted to an individual policy if group coverage ends. This allows the insured to maintain life insurance if they leave an employer where they purchased dependent coverage.

Conclusion

Dependent life insurance provides essential guarantees to employees with loved ones who depend on them financially. While coverage amounts are small, they can make a big difference for survivors facing unexpected final costs and loss of income from the death of a spouse or child.

Group-dependent life insurance offers affordable rates for all employees to protect their families through convenient payroll deductions. It is highly recommended that dependent life insurance be added to existing policies for peace of mind and to ensure your family’s financial security if the worst happens.

For more current employee benefits news and trends in Canada, please visit Ebsource to not miss a thing!

Article Sources

At Ebsource, we empower Canadians to make smart benefits choices. We provide unbiased insights from finance veterans aligned with industry best practices. Our data comes from reputable government sources like Statistics Canada, ensuring accuracy. Through rigorous research of Canada’s major providers, we offer customized recommendations tailored to individuals’ budgets and needs. Ebsource adheres to high editorial standards, citing reputable sources transparently. We aim to equip Canadians with trusted knowledge so they can confidently select the ideal benefits for their situation. Our purpose is to be Canada’s most reliable educational resource for savvy benefits decisions.

Dependant Life Insurance – groupbenefits.ca
Dependent Life Insurance – lakeheadu.ca
What is Dependent Life Insurance? Who Qualifies as a Dependent for Insurance? – valuepenguin.com
GROUP DEPENDENT LIFE INSURANCE BENEFITS – tannerfinancial.ca

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