This contains general information and is intended as a reference only. It is not a substitute for independent legal advice regarding your situation.
Most employers offer some type of group life insurance benefits. Dependent on the insurance policy, the life insurance can allow for separate coverage for the member, spouse and dependents. Life insurance benefits can be paid as a lump sum amount or have a formula (i.e., one, two- or three-times salary).
At the time of hire or when you become eligible, your employer should provide you with information on what group life insurance is available. You will need to decide how much coverage you want, generally within 31 days. If you have a change in your life circumstances (e.g. change in marital status or new dependents), you generally need to tell the employer within 31 days of the event. If you wish to add additional coverage after that date, you may have to provide evidence of insurability (i.e. medical evidence) for any additional coverage. Depending on the wording of your Collective Agreement, the employer may pay all or some part of the life insurance premium. The employer submits the life insurance premium every month to the insurer and collects any payments made by the employee by payroll deduction. You cannot increase your life insurance coverage amount if you are in receipt of long-term disability benefits (sometimes known as LTD or LTIP). The insurance company will often waive the premium for your life insurance while you are receiving LTD and your life insurance coverage continues. However, if you paid life insurance premiums for supplementary life insurance coverage through payroll deduction, you may have to continue the payments to the employer, while on LTD/LTIP.
Taxes and Life Insurance
If the employer pays premiums for your life insurance, those premiums are considered taxable income by Canada Revenue Agency. This means that the amount paid by your employer will be added to your taxable income on your annual T4 slip and you will be required to pay tax on it.
Life insurance payments to your beneficiary or beneficiaries are not considered taxable income.
Naming Beneficiaries
It’s important to designate a beneficiary, and you can name more than one beneficiary for your life insurance. You must put the request in writing, and the employer will ask you to complete a form which will allow you to list one or more beneficiaries. If you wish to change a beneficiary, it must be in writing to the employer, and you should request a written acknowledgement that the change has been done. If you are not sure who you have listed, contact the employer. The employer informs the insurer of the change. In the Province of Quebec, spousal beneficiary designations are non-revocable.
There can be significant tax consequences if you fail to designate a beneficiary, or you designate your estate as the beneficiary. If the money is paid to the estate, it will be subject to federal and provincial tax along with inheritance tax where applicable. Thus, it is important to ensure that a beneficiary is named and reviewed periodically as circumstances change over time.
Your executor should be aware that life insurance information is available from your employer and how to contact them in the event of your death.
Conversion Option
Most group life insurance policies have a conversion option. This means that the group life policy can be converted at the time of termination from the employer to an individual life insurance policy, without evidence of insurability (good health). This can be important for someone who is in poor health when they are leaving their employer.
If you are losing your life insurance at the time of termination of employment, and are healthy and under age 65, it is a worthwhile endeavour to shop around and see if you can obtain life insurance at a cheaper rate. However, you will need to show evidence of good health and that you are insurable. It is important to do this quickly however as there is usually a deadline (often 31 days) to apply to convert your life insurance.
Insurers will provide you the information on premiums rates to continue coverage at the same or lesser insurance coverage. You elect the coverage and pay the premium directly to the insurer. Your coverage will stop when you stop paying premiums. You will also need to list your beneficiary with the insurer when you complete the insurance application for the individual insurance policy.
Terminal Illness and Your Life Insurance
Some life insurance companies will allow a person covered under a group life insurance plan, an advance on a portion of their life insurance benefits if they are diagnosed by a physician as having less than one or two years to live. To determine if this is an option available for your life insurance, ask your Employer or the insurance company for information.
Other types of insurance
Critical Illness Insurance
Critical Illness Insurance allows for a lump sum payout (after an application by the insured individual with supporting medical documentation and approval process by the insurer) if the insured member is diagnosed with a critical illness such as cancer, stroke or heart attack. Critical illness is used to help offset the cost of the surviving a serious illness whereas terminal illness is an advance on the insured’s life insurance.
Accidental Death and Dismemberment (AD and D) Insurance
You may have this workplace insurance coverage with or without other life insurance. Accidental Death and Dismemberment Insurance allows for a lump sum payment (after an application by the insured individual with supporting medical documentation and approval process by the insurer) due to an accidental physical loss (or loss of use) of a body part, or death. There is normally a schedule for what amount would be paid for a physical loss.
Insurance Tips
- Determine your coverage when you first become eligible and consider what the maximum amount of coverage you want. It can be difficult to add additional coverage later without being subject to proof of good health.
- List your beneficiary and review it periodically. Any changes need to be in writing; keep a copy of the change.
- If you are not sure of your coverage, contact your employer human resources contact.
- If you want to add your spouse or dependent on to your insurance, you need to do it generally with 31 days of the life event (e.g. marriage or birth) and inform your employer in writing.
- At the time of termination of employer, explore the conversion option to see if you wish to continue coverage.