Why life insurance claims are denied

Start with the proportion

The great majority of Canadian life insurance claims are paid, and paid without difficulty. Refusals are the exception, and the ones that make the news are memorable precisely because they are unusual.

That said, when a claim is refused the consequences are severe, and the reasons are worth understanding while you can still do something about them. Almost all of them are avoidable at the point the policy is bought and maintained.

The reasons, roughly in order

The policy had lapsed. This is the most common reason a death benefit is not paid, and it is not a dispute at all. Premiums stopped, the grace period expired, and there was no policy in force when the death occurred. Often nobody knew, particularly where a payment method failed quietly. See missed payments, lapse and reinstatement.

Something material was inaccurate on the application. Within the first two years, insurers review the application against the medical record on any claim. If something that would have changed their decision was misstated or left out, the claim can be reduced or refused.

Most of this is not deliberate. Forgotten hospital visits, misread questions with time windows, conditions the applicant thought too minor to mention. Intent does not change the outcome in the ordinary case. See leaving something off the application and the contestability period.

A waiting period applied. On many guaranteed issue policies, death from illness in the first couple of years returns the premiums paid rather than the full amount. This is a contract term rather than a refusal, and it is frequently a surprise because the product was sold without it being made clear. See waiting periods and graded benefits.

The suicide clause. Almost every Canadian policy provides that death by suicide within the first two years returns premiums rather than paying the benefit. After that period, most policies pay in full.

An exclusion applied. Where a policy was issued with an exclusion, such as an aviation exclusion, and death occurred from that specific cause. The exclusion removes cover for that cause only; everything else pays normally.

The wrong person claimed, or nobody did. Where a beneficiary designation was never updated, the money goes to whoever is named, which may not be who the deceased intended. That is the designation working exactly as written, and it is a planning failure rather than a claim failure.

What insurers cannot do

They cannot refuse because they would prefer not to pay. A refusal has to rest on a contract term or on a misstatement that meets the legal test in the applicable provincial insurance legislation.

After the contestability period, an innocent error on the application generally cannot be used to challenge the policy. Deliberate fraud remains actionable.

They also cannot refuse on the basis of the cause of death alone, other than through a specific exclusion or the suicide clause. Life insurance covers death from illness, accident and old age alike.

What to do if a claim is refused

Get the reason in writing, with the specific policy provision they are relying on and the evidence behind it.

Read the policy. Not the brochure or the summary, the actual contract. Check whether the provision cited says what the insurer says it says, and whether the contestability period had passed.

Use the internal complaints process. Every Canadian insurer has one, and it is a real process rather than a formality. Escalating within the company resolves a meaningful share of disputes, particularly where the original decision rested on incomplete information.

Then go to the OmbudService for Life and Health Insurance. OLHI provides free, independent review for Canadian consumers once the insurer’s internal process is exhausted. It is not a court, and it produces recommendations rather than binding orders in most cases, and insurers generally take those recommendations seriously.

Consider legal advice where the amount is significant or the issue turns on a question of law. Time limits apply to legal claims and they differ by province, so getting advice early rather than late matters.

Preventing it

Almost everything on this page is addressable before a claim.

Answer the application completely, including the awkward questions. Read what an advisor filled in on your behalf before signing it. Make sure premiums are paid from an account that will not quietly fail, and check the policy is still in force periodically. Review beneficiary designations whenever your circumstances change. And tell whoever will need to claim that the policy exists and where to find it.

That last one costs nothing and prevents a policy sitting unclaimed.