An Advance of the Death Benefit While Living

Can you receive part of the death benefit while you are still living?

Yes, in some cases: when the person insured has a terminal prognosis and the insurer agrees. Some Canadian life policies, and some insurers' own programs, allow part of the death benefit to be paid early in that situation. Insurers use different names for it: a living benefit, a compassionate advance, a terminal illness benefit or an advance payment of the death benefit. Whatever the name, the money is paid now, and it comes off what the beneficiary receives later.

If you are reading this for yourself or for someone you love, here is the short version first.

• It comes in two forms. Some policies carry it as a clause or a rider. Some insurers instead run a discretionary program outside the contract. They may approve it case by case, and they may change or withdraw it. Neither form is on every policy.
• It needs a terminal prognosis, not only a serious diagnosis. A physician estimates the time likely to remain. The insurer decides whether that estimate meets its definition.
• It can have a cost that grows. Where the advance is a loan, the insurer charges interest until the person insured dies, at a rate it sets. Some arrangements use a discount or another cost instead. Premiums may still be payable.
• Some things can reduce it or stop it. An existing policy loan, a recent change to the policy, or an irrevocable beneficiary who does not consent can shrink the amount or lead the insurer to decline.
• Tax and provincial benefits depend on how it is paid. Ask the insurer in writing, then an accountant and the program that pays you, before anyone signs.

Already have a policy? The insurer's life claims team decides, so start there. Call the number on the policy or on the latest annual statement. Ask whether an advance is available on this policy. If the policy says nothing about it, ask anyway.

What Canadian insurers call it, and what it is not

Names vary from one insurer to the next. "Living benefit", "compassionate advance", "terminal illness benefit" and "advance payment" are all used in Canada. You may also see "accelerated death benefit", which is mostly the American term. When you call, use any of these names. Then describe the situation plainly: the person insured has a terminal prognosis, and the owner wants to know whether part of the death benefit can be paid now.

It is not critical illness insurance. A critical illness policy is a separate contract. It pays a lump sum when a covered condition is diagnosed and that policy's conditions are met, which can be long before any terminal prognosis. It is not disability insurance either, which replaces part of lost income. Nor is it long term care insurance. Each of those is bought and underwritten on its own, with its own questions.

The advance discussed here touches only the death benefit of a life insurance policy that is already in force. It brings part of that benefit forward in time. It is not an investment, and it creates no new money. It moves part of a payment the family would receive at death to an earlier date, and that move has a cost.

A clause in your policy, or a program your insurer runs

The advance comes from the insurer, not from a statute. No statute we have found requires a Canadian insurer to offer one. It reaches the owner in one of two ways.

A contractual benefit. The policy, or a rider attached to it, says the owner may request part of the death benefit on a terminal prognosis. The clause sets the conditions, the maximum and the cost, and the insurer applies it as written. Some policies include it from the day they are issued. Others add it by rider, at issue or later. If yours was added by rider, ask whether the rider has its own cost.

A discretionary program. Some insurers offer an advance that is not written into the contract. The insurer may approve a request case by case, and it may change or withdraw the program. Where the program works as a loan, the insurer may ask the owner to sign a separate agreement that sets the amount, the interest and how the balance is recovered at death.

Neither form is on every policy. An older contract may have no clause at all. That does not settle the question, because a program outside the contract may still exist. If the policy says nothing, still ask the insurer. Put two questions in writing. Is this a contractual benefit or a discretionary program? Can you send me the current terms?

The difference matters later on this page. It can change the cost, the paperwork, whether a beneficiary must sign, and how the payment is treated for tax.

Who is involved, and who owes whom

Four parties can be involved. One person may hold two of these roles, such as owner and person insured, but not always, so check each one.

Who owes whom is simple once it is written down. Where the advance is a loan, the owner owes it to the insurer, just as the owner owes any existing policy loan to the insurer. The insurer recovers both from the death benefit before paying the beneficiary. The beneficiary owes nothing; the beneficiary simply receives less.

If the owner then lends part of the money to a relative, that is a second and separate loan, between the owner and that relative. It has its own terms, and it is wise to put them in writing. Nobody in this chain repays themselves.

What is the medical condition for access?

A terminal prognosis, confirmed by a physician and accepted by the insurer. A serious diagnosis alone is not the test.

A diagnosis names the illness. A prognosis estimates how much time is likely to remain. The insurer's clause or program states a period, and the physician's estimate must fall within it. Two people with the same diagnosis can receive different prognoses, depending on the stage of the illness and how it responds to treatment. So ask the insurer for its written definition of terminal illness, including the period it uses, before the physician fills in the form.

The insurer decides, usually after review by its own medical staff. The attending physician's statement is where the file starts, not where it ends. The insurer may ask for more records, for an assessment by a physician it names, or for both. Ask the claims team how long an assessment usually takes and which records would help. Time matters here, because the need for money is often urgent.

Reasons an insurer may decline, and what to ask first

Insurers set their own rules, and a program outside the contract can change. The questions below help you learn early whether a request is likely to succeed. Ask them before you gather medical paperwork.

• Was the policy issued, reinstated or changed recently?
• Is the policy still within the period during which the insurer can contest it?
• Is there a policy loan outstanding, and how large is it?
• Is any beneficiary designated irrevocably?
• Is it joint coverage on two lives?
• When did the illness first appear, compared with the date the policy was issued?
• Is the coverage individual, or through an employer or association?
• Who is the owner, and is the owner able to sign?

A "yes" to one of these does not always mean a refusal. It means you should ask how the insurer treats that situation. Ask for the answer in writing, so the family has it later.

How much can be advanced?

Usually part of the death benefit, up to a maximum the insurer sets. The clause or program generally states a share of the death benefit and a dollar cap, and the cap can limit the payment even when the percentage would allow more. We do not print figures here. Each insurer sets its own, and they change. Your insurer's written terms are the only numbers that count for your policy.

What it costs your beneficiary: the arithmetic

In broad terms, the beneficiary receives the death benefit minus the advance, minus the cost of the advance, minus any other policy loan. The family does not receive the full death benefit on top of the advance. The real choice is between money now and a larger sum later.

Where the cost is interest, it is not a one-time fee. Where the advance is a loan, interest accrues from the day it is paid until the person insured dies. The insurer sets the rate in its agreement. Ask whether that rate is fixed or can change. Because interest keeps running, the deduction grows every month the person insured lives. Living longer is what everyone hopes for. It is still worth knowing that each month adds to the deduction. Some arrangements use a discount or a flat cost instead, so ask which one applies.

The cost of the advance is separate from the premiums already paid. Ask also whether premiums stay payable after the advance. If they do, and they stop, the policy may lapse under its terms, which could end the rest of the coverage.

The formula, in letters. Call the death benefit D, the advance X, the interest accrued until death I, and any existing policy loan balance at death L. If the agreement deducts in that order and makes no other adjustment, the beneficiary receives D minus X minus I minus L. Your insurer may calculate differently, which is why the written calculation matters.

Illustrative example. These figures are ours, chosen only to show the arithmetic. They are not any insurer's terms or rates. Assumptions: a death benefit of $300,000; an advance of $60,000; interest on the advance at 6% a year, compounded yearly; an existing policy loan of $20,000 on the day of the advance, which also grows at 6% a year; no unpaid premiums and no other adjustment.

In this example, the family receives $67,416 less at 24 months than it would with no advance: the $60,000 advance plus $7,416 of interest. In exchange, the owner had $60,000 during the illness. Ask your insurer for the same calculation on your own policy, at two or three dates, and read it together with the beneficiary if you can.

If there is already a policy loan on the policy

An existing policy loan can reduce the amount available and the net death benefit. Under some insurers' rules, it can also be a reason to decline the request. The loan and the advance both draw on the same death benefit, so the insurer has to account for both.

Before you apply, ask the insurer these four questions:

• Is the maximum advance calculated before or after the loan balance is subtracted?
• Does interest on the existing loan continue during the illness, and is unpaid interest added to the balance?
• How are the loan and the advance deducted at death, and in what order?
• Can you send a written calculation under my policy and the advance agreement?

The debts stay separate, even though both are settled from the same death benefit. The owner owes the policy loan to the insurer. Where the advance is a loan, the owner owes that to the insurer as well. The beneficiary owes neither. The insurer deducts both before paying what remains.

If policy loans are part of how you use your policy, ask your insurer now, while everyone is well, how an outstanding loan would affect a terminal illness request. That answer is much easier to obtain, and to act on, before anyone is ill.

Is the advance taxable?

There is no single answer we can give you. Do not assume the advance is tax-free because it comes out of the death benefit. It is paid while the person insured is alive, and its tax treatment depends on how the insurer pays it.

The insurer may pay it as a contractual benefit, as a policy loan under the policy's terms, as a loan under a separate agreement, or through another arrangement. Those can be treated differently. The Income Tax Act's rules for life insurance policies are in section 148 of the Income Tax Act. Under those rules, an ordinary policy loan is a disposition of an interest in the policy, and the part above the adjusted cost basis is included in income in that year. Whether a particular terminal advance falls under that rule depends on how it is set up. We do not state a rule for it here, and nobody should state one without seeing the agreement.

Two figures about your policy help an accountant answer: the cash surrender value and the adjusted cost basis (ACB). The ACB is a tax figure the insurer calculates. It is not simply the total of premiums paid. A term policy with no cash value and a specially designed, high-cash-value, participating whole life insurance policy with a large cash value can lead to different answers, so bring both figures.

Before accepting, ask the insurer in writing:

1. How do you classify this payment: a benefit, a policy loan, or a loan under a separate agreement?
2. Will you issue a tax slip for it, and for which year?
3. What are the policy's cash surrender value and ACB today?

Then give the answers and the agreement to an accountant. Ask about the year of death as well as the year of the advance. Our pages on whether life insurance is taxable in Canada and on when a policy loan becomes taxable explain the general rules for the death benefit and for ordinary policy loans.

Five ways money can come out during a serious illness

People often mix these up, and each works differently. The terminal illness advance is only one of them. Where a cell says to confirm, the answer depends on the contract or the insurer's terms.

Provincial benefits: ask before you accept

If you, or the owner, receive a provincial benefit that depends on income or assets, ask its administrator before accepting the advance. Ask two questions. Must this payment be reported? How is it treated: as income, as an asset, or as exempt? The answer depends on the province, the program, how the payment is structured and your own circumstances. The insurer pays under the contract and cannot answer this for you.

Programs to ask about include the Ontario Disability Support Program, Quebec's Social Assistance Program and Social Solidarity Program, and British Columbia's disability assistance. Alberta, Manitoba and New Brunswick have their own income-tested programs. Ask the caseworker directly, and keep a note of the answer, the name of the person and the date.

Ask one more question while you have them: if the money is spent on care, or returned, does that change the result? Do not assume that giving the money back later reverses an effect on eligibility. Only the program can tell you.

Irrevocable beneficiaries: Quebec and the other provinces

A beneficiary named irrevocably holds a right the owner cannot take away alone. An advance that reduces what that beneficiary receives may need that beneficiary's written consent. Separately, the insurer's own program may require beneficiaries' signatures, or may decline a request whatever consent is given.

In Quebec. The Civil Code makes the designation of a married or civil union spouse as beneficiary irrevocable, unless the designation says otherwise, when it is made in the policy or in a writing other than a will. So not every spouse designation is irrevocable, but a spouse named in the policy is irrevocable by default, sometimes without the owner remembering it. An irrevocable designation binds the owner even if the beneficiary does not know about it. Our pages on the Civil Code and the life insurance contract and on the contingent beneficiary explain the rules in full. You can read the Code itself on LégisQuébec.

In the other provinces. A designation stays revocable unless the owner made it irrevocable. Where it is irrevocable, the provincial insurance statute limits what the owner can do with the policy without that beneficiary's consent.

If the beneficiary is a minor or cannot consent. Consent may be impossible to obtain in the ordinary way. There may be a legal route, through a tutor, a court or another process, depending on the province. It takes time, so ask early.

Who to ask, in order: the insurer first, for the designation it has on record and for its consent form. Then a notary in Quebec, or a lawyer elsewhere, if consent is disputed or cannot be given.

What goes wrong, and how to see it coming

Four problems come up. Each is easier to handle when you know about it before the need is urgent.

The family receives less, and the decision comes at a hard time. The advance and its cost come out of the death benefit. That decision is made during a terminal illness, when families have the least room to weigh options calmly. Talking it through early, with the beneficiary present, helps everyone.

A beneficiary's consent may be needed and not available. An irrevocable beneficiary may refuse, may be hard to reach, or may be unable to consent. The request can then stall until a legal route is found, if one exists.

A provincial benefit may be affected. A lump sum can trigger a review. Depending on the program, it may reduce support at the moment costs are rising. Asking the program first is the protection.

It arrives late in the illness. The costs of a serious illness often begin well before a terminal prognosis: travel to treatment, changes to the home, and lost income for the patient or a caregiver. This advance does not meet those early costs. Coverage already in force, such as critical illness or disability insurance, may. The advance is one piece of a family's wider estate planning, not the whole of it.

When requesting an advance makes sense, and when to pause

It can make sense when several things line up. The policy or the insurer's program allows it. The beneficiary designation is revocable, or the beneficiary agrees. No provincial benefit is at stake, or the program has confirmed the effect in writing. And the family has read the written calculation and accepts the smaller death benefit.

Pause when an irrevocable beneficiary objects or cannot consent, and take legal advice first. Pause also when you receive an income-tested or asset-tested provincial benefit and have not yet heard from the program. And pause if the insurer has not told you in writing how it classifies the payment for tax.

Look elsewhere if the need is for money at the start of an illness. The advance answers a late stage. Critical illness or disability coverage already in force, savings, or other family resources may answer the earlier needs.

Is this feature a reason to buy a policy?

Rarely on its own. Where it exists, it may be discretionary, capped, charged with interest, and changed or withdrawn by the insurer. It also reduces a death benefit your family may need later.

If you are choosing coverage, ask whether the policy has a contractual terminal illness benefit and read its terms. Then choose the policy for the protection your family needs. A policy's terms, including any such benefit, are set at underwriting, when the insurer issues the contract. Someone who already has a terminal diagnosis should contact the existing insurer, rather than assume a new application is possible.

Different needs call for different tools. This table sets them side by side.

Savings plans such as a TFSA or an RRSP are not insurance. Questions about them belong with someone licensed for those products.

Workplace coverage

If you have life insurance through an employer or an association, check the group plan too. Some group plans include an advance or a living benefit for a member who is terminally ill. The route is different from an individual policy. Start with the plan booklet. Then contact the plan administrator, often human resources, or the group insurer named in the booklet. The group insurer assesses the medical evidence and decides. Ask the same questions you would ask about an individual policy, and ask for the answers in writing.

What to do next with an existing policy

These steps follow the order most requests take. Each one names who acts.

1. The owner or the family finds the policy. Locate the contract, the latest annual statement and the insurer's contact details. Note whether the coverage is individual or through work.
2. The owner contacts the insurer's life claims team. The representative who placed the policy can help, and for workplace coverage the plan administrator is the first stop. Say that the person insured has a terminal prognosis, and ask whether an advance is available.
3. The owner asks the questions below, in writing. Keep every reply.
4. The attending physician completes the insurer's statement. Use the insurer's own form, and ask which records it needs.
5. The insurer assesses the file. It may ask for more records, or for an assessment by a physician it names.
6. Irrevocable beneficiaries sign, where required. The insurer will say whose consent it needs.
7. The owner checks tax and provincial benefits before signing. An accountant reviews the insurer's written answers, and the program's caseworker confirms the effect on benefits.
8. The owner signs and keeps copies. Keep the agreement and the net death benefit calculation where the beneficiary and the executor can find them later.

Ask the insurer to put these figures and answers in writing. Write each one down as you receive it.

Some questions belong to other people. This is who answers what.

If you are doing this for someone you love, take it one step at a time. The first call is to the insurer, and the rest follows from what it puts in writing.

Everything here is written by someone paid by commission from the insurer when a contract is issued. That is stated on the author page and at the foot of every page on this site.