Life Insurance Payout Investment Guide: Ontario 2026

Question: Is life insurance payout taxable in Canada?

Answer: No - life insurance death benefits paid to named beneficiaries are completely tax-free in Canada. Whether you receive $50,000 or $5,000,000, you keep the entire amount. However, there are exceptions: if the policy was transferred for value, if proceeds go to the estate (may face estate taxes on other assets), or if there's a taxable policy gain on certain whole life policies. Once you invest the proceeds, all FUTURE income (interest, dividends, capital gains) IS taxable. This makes tax-efficient investing crucial from day one.

Question: How long does it take to receive a life insurance payout?

Answer: Most Canadian life insurance companies pay claims within 30-60 days after receiving all required documentation. Typical requirements: certified death certificate, completed claim form, policy document (if available), and beneficiary identification. Delays can occur if: the death occurred within the 2-year contestability period, cause of death is being investigated, multiple beneficiaries dispute claims, or there are questions about policy validity. During the waiting period, don't make financial commitments based on expected proceeds.

Question: Should I pay off my mortgage with life insurance money?

Answer: It depends on your situation: YES, consider paying off the mortgage if: you were dependent on the deceased's income to make payments, it provides peace of mind during grief, mortgage rate is high (5%+), or you want guaranteed housing security. NO, consider keeping the mortgage if: interest rate is low (under 4%), you have other income sources, investment returns likely exceed mortgage rate, or you need liquidity for other needs. A common middle-ground: pay down mortgage to a comfortable level while investing the remainder.

Question: How do I invest life insurance money for income?

Answer: For beneficiaries who need the payout to replace deceased's income: 1) Calculate your income shortfall (what you need minus other income sources), 2) Apply the 4% rule - you need 25x your annual shortfall invested ($40K/year need = $1M invested), 3) Build a balanced portfolio (50-60% equities, 40-50% fixed income), 4) Focus on dividend-paying investments for regular income, 5) Max TFSA first for tax-free income. Example: $500K payout in a balanced portfolio could generate ~$20,000/year in sustainable income.

Question: Should I hire a financial advisor for life insurance proceeds?

Answer: For amounts over $100,000, professional guidance is highly recommended. Grief impairs decision-making, and mistakes with a large lump sum can be costly. A Certified Financial Planner can help: create a sustainable income replacement strategy, optimize tax efficiency of investments, protect the capital from poor decisions, and coordinate with other financial considerations (estate settlement, survivor benefits). Look for fee-only or fee-based advisors with fiduciary duty. Avoid advisors who pressure you to buy products from the proceeds.

Question: What if I'm the executor and also a beneficiary?

Answer: This is common - spouse or child often serves as both. Important distinctions: 1) Life insurance with named beneficiary bypasses the estate - you receive it directly as beneficiary, not through the estate, 2) This money is yours immediately, not subject to probate or estate debts, 3) As executor, you have separate duties to manage estate assets for ALL beneficiaries, 4) Keep life insurance proceeds separate from estate funds to avoid confusion, 5) If you're also an estate beneficiary, that inheritance comes later through the estate settlement process. These are two different pools of money.