FAQ – Life Insurance Beneficiaries

Some people know exactly who they would name their life insurance beneficiary while others may find this decision challenging.

When designating a beneficiary for your life insurance policy, you can choose anyone you’d like. It can be a person such as a family member or friend. Alternatively, you can choose a religious institution or charitable organization. The key is that the beneficiary chosen must have an insurable interest in the life of the insured. Insurable interest means they would experience financial challenges and hardship if you were to pass away.

It’s important to know that you can choose one or more beneficiaries for your life insurance policy. You can decide the percentage split of the death benefit for each beneficiary.

It is important to let your beneficiary know that you have designated them as the beneficiary to your policy, so if you pass away, they know to contact your financial advisor to file a death claim.

Below are some considerations for naming beneficiaries for your life insurance policy:

Country – A common misconception is that your beneficiary needs to live in the same country as you. However, this is not the case, your beneficiary can live in another country when the life insurance claim is filed. This means if you have a loved one living in a different country you can assign them as a beneficiary, but ensure you keep their contact information up to date to make the claim go as smoothly as possible.

Keep in mind that while life insurance proceeds are tax free in Canada, this may not be the case in the place they live. As a result, there could be tax implications upon receiving the death benefit.

Underage children – If you choose to designate an underage child as the beneficiary of your life insurance policy, then a trustee must be named. The trustee manages the funds of the trust until the children are the age of majority (18 years of age in Ontario). However, if a child is designated as a beneficiary in Quebec, then the death benefit is paid directly to the parent(s) or legal guardian.

If you don’t name a trustee, but underage children are designated as beneficiaries of your life insurance policy, then the funds are paid to the public trustee and the children can access them when they reach age of majority.

Below we outline the two types of beneficiaries that can be named within your life insurance policy. The type of beneficiary you choose can have an impact on whether beneficiaries can be updated later.

1) Irrevocable beneficiary
An irrevocable beneficiary requires the beneficiary of the policy to sign off on any changes made. This means if at any point the policy owner wants to change the beneficiary of the policy, they must both sign off on this change.

Often irrevocable beneficiaries are used as part of marriage separation agreement or divorce settlements. For instance, an ex-spouse may be made an irrevocable beneficiary to ensure that if their ex-partner remarries, they are not later removed from the policy.

2) Revocable beneficiary
The policy owner can change the beneficiary at any time. In all provinces (other than Quebec), a beneficiary is automatically revocable, unless declared otherwise.

In Quebec, a legally married spouse is automatically considered an irrevocable beneficiary unless indicated as revocable. In all provinces except Quebec, the policy owner decides who the beneficiary of their policy should be. In Quebec, however, the person whose life is insured by the policy is the one who chooses the beneficiary (this is only applicable where the life insured is not the owner of their policy).

If you don’t designate a beneficiary for your life insurance policy, then your estate automatically becomes your beneficiary.

Although, be wary that if your death benefit flows through your estate it will be subject to estate admin tax. The funds are then allocated to your beneficiaries through the estate via the will.  As a result, your loved ones may receive less money than if you had clearly defined beneficiaries for your life insurance policy. This lengthy distribution process can also delay when your loved ones will receive the death benefit. In contrast, if you name your beneficiaries in your policy then it bypasses this process and is paid out tax-free.

Life insurance beneficiaries supersede the beneficiaries outlined in a will. Therefore, as life circumstances change, it’s your responsibility to keep your policy beneficiaries up to date. Make sure to update the beneficiaries in your life insurance policy as well and avoid exclusively updating beneficiaries in your will.

If your beneficiary dies before or at the same time as you, then the death benefit either goes to a contingent beneficiary or is paid to the estate. If the beneficiary dies first, then it is paid to the estate of the policy owner. If the beneficiary dies after, then the death benefit is paid to the estate of the beneficiary.

The best way to ensure that someone you choose gets your policy’s death benefit is by adding contingent beneficiaries. These are back-up beneficiaries who become eligible for the death benefit if the primary beneficiaries pass away. Think of your contingent beneficiaries as your life insurance safety net!

Speaking with an insurance advisor can help map out a route for your life insurance policy death benefit in the event that your beneficiary is no longer alive to receive the funds. This additional planning ensures that the financial protection from your life insurance policy will always land in the hands of someone you choose.