Life insurance beneficiaries: what you need to know

September is life insurance month and an excellent opportunity to consider why you need life insurance and what you need to know about it. One of the essential things to consider when signing up for a life insurance policy is who you’re going to name as a beneficiary. Why is this essential? Let’s take a look.

What is a life insurance beneficiary?

When you sign up for a life insurance policy, you’ll need to name a beneficiary. The beneficiary is the person who will receive the lump sum payout upon your passing.  Assigning a beneficiary ensures your loved ones will receive financial support when you die. Families can use death benefits to cover everything from funeral costs to mortgages to compensation for a lifetime’s loss of income.

Who can you name as a life insurance beneficiary?

A beneficiary can be anyone from your spouse and children to another family member, a friend, or even a charitable organization.

If you name a minor as your beneficiary, you will also have to name a trustee. This individual will be responsible for managing the money until the youth reaches the age of majority. Your trustee must adhere to specific guidelines, like keeping a record of financial transactions, investing the money in a court-approved management plan, providing courts with the appropriate documents on schedule, and delivering the money to the youth when they reach the age of majority.

NOTE: in Ontario, if you name a youth as the beneficiary but fail to name a trustee, any payout from your life insurance policy will be held in trust by the province until the age of majority is reached.

Another alternative to naming a person as your beneficiary is to name your estate. If you choose to do this, the insurance payout will be subject to estate taxes, but the remaining sum will be distributed based on your will. If you have outstanding debts upon your passing - such as bank loans, mortgages or unpaid bills – the estate will be used to settle them.

DID YOU KNOW: If you don’t name a beneficiary, your estate becomes it by default.  If this happens, not only could your beneficiaries receive less than expected due to estate tax, but the payout could also be delayed due to the administration process. Naming a beneficiary ensures your loved ones will receive the payment you want them to, and that it will be tax-free.

Primary vs. contingent beneficiary

What happens if your named beneficiary passes away before or at the same time as you? It’s why you want a contingent beneficiary. 

When you name an individual in your policy, they become your primary beneficiary. The contingent beneficiary is a second named party who will be entitled to the death benefit if the primary beneficiary predeceases you.  If you do not name a contingent beneficiary, then the payout proceeds will go to your estate.

TIP: take the time to speak with your insurance advisor to review who your primary and contingent beneficiaries are.  If you’ve experienced a “life event” like a marriage or the birth of a child, it might be time to update your beneficiary. 

Choosing a life insurance beneficiary

When it comes time to name your beneficiary, you’re going to have to ask yourself some critical questions.  

1. (The most valuable) What do you intend the beneficiary to do with it? 
2. Do you want the payout to help your family out financially? If so, you might want to name your partner as the beneficiary.  
3. Do you want to help a cause that is important to you with the payout? Then you might want to name a charity in your policy.

TIP: Be sure to keep your beneficiary’s contact information up-to-date, review it annually when doing your taxes.  It simplifies the process of paying out the benefit.

What happens if you want to name more than one party as a beneficiary? 

What if you want to leave a significant portion to your partner and want your business to collect on a life insurance benefit?  The good news is that you can name more than one individual as a beneficiary to your policy.  Again, if you choose to do this, speak with your insurance provider to discuss how you would like your death benefit to be distributed. You are free to decide how to allocate the funds: for example, you could choose to have 50% of the payout go to your partner and the other 50% to your child.

TIP: when splitting the payout between life insurance beneficiaries, be specific.  Clearly name the individuals you would like the payout to go to and what percentage they are to receive. It helps prevent headaches and ensures the correct distribution of your benefit is quick and according to your wishes.

DID YOU KNOW: Something to keep in mind is that the beneficiary must have an “insurable interest” in your life. Simply put, this means that if you pass away, the named beneficiary may experience financial difficulties or mental distress. When thinking about your beneficiary, consider what the financial needs of your loved ones will be after you die. The life insurance benefit, in general, is to help the individuals you leave behind settle financial affairs and take care of things like funeral expenses. 

Also, the individual or individuals you name as beneficiaries can live in any country.  If you have family or friends living elsewhere in the world, you might want to designate them as the beneficiary.  If you do this, there may be country-specific tax implications of which you might be unaware. Be sure to speak with a lawyer or your insurance company for more information.

Irrevocable vs. revocable beneficiaries 

When naming a beneficiary, you have the option of making them revocable or irrevocable.  If the beneficiary is revocable, that means that you can change the named beneficiary at any time.  If the beneficiary is irrevocable, it means that you must have the written permission of the beneficiary to change it.

In Quebec, if you name your spouse as your beneficiary, the designation is automatically irrevocable.  If you prefer this to be revocable, you must make it so when you first designate the beneficiary.

TIP: if you want to change your life insurance beneficiary, or it’s at least a possibility, let your life insurance broker know. 

Contesting a life insurance beneficiary

There are instances where there are valid grounds to challenge a beneficiary despite your having named a beneficiary.  Two of the more common examples are when fraud is suspected or issues concerning child support.

If a beneficiary is contested, the life insurance provider will hand the dispute over to the courts. For this reason, the beneficiaries will need to ensure they have proper legal support in challenging the issue.  Even if the beneficiary is irrevocable, there are instances where the courts can override this – for instance, if there are competing claims on a policy.

Life insurance beneficiary vs. a will

Even though you may have a will, this doesn’t take the place of naming a beneficiary in your life insurance policy.  In fact, a life insurance beneficiary supersedes any beneficiaries you name in your will. 

• To avoid confusion, if you’re making changes to beneficiaries in your will, be sure to update your life insurance policy at the same time.

When signing up for a life insurance policy or updating your existing one, be sure to take the time to consider who you name as your beneficiary. Ask yourself who will need the benefit upon your death, and speak to your insurance provider to ensure that you take all the appropriate steps in designating a party.

The bottom line 

Life insurance beneficiaries is a decision not to be taken lightly, and there are many possible twists and turns. You must understand the rules. It’s your money, after all. 

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