What is a life insurance beneficiary? 2024 guide
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Discover the methodologyLife insurance plays a crucial role in providing for loved ones after your passing, with approximately 60% of Canadians securing such coverage. A cornerstone of this process is selecting and designating your life insurance beneficiary.
In this guide, we will explore the essential aspects and address common queries related to life insurance beneficiary rules in Canada.
Once you know how the life insurance beneficiary framework functions, but you still don't have a policy, we've got you covered. Use our free comparator to compare the best life insurance plans in Canada and get free quotes so you can buy a policy that truly suits you.
Life Insurance Beneficiary: 6 Key Points
- You can name anyone—family, friends, or even a charity—as your beneficiary.
- If your beneficiary is a minor, a trustee will manage the funds until they’re an adult.
- Don’t worry; death benefits are usually tax-free in Canada.
- Make sure to update your beneficiaries after any major life changes.
- If you don’t name a beneficiary, the payout will go to your estate.
- You can contest a life insurance beneficiary with proof of fraud, undue influence, or lack of mental capacity.
What is a life insurance beneficiary?
A beneficiary receives any money paid out by an insurance claim. For most types of insurance, like health insurance, the person who buys the policy will be the beneficiary. However, with life insurance policies, the beneficiary will usually be the person you have chosen when purchasing the policy.
Typically, people choose their dependents as beneficiaries. A partner or children are common choices however you can choose to make people outside of your family or even institutions beneficiaries too. There are different types of beneficiaries and various rules governing how and when you can change your beneficiaries for your life insurance policies.
Good to know
The payout from a life insurance claim is sometimes called the "death benefit".
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Life insurance beneficiary vs will
The primary distinction between a life insurance beneficiary and a will lies in their scope and distribution. A life insurance beneficiary designation allows the policyholder to directly specify who will receive the death benefit upon their passing, avoiding the probate process and ensuring a swift, private payout.
In contrast, a will encompasses all of one's assets, debts, and personal belongings, and it dictates their distribution after the individual's death. Wills are subject to probate, which can introduce delays and expose the document to public scrutiny, whereas life insurance beneficiaries offer a more targeted and expedited method for passing on the policy's benefits.
Is there a beneficiary for all types of life insurance policies?
In all types of life insurance policies, such as term life insurance, whole life, and universal life, a beneficiary is designated to receive the policy's death benefit when the insured person passes away. In term life insurance, the beneficiary receives the death benefit if the insured passes away during the policy's specified term.
Whole life insurance policies, designed to last a lifetime, ensure that the beneficiary receives the death benefit and any accumulated cash value. Universal life insurance combines a death benefit with investment options, and the beneficiary plays a pivotal role in determining who receives the policy proceeds.
In all cases, the beneficiary can be an individual, family member, trust, or organization, making beneficiary designation a fundamental aspect of life insurance to provide financial security to the intended recipient.
Good to know
If you're new to life insurance, read our guide on life insurance benefits to get a more thorough understanding of all its advantages.
What are the different life insurance beneficiary types?
When you buy a life insurance policy you choose your beneficiary. There are some subsidiary choices that you can make too. Let's take a look.
Primary vs contingent beneficiary
Your primary beneficiary is the person you name that you wish to receive the death benefit. However, you may wish to name a contingent beneficiary in case your primary beneficiary dies. Let's take an example.
Miles, 75 from Ontario, buys a life insurance policy and names his wife Iris as his primary beneficiary. This means that when Miles dies, Iris will receive the payout. However, he also names his niece, Ivy as his contingent beneficiary.
This means that if Iris dies before or at the same time as Miles when Miles dies the payout will go to Ivy. Naming a contingent beneficiary means that you are prepared for the unexpected and are still able to direct where you would like the payout to go.
Revocable vs irrevocable beneficiary
When buying a life insurance policy and naming your beneficiary you can choose whether to make them a revocable beneficiary or an irrevocable beneficiary. If you make them a revocable beneficiary you can replace them with someone else whenever you like. In case they are an irrevocable beneficiary you must obtain written permission from them to remove their name from the policy.
Good to know
If you name your husband or wife your beneficiary in Quebec it is automatically irrevocable. You can specifically request that they be revocable beneficiaries.
What are the life insurance beneficiary rules in Canada?
You can choose one or multiple beneficiaries when purchasing a life insurance policy. If you name multiple beneficiaries you will need to decide how the death benefit breakdown between the different beneficiaries. You will specify the percentages and these will be written into the policy.
For example, Teri, 67 from BC, wants to make sure to support her children. She specifies 50% to her daughter Pam and 50% to her son Mick.
You should make sure your beneficiary is aware of the policy and the amounts involved to make it easy for them to claim it. You should also make sure to keep your policy up to date, checking regularly that all contact details and addresses are still accurate. Your beneficiaries do not have to live in Canada.
One important thing to remember is that a policy may require that your beneficiary has an "insurable interest" in you. This means your death will emotionally and financially affect them.
For example
Life Insurance Beneficiary Rules Ontario: In Ontario, suppose you name your spouse as the primary beneficiary of your life insurance policy. Your two children are designated as contingent beneficiaries. If your spouse is alive at the time of your death, they receive the proceeds. If your spouse has also passed away, the insurance payout goes to your children. Keep in mind that Ontario's spousal rights and divorce do not automatically affect beneficiary designations, underscoring the importance of regular updates.
Who can you name as a life insurance beneficiary in Canada?
You can name an individual, whether or not they live in Canada. You can name a minor as a beneficiary but it is advisable to name a trustee in case they are not yet of age when you die.
Some policies will require that your beneficiary has an "insurable interest" in you. This means that they will experience emotional distress or financial hardship due to your death.
What if your beneficiary is not an adult?
If you name a beneficiary who is not yet legally an adult you should also name a trustee who will administer the payout until they come of age. if you do not name a trustee then your province will administer the payout until your beneficiary comes of age.
Can you name your estate as your beneficiary?
Yes, you can name your estate as your beneficiary. This means that your death benefit will be rolled into your estate and distributed into the terms of your well. It is worth remembering that if the death benefit becomes part of your estate it will be subject to taxes. It also means that the money can be accessed by creditors looking for payment on debts.
Can you name multiple beneficiaries?
Yes, you can name multiple beneficiaries on your life insurance. If you name multiple beneficiaries you will need to specify how you would like the death benefit will be divided between them. For example, you could divide the payout 50:50 or 10:20:70 or however, you would like it to be split up.
If you have multiple beneficiaries you'd like to add, you may have to fill up a special form. Here is a sample of the TD life insurance beneficiary form.
Can you name an organization as your beneficiary?
You can name an organization or institution as your beneficiary and the payout will be received as a tax-free gift.
What happens if your beneficiary passes away before or at the same time you do?
If your beneficiary passes away before or at the same time as you, the life insurance death benefit typically goes to a contingent beneficiary if you’ve named one. As mentioned earlier, a contingent beneficiary is the backup recipient listed on your policy.
If no contingent beneficiary is named, the death benefit is paid to your estate. This can lead to delays due to probate and may reduce the amount available to your loved ones due to taxes and creditors’ claims. To avoid this, it’s a good idea to regularly update your beneficiaries to reflect any life changes.
When should you change your life insurance beneficiary?
You should update your life insurance beneficiary whenever there’s a significant life event that affects your relationships or financial priorities. Common scenarios include:
- Marriage or divorce: Add your spouse or remove an ex-partner if applicable.
- Birth or adoption: Include new children as beneficiaries.
- Death of a beneficiary: Replace a deceased beneficiary to avoid the payout going to your estate.
- Change in financial responsibilities: Update based on new obligations, like supporting aging parents.
- Estate planning adjustments: Reflect changes in your will or trust.
Regularly reviewing and updating your beneficiaries ensures your policy aligns with your current wishes and avoids complications later.
How to change your life insurance beneficiary?
- Contact Your Insurance Provider: Reach out to your life insurance company to request a beneficiary change form. Many insurers also provide online options.
- Fill Out the Form: Complete the form with the new beneficiary’s full name, relationship to you, and contact details. Ensure the information is accurate to avoid processing delays.
- Submit Supporting Documents (if required): Some changes, like naming a minor or a trust, may require additional paperwork.
- Submit the Form: Return the completed form to your insurer by mail, email, or through their online portal as instructed.
- Confirm the Update: Ask for written confirmation to ensure the change has been processed successfully.
Here is a sample RBC life insurance beneficiary change form for your perusal.
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How long does a life insurance beneficiary have to claim a policy benefit?
The sooner a beneficiary makes a claim, the better.
With that said, as long as the policy was active and in good standing when the policyholder died, it should not have an expiration date. You could make a claim years after a policyholder died, but the documentation and process could be longer and more complicated.
How is a beneficiary paid?
To make sure life insurance pays out easily make sure that beneficiaries are aware of the policy and that all information (especially contact information) is up to date.
The beneficiary will need to get hold of a copy of the death certificate. Then they will need to decide how they wish to receive the death benefit, either in a lump sum or in installments. They can then submit their claim to the insurance provider. It may take a few weeks before the insurance provider starts to pay out the death benefit.
Is life insurance taxable income to the beneficiary in Canada?
If your life insurance is paid to your estate and incorporated into your will then, yes, it becomes taxable and will be taxed when the estate is settled.
If you name a beneficiary then the payout will not be taxed. However, the interest that is earned on the payout is taxable. You can read our full guide on "Is life insurance taxable" to get a comprehensive view.
What happens if you don’t name a beneficiary in your insurance?
If you do not name a beneficiary in your life insurance policy, the insurance company will default to the estate as the recipient of the death benefit. This means that the payout becomes part of the assets to be distributed as per your will.
The probate process may delay the funds' distribution, and they could be subject to estate taxes. Naming a beneficiary ensures a smoother and more direct payout to the designated recipient while avoiding potential legal complexities associated with estate distribution.
Can you contest a life insurance beneficiary?
Yes, a life insurance beneficiary can be contested, but only under specific circumstances. Common reasons for contesting a life insurance beneficiary include:
- Fraud or undue influence: If someone pressured the policyholder to change the beneficiary against their will.
- Mental incapacity: If the policyholder was not of sound mind when making the change.
- Errors or ambiguities: If the designation is unclear or conflicting.
Expert advice
To contest a beneficiary, you typically need to file a legal claim and provide evidence to support your case. This process can be complex and may delay the payout, so consulting a lawyer with experience in insurance disputes is highly recommended.
A strong letter to support your claim is recommended. Here is a sample letter contesting life insurance beneficiary. You can download it for free and edit it.
How to file a life insurance claim as a beneficiary?
Filing a life insurance claim is straightforward:
- Contact the insurance company: Notify the insurer of the policyholder’s death. Have the policy number or other identifying details ready.
- Complete the life insurance beneficiary claim form: The insurer will provide a form to fill out, detailing your information and relationship to the policyholder.
- Submit necessary documents: Provide a certified copy of the death certificate and any other requested paperwork, such as proof of identity.
Once submitted, the insurer will review your claim. If everything is in order, the payout is usually processed within 30–60 days.
Are you a life insurance beneficiary?
When filling out the beneficiary claim form, ensure all information is accurate and matches the policy details, including your name and relationship to the policyholder. Attach all required documents, such as a certified death certificate, and follow the insurer’s instructions carefully. Double-check for errors to avoid delays, and contact the insurer if you’re unsure about any section.
FAQs on Life Insurance Beneficiary Rules
A life insurance beneficiary is the person, people, or entity (like a trust or charity) chosen to receive the death benefit when the life insured passes away. This person is named in the policy and can be a family member, friend, or organization.
No, a life insurance beneficiary cannot be changed after the policyholder has passed away. Once the policyholder dies, the insurance company pays out the death benefit to the named beneficiaries on the policy. Update your beneficiary designations during your lifetime if circumstances change, such as marriage, divorce, or the birth of a child. If no beneficiary is named or they have predeceased you, the payout typically goes to your estate, which can lead to delays and legal complexities.
No, life insurance death benefits are generally not considered taxable income in Canada. However, if the benefit earns interest while being held by the insurer, the interest portion may be taxable.
To collect life insurance, beneficiaries must notify the insurance company of the policyholder’s death and submit a claim form provided by the insurer. They will also need to provide a certified copy of the death certificate. Once these documents are submitted, the insurer will review the claim and process the payment if all requirements are met.
To change a beneficiary, contact your insurance company. They will provide a beneficiary designation form, which you’ll need to fill out and submit. The change becomes effective once the insurer processes and approves the updated designation. Always review your beneficiaries regularly to ensure they align with your wishes.
Anyone can be a beneficiary, including family, friends, organizations, or charities. In Canada, you can also name a minor, but the payout will be held in trust until they reach the age of majority. It’s important to clearly specify your beneficiaries to avoid confusion or disputes.
In Canada, beneficiaries must be clearly named in the policy to receive the death benefit. If no beneficiary is named, the payout goes to the estate and becomes subject to probate fees. Minors can be beneficiaries, but the funds will typically be managed by a trustee until they reach the age of majority.
If no beneficiary is named, the death benefit is paid to the policyholder’s estate. This can delay payment and may subject the benefit to probate fees and creditors' claims, reducing the amount available to loved ones.
The payout process typically takes 30 to 60 days once all required documents (like the death certificate and claim form) are submitted. Delays can occur if the insurer needs to investigate the claim or confirm beneficiary details.
The life insured is the person whose life is covered by the insurance policy. If this person passes away, the policy pays out.
The beneficiary is the person or entity chosen to receive the death benefit when the life insured dies. In simple terms, the life insured is the one covered, and the beneficiary is the one who receives the money.
