What is a life insurance beneficiary? 2024 guide
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Life 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: 5 key takeaways
- Beneficiaries receive life insurance payouts, typically designated when purchasing the policy.
- Beneficiary types: Primary, Contingent, Revocable, and Irrevocable.
- Provincial regulations may differ, but beneficiaries can be individuals, minors, or entities.
- Appoint a trustee for minor beneficiaries to manage payouts; avoid provincial administration.
- In cases of disputes or concerns, beneficiaries can contest designations.
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".
If you are already aware of life insurance beneficiary rules in Canada and would like to explore policies, you can do it right here. Use our comparator below to compare the best plans and get over 20 free life insurance quotes in seconds.
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What is 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 Canada region?
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.
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.
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.
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.
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.
When should you change your life insurance beneficiary?
If you have a revocable beneficiary on your life insurance you can change them at any time. If you have an irrevocable beneficiary on your policy, you will need written permission from the beneficiary to take them out of the policy.
Typically you would change the beneficiary on your life insurance due to a change in life circumstances such as divorce.
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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?
Contesting life insurance beneficiary Canada is possible. Yes, if you believe there has been an error or fraud you can contest a choice of beneficiary. If you wish to contest you will need to seek legal advice and usually, the dispute will be resolved in the courts.
A common reason to contest a life insurance beneficiary is if you feel that child support obligations are not being honored. A less common reason could be that you suspect that someone has been taken advantage of.
Can a life insurance beneficiary be changed after death?
In Canada, a beneficiary cannot be changed after the policyholder's death. Once the policyholder passes away, the beneficiary designation becomes irrevocable, meaning it cannot be altered. Therefore, it's crucial to regularly review and update beneficiary designations to ensure they align with your current wishes and circumstances before the situation becomes irrevocable.
Pre-planning and clear communication with beneficiaries are essential to avoid potential complications after the policyholder's demise.
