Choosing your life insurance beneficiary is as essential as selecting the type of life insurance you want and how much life insurance you need.
Although it seems like one of those fields on the application form you could glaze over, specifying who receives the payout of your life insurance policy is a crucial decision to make.
Life insurance policies are designed to help you financially secure your family and loved ones if something happens to you.
When you purchase a life insurance policy, the insurance company would ask you to name who would receive the proceeds of the life insurance policy upon your death.
That’s why knowing how to choose a life insurance beneficiary is essential. This article discusses who a beneficiary is and offers you tips on how to choose a life insurance beneficiary in Canada.
What is a Life Insurance Beneficiary, and Why name one?
A life insurance beneficiary is a person, persons, or entity you choose to receive the proceeds (death benefit) from your life insurance policy if something happens to you.
Your insurance company such as Manulife, pays out your death benefit to your beneficiary regardless of your will, probate court, or family decision. You can have more than one beneficiary and rightly indicate how much of the death benefit each person receives.
Suppose you want to use your death benefit to keep your business afloat; you can name your company as the beneficiary of your life insurance policy.
You can name one primary beneficiary and one or more contingent beneficiaries.
The primary beneficiary receives the death benefit payout from your insurance policy when you die. However, the contingent beneficiary gets the policy’s death benefit if the primary beneficiary cannot receive it; maybe the person is dead or doesn’t want to get involved with the death benefit.
How To Choose a Life Insurance Beneficiary: 11 Things to Consider
Here are some valuable tips and life insurance beneficiary rules to help you choose a beneficiary and avoid common missteps.
1. Know the Options Available To You
When choosing who to name as your beneficiary, other options exist aside from your spouse and kids.
You can name a trust, a charity organization, or your estate as your beneficiary.
Suppose you have minor children and want the death benefit managed on their behalf. Maybe you want to ensure there are no disagreements in the event of a divorce, or you want to ensure the payout is used for childcare or college education. In that case, you can name a trust as your life insurance.
However, if you name an estate as your beneficiary, your dependents will receive less money than you intended because the payout is taxable.
2. Ask Yourself Who Needs the Benefit the Most
Naming a beneficiary before you die ensures that your death benefit goes precisely where you want it to go. Who receives the death benefit depends on why you are buying the insurance policy.
Suppose you are married and are purchasing life insurance to protect your family and provide a safety net if something happens to you. In that case, your spouse is the obvious choice for a life insurance beneficiary.
The death benefit can help your spouse and kids replace your income, take care of everyday living expenses, and cover any debts you might have left behind.
If you are a single parent, you must secure your child’s life financially. Consider who you would like to take charge of your kid and name them as a beneficiary. The guardian can use the death benefit payout to care for your child’s needs and save for their future. Also, you can set up a trust and name your child as the beneficiary.
If you have aging parents who depend financially on you, your death benefit can help them stay afloat if something happens to you. You can pick multiple beneficiaries to look after your parents and divide the death benefit among the beneficiaries.
If you are a single parent with no dependents, you can name a charitable group as the beneficiary of your policy. If you are passionate about saving your environment or educating underprivileged children in society, you can turn your death benefit into a charitable gift.
3. Have A Backup/Contingent Beneficiary
When you name a primary beneficiary who would receive your death benefit payout, you can also choose one or more contingent beneficiaries.
If your primary beneficiary cannot be located, is deceased, or refuses the payout, your contingent beneficiary becomes the recipient. This would help you keep your death benefit out of probate and ensure your payout is received by who you want.
Ensure you take the same caution in choosing your contingent beneficiary as you would your primary beneficiary.
4. You can Have Multiple Beneficiaries, Only Be Specific and Clear
Multiple people or a class of people can be designated as your beneficiaries instead of a single person.
However, It is better to specifically name your life insurance beneficiaries by their names and outline what percentage of your death benefit each should receive.
Being specific in your allocation will remove ambiguity and prevent disagreements and misunderstandings.
For example, If you write “all children” against your beneficiary, all your children, including your adopted children, will have access to your payout. In fact, your stepchildren may even contest to be considered as beneficiaries especially if you were very cordial while you were alive.
Therefore, you must be specific and clear about which child you want to receive the proceeds to discourage disagreements.
5. Distribute your Payout between Your Beneficiaries
When you designate multiple beneficiaries to your life insurance benefit, specify how much of the payout you want each to receive.
Assign life insurance beneficiary percentage of your death benefit to each beneficiary or list the exact figure you want them to receive.
You can choose to distribute your death benefit per capita or stripes. In the per capita distribution, a beneficiary only receives a payout if they outlive you. If they die before you, their share is distributed among other beneficiaries.
However, in the per stripes distribution, if any beneficiary dies before you, their share is distributed equally among their surviving descendants.
6. Keep Your Beneficiary Designations Up-To-Date
Ensure you periodically review your beneficiary designations. If there is a change in your family status or the death of a beneficiary, update your life insurance immediately.
This would ensure that your death benefit payout goes to where you want.
For example, you are expected to update your life insurance after you get married if you named your mum as your beneficiary when you were single. If you don’t, your payout still goes to your mother.
When you get married, divorced, have one or more children, assume responsibility for a loved one, or your loved one passes away, you should update your life insurance.
7. Ensure That Your will Matches Your Life Insurance Beneficiary Choices
It is advisable to make sure that your will and life insurance policy reflect the same beneficiary choice. Update your will as soon as you update your life insurance policy.
If there is any mismatch, your payout will be received by the beneficiary designations on your life insurance policy and not your will.
For example, if your will states your child as the beneficiary and your life insurance policy has your spouse’s name, your spouse will receive your life insurance death benefit.
8. Don’t Name a Person Dependent on Government Assistance as a Direct Beneficiary.
If your beneficiary is disabled or aged, or otherwise depends on the Government for financial and income assistance like ODSP, your death benefit may increase their income, which may disqualify them from receiving benefits.
This is always unsettling and disruptive, as their monetary benefits may be suspended or reduced. Therefore, you need to ensure that you take your beneficiary into account and consider federal regulations.
If your beneficiary needs to access other benefits after you die, ensure that your death benefit payout does not affect their ability to receive the other benefits.
Instead of making your special needs child, or your dependent your direct beneficiaries, it may be better if you create a trust for them, and assign a trustee who will use the funds to pay for expenses that the government does not cover.
This may be more efficient, and it may not disqualify them from receiving assistance from the government.
9. Never Name Minors as Beneficiaries
When choosing your life insurance beneficiary, never name a minor as your beneficiary. The law of Canada prevents insurance companies from writing cheques in the name of a minor.
So consider your beneficiary’s age before you choose them. Suppose you pass away and your beneficiary is still below the age of majority in Canada or your province. In that case, the court will assign a guardian to manage your life insurance policy’s death benefit until your beneficiary reaches the age of majority.
However, you can set up a trust and name it as your life insurance beneficiary. The trust manager will help manage your policy’s proceeds until your beneficiary can legally claim it.
10. Seek Counsel Before You Name an Irrevocable Beneficiary
An irrevocable beneficiary will receive the death benefit of your life insurance policy if you die. However, if you want to remove their name as a beneficiary of your policy, you and the irrevocable beneficiary must sign the agreement to effect the change.
You cannot remove their name as a beneficiary without their consent, hence the irrevocable. If they refuse to sign the necessary documents, their name remains as a beneficiary on your policy.
I believe not all beneficiary designations should be permanent; even the seemingly soundest marriage or partnership is susceptible to dissolution, and an irrevocable beneficiary designation may be regretted following a separation or divorce.
Therefore, before deciding on an irrevocable beneficiary, seek the counsel of a professional insurance advisor to avoid unnecessary complications in the payout of your life insurance policy.
11. Be Aware of Provincial Laws
Some provinces have different rules regarding who you can name as your beneficiary. In some provinces, your spouse can legally claim part of your death benefit regardless of who you name as your beneficiary.
Who Should Be Your Life Insurance Beneficiary: Spouse Or Child?
Choosing a life insurance beneficiary depends on the purpose of the life insurance policy. Most people buy a life insurance policy at certain milestones and major events in their lives.
Suppose you buy a life insurance policy to financially protect your spouse and kids and ensure that they have the means to live comfortably in your absence. In that case, your spouse or common-law partner is the primary beneficiary you should name on your life insurance policies.
This is important because raising your kids, household expenses, child-care expenses, mortgage, and education costs transfers to your spouse or common-law partner when you die.
Choosing your spouse as your life insurance beneficiary will leave them enough funds to raise the children, maintain the mortgage and take care of everyday living expenses.
However, you can choose your adult child as your life insurance beneficiary if you are not in a domestic partnership with the child’s other parent.
To ensure your adult child is cared for, you can name them as your policy’s beneficiary to ensure the proceeds of your life insurance policy go to them.
If your child is a minor, you can set up a trust for them and make them beneficiaries of the trust.
Another option is to name your children as your contingent beneficiary and your partner as your primary beneficiary.
Who Should You Never Name As Beneficiary?
You need to consider some scenarios before you name a life insurance beneficiary. Some of these can result in unnecessary complications for those you leave behind. They could lead to long probate court processes and tax implications.
To avoid these kinds of situations, it’s best to know the people you should never name as beneficiaries on your life insurance policy.
1. Never name a minor as your beneficiary. According to Canadian laws, minor children cannot receive insurance proceeds directly.
Therefore, if you have designated your minor child as a revocable beneficiary, and you have elected a trustee, the proceeds will be paid to the trustee who will hold the proceeds of your policy till the minor reaches the age of majority.
If there’s no trustee, the court will appoint a guardian to manage the benefits until your child becomes an adult.
However, if a minor has been designated as an irrevocable beneficiary, the policy will not be released to the care of a guardian.
Instead, it will be automatically frozen until the beneficiary reaches the age of majority. This is designation is so powerful, and even a parent or legal guardian cannot consent to a beneficiary change on behalf of the minor.
The most effective, and smartest way to transfer your policy proceeds to your minor children is to set up a trust and name it as an irrevocable beneficiary. Your assigned trustees will help manage your policy’s proceeds and disburse them to your minor children, who are the trust’s beneficiaries.
2. Never name a person with a disability. If the person is already receiving or intends to apply for government benefits in Canada, receiving an inheritance may disqualify them from receiving government benefits.
3. Never name your estate. If you name your estate as your life insurance beneficiary, you will have to pay probate fees on the death benefit payout.
Can Life Insurance Beneficiary be Changed After Death?
Generally, it is impossible to change a life insurance beneficiary after you pass away. The designated beneficiary can only be changed by the policyholder.
Immediately after the policyholder dies, the death benefit goes to the policy’s beneficiary at the time of death.
However, life insurance beneficiaries can be contested. The beneficiary can be contested if there seems to be a dispute at the time of death.
Final Thoughts
Life insurance isn’t fun to contemplate, but being specific about your wishes can spare your family and loved ones the stress from legal entanglements and provide them with a secure financial future.
Knowing how to choose a life insurance beneficiary is essential because if you fail to select your beneficiary or make mistakes in documenting them, other persons you don’t want can end up receiving your payouts.
If you are worried or concerned about how to choose a life insurance beneficiary in Canada, a professional insurance advisor can help you ensure your intentions are clearly spelled out.
Hi, I'm Adeola Adegoke. I am a licensed Insurance Broker in Manitoba, and I hold a master’s degree in Mathematical Sciences (with a major in Financial Modeling) from the African Institute for Mathematical Sciences (AIMS), Tanzania.
Also, I have a second master's degree in Statistics from the University of Regina, and I am currently pursuing my Ph.D. in Statistics at the University of Manitoba.
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