What is a beneficiary?
When you purchase a life insurance policy you can name a beneficiary. A beneficiary is a person or persons who will receive the death benefit from your life insurance policy when you die. If you die without naming anyone, the money will go to your estate (the sum of all your property, possessions, financial assets and debts) by default. When you name a beneficiary, the money does not go to your estate, but goes directly to the beneficiary.
Who can be a beneficiary?
You can name your spouse, children, dependants, another family member, a friend or a charity as a beneficiary. If you name more than one beneficiary, the insurance company will divide the death benefit between them. You can assign percentages of the death benefit to each beneficiary, e.g. 50 per cent to your spouse, 50 per cent to your children.
Can I name my under-age children as beneficiaries?
In Ontario, children under 18 cannot receive control over any money left to them in an insurance policy. If you want the children to receive the money, you should name a trustee or administrator and set up a trust for the children. When you die, the trustee or administrator will hold the death benefit in trust for the children until they are 18 years old, at which point the money will be paid out to the child.
It is important to choose a responsible trustee who you can trust. The trustee is responsible for:
- keeping careful records of all dealings with the money;
- investing the money as required by a court-approved management plan;
- passing the accounts before the courts on a fixed schedule; and
- transferring all of the money to the children at age 18.
TIP:
Consult with a lawyer or financial advisor for more information on naming your children as beneficiaries.
If you die without naming a trustee or administrator, the death benefit, and any earned interest, will be held in trust by the province of Ontario, and will be paid out when the children reach legal age.
Can I name my estate as beneficiary?
If you name your estate as beneficiary, the death benefit will become a part of your estate. The funds will be used according to the terms of your will. If you choose this option, keep in mind that the death benefit will be subject to estate administration tax. The estate administration tax is charged on the total value of your estate, including all property, possessions and financial assets. Creditors may claim the death benefit to pay for any outstanding debts. This could result in your family receiving less money than they would if you named them as beneficiaries.
How do I name a beneficiary?
If you wish to, you can name your beneficiaries when you purchase your policy. You should discuss your plans with your beneficiary. You should decide if the beneficiary is revocable, or irrevocable.
- Revocable beneficiary: you can change the beneficiary at any time without telling them.
- Irrevocable beneficiary: you must have written permission from the irrevocable beneficiary before you can make any changes.
How do I update or change my named beneficiaries?
There are different requirements for revocable and irrevocable beneficiaries. Contact your insurance agent or company for more information.
What if my beneficiary dies before or at the same time I do?
You can name an alternate or contingent beneficiary. This person will receive the death benefit if your named beneficiary dies before you or at the same time you do. If you have not named an alternate or contingent beneficiary, your death benefit will be paid to your estate.
A beneficiary is the person or entity you name in a life insurance policy to receive the death benefit. You can name:
- One person
- Two or more people
- The trustee of a trust you’ve set up
- A charity
- Your estate
If you don’t name a beneficiary, the death benefit will be paid to your estate.
Two “levels” of beneficiaries
Your life insurance policy should have both “primary” and “contingent” beneficiaries. The primary beneficiary gets the death benefits if he or she can be found after your death. Contingent beneficiaries get the death benefits if the primary beneficiary can’t be found. If no primary or contingent beneficiaries can be found, the death benefit will be paid to your estate.
As part of naming beneficiaries, you should identify them as clearly as possible and include their social security numbers. This will make it easier for the life insurance company to find them, and it will make it less likely that disputes will arise regarding the death benefits. For example, if you write "wife [or husband] of the insured" without using a specific name, an ex-spouse could claim the death benefit. On the other hand, if you have named specific children, any later-born or adopted children will not receive the death benefit—unless you change the beneficiary designation to include them.
Besides naming beneficiaries, you should specify how the benefits are to be handled if one or more beneficiaries can’t be found. For example, suppose you have two children and you name each one to receive half of the death benefit. If one of the children dies before you do, do you want the other child to get the entire death benefit, or the deceased child’s heirs to get his or her share?
If the death benefit goes to your estate, probate proceedings could delay distributing the money, and the cost of probate could diminish the amount available to your heirs.
Choosing beneficiaries, and keeping those choices up-to-date, is an important part of owning life insurance. The birth or adoption of a child, marriage or divorce can affect your initial choice. Review your beneficiary designation as new situations arise in order to make sure your choice is still appropriate.