A beneficiary is the person or entity who receives the proceeds of a life insurance policy upon the death of the insured person. When you purchase a life insurance policy, you will be asked to name one or more beneficiaries. The beneficiary can be a person, such as a family member or friend, or an organization, such as a charity or non-profit. You can also name multiple beneficiaries and assign them different percentages of the policy proceeds.
The beneficiary designation is an important aspect of a life insurance policy, as it determines who will receive the death benefit in the event of the insured person’s death. It’s important to keep your beneficiary designation up to date and ensure that the correct person or entity is listed as your beneficiary. If you don’t name a beneficiary, the policy proceeds will typically be paid to your estate, which can delay the payment of the death benefit and increase the cost of probate.
Life Insurance Beneficiary Rules Canada
Here are some general rules regarding life insurance beneficiaries in Canada:
- Beneficiary designation: When you purchase a life insurance policy in Canada, you will be asked to name one or more beneficiaries. You can name a person, a trust, an estate, or a charity as your beneficiary.
- Revocable designation: In Canada, most life insurance policies have a revocable beneficiary designation, which means that you can change your beneficiary designation at any time.
- Irrevocable designation: An irrevocable beneficiary designation cannot be changed without the beneficiary’s consent. If you name an irrevocable beneficiary, you will need their permission to make any changes to the designation.
- Primary and contingent beneficiaries: You can name one or more primary beneficiaries, who will receive the death benefit in the event of your death. You can also name one or more contingent beneficiaries, who will receive the death benefit if the primary beneficiary predeceases you or is unable to receive the benefit for any other reason.
- Spousal rights: In some Canadian provinces, spouses have certain rights to a portion of the life insurance proceeds, even if they are not named as a beneficiary. For example, in Ontario, if you name someone other than your spouse as your beneficiary, your spouse may be entitled to a share of the death benefit if they can demonstrate that they have a financial dependency on you.
- Tax implications: Life insurance proceeds are generally not subject to income tax in Canada, but may be subject to estate tax. It’s important to consult with a tax professional to understand the tax implications of your life insurance policy.
- Updating beneficiaries: It’s important to review and update your beneficiary designation regularly to ensure that it reflects your current wishes. This is especially important if you experience a major life event, such as a marriage, divorce, birth of a child, or death of a beneficiary.
Naming a Minor as a Beneficiary in Canada
You can name a minor as a beneficiary in Canada, but there are some special considerations to keep in mind. Here are some things to consider when naming a minor as a beneficiary of a life insurance policy:
- Age of majority: In most Canadian provinces and territories, the age of majority is 18. If you name a minor as a beneficiary, the death benefit will be held in trust until the child reaches the age of majority. At that point, the funds will be transferred to the child.
- Trustee: You will need to name a trustee who will manage the funds on behalf of the minor until they reach the age of majority. This can be a parent or guardian, or you may choose to name a separate trustee who has experience managing financial assets.
- Contingency plan: It’s important to have a contingency plan in place in case the trustee you name is unable or unwilling to serve in that role. You may want to name a backup trustee or include language in your will that outlines what should happen if the original trustee is unable to serve.
- Guardianship: If the minor is orphaned or otherwise without a legal guardian, the trustee you name may be responsible for making decisions related to the care and custody of the child. It’s important to consider this when selecting a trustee.
- Tax implications: The income generated by the trust may be subject to income tax, so it’s important to consult with a tax professional to understand the tax implications of naming a minor as a beneficiary.
- Specificity: It’s important to be specific in your beneficiary designation about how the funds should be distributed. For example, you may want to specify that the funds should be used for the child’s education or other specific purposes.
- Legal advice: If you are considering naming a minor as a beneficiary, it’s important to consult with a lawyer who has experience in estate planning and trust administration to ensure that your wishes are properly documented and legally enforceable.
Do Life Insurance Companies Contact Beneficiaries?
In most cases, life insurance companies will not contact beneficiaries directly. It is typically the responsibility of the beneficiary to contact the life insurance company and initiate the claims process.
However, some life insurance companies may contact beneficiaries if they have reason to believe that the insured person has passed away and the beneficiary is not aware of the policy. In these cases, the insurance company may use public records or other methods to try to locate the beneficiary and notify them of the policy.
Additionally, some life insurance policies may include an option for the insurance company to provide ongoing support to beneficiaries, such as financial planning services or other resources. In these cases, the insurance company may reach out to the beneficiary to offer these services.
Overall, it’s important for beneficiaries to keep their contact information up to date with the life insurance company and to contact the company promptly after the insured person’s death to initiate the claims process.
What Happens if I Don’t Name a Beneficiary?
If you do not name a beneficiary on your life insurance policy, the proceeds of the policy will typically be paid to your estate. This means that the money will become part of your estate and will be distributed according to your will or, if you do not have a will, according to provincial laws of intestacy.
If the proceeds are paid to your estate, they will be subject to probate, which is the legal process of validating your will and distributing your assets. Probate can be a lengthy and expensive process, which may delay the payment of the death benefit to your heirs and reduce the amount of money that ultimately goes to them.
In addition, if you owe debts or have outstanding obligations, the proceeds of the life insurance policy may be used to pay these debts before they are distributed to your heirs.
Overall, it’s important to name a beneficiary on your life insurance policy to ensure that the death benefit is distributed according to your wishes and to avoid the time and expense of probate. If you are unsure of who to name as your beneficiary, it’s a good idea to consult with a lawyer or financial advisor who can help you make an informed decision.
Who Inherits if a Beneficiary Dies?
If a named beneficiary on a life insurance policy dies before the policyholder, the death benefit will typically be paid to the contingent beneficiary, if one was named.
A contingent beneficiary is the person or entity named as a backup to the primary beneficiary. If the primary beneficiary is unable to receive the death benefit, the contingent beneficiary will receive the proceeds of the policy.
If there is no contingent beneficiary named, the death benefit will be paid to the insured person’s estate and distributed according to their will or, if there is no will, according to provincial laws of intestacy.
It’s important to review and update your beneficiary designations regularly to ensure that they reflect your current wishes and to name contingent beneficiaries to ensure that the death benefit is distributed according to your wishes. If you are unsure of who to name as your beneficiaries, it’s a good idea to consult with a lawyer or financial advisor who can help you make an informed decision.