People take out life insurance for different reasons. One of the main reasons is so their loved ones will not be financially burdened upon the death of the insured. The insured wants to be sure that the proceeds from the insurance coverage will specifically go to those who the insured has named as the beneficiaries.
What is a Beneficiary for Benefits?
A beneficiary of benefits is the individuals who are named on the insurance policy to receive the value of the insurance policy when the insured dies.
Life Insurance Beneficiary Rules Canada
Life insurance is an important product where many rules and regulations are applied to it. Part of these rules applies to the section of insurance that deals with the beneficiaries. When looking at any rules and regulations review them carefully. It is important to remember that there can be both Federal and Provincial rules that may apply.
Insurance proceeds are normally tax exempt. This would include the federal portion of the tax. As well as the provincial portion.
When looking at the rules for beneficiaries on the provincial level, it can be complex. It is because there are several different types of beneficiaries such as;
- The estate is named as beneficiary
- An individual or individuals are named as beneficiaries
- An individual that is considered to be incompetent is named as beneficiary
- The individual named as beneficiary is a minor.
- Beneficiaries under a legal agreement
Each province has its own rules that govern the insurance industry. As such they will specifically have rules in place that apply to the beneficiaries. The rules and regulations are normally found under the Provincial Insurance Act.
In most cases, the insurance proceeds are not part of the estate as it pertains to the individual who has died.
The insurance money is being received most often is under creditor protection. Meaning creditors of the deceased cannot go after the money left to the beneficiary.
Life insurance can be complex. It means there can be exceptions to some of the general rules as they pertain to life insurance and beneficiaries. Issues can arise due to the particular province which the insurance is governed by.
Whether the insurance proceeds were being declared under a designation, for example, when an individual names a beneficiary on the insurance contract. Or whether the beneficiaries were made under a declaration. Such as a written document or a will for example.
Declarations and designations each have their own sets of rules and regulations.
Naming a Minor as a Beneficiary in Canada
Many insured individuals want to name their children or others that may be a minor. It is possible to do this. But it has to be done very carefully. Insurance companies cannot pay out the insurance proceeds to a minor. This means the insured must take extra steps. Ones to be sure that the minor will receive the money. They can do this by:
Setting Up a Trust
An individual can set up a trust in the name of the beneficiary who is a minor. The trust itself then can be named as the beneficiary.
It should not be assumed that the parent of the minor child will be considered as the guardian over the property of a minor. Which would include the proceeds from the life insurance. A parent could apply to the courts to become guardian over the life insurance money.
The courts may name a public trustee to manage the funds until the child becomes of age.
Do Life Insurance Companies Contact Beneficiaries?
Life insurance companies have a copy of the life insurance contract in their possession. However, they have no way of knowing if an insured has died unless they are contacted. It means that the insurance company does not contact the beneficiaries. It is up to the named beneficiary to contact the insurance company.
What Happens if I Don’t Name a Beneficiary?
There are some individuals that have no family. Or they simply do not want to name a beneficiary. At the same time, they may want to have money available to meet their estate obligations. In this case, they may not name a beneficiary. Which means the insurance proceeds will go into the estate of the deceased.
If a will has been left, then there will be a named executor of the will. This is the person who is responsible for carrying out instructions in the will. For seeing that all the wishes outlined in the will by the deceased are carried out. It also means that executor will see to it that all of the estate’s obligations are met according to any assets that are included in the estate.
Money from the insurance company that has gone into the estate may be used to pay creditors those who have a claim against the estate. There may not be any claims against the estate. Then the insurance money will go to those who have been named as beneficiaries in the will itself.
Who Inherits if a Beneficiary Dies?
Often insurance policies are in place for many years. The insured doesn’t give any further thought to the beneficiaries they may have named. On occasion, a beneficiary may pass away before the insured does. It may be that the insured does not recall that this individual was named as a beneficiary.
In this case, the proceeds from the life insurance would go into the insured’s estate.
One way to protect against this is for the insured to name an alternate beneficiary in the event of the primary beneficiary being deceased.
When an individual is buying life insurance, there are a lot of things that they need to consider. Often naming the beneficiary is not given much thought. To avoid potential mistakes being made during this segment of purchasing the life insurance, the insurance shopper can;
- Make sure they are dealing with an experienced insurance provider. One who is going to emphasize the importance of naming a beneficiary.
- Give careful thought about naming a minor as a beneficiary, which may mean setting up a trust — one to cover the years that the beneficiary will be classed as a minor.
- Keep the insurance documents in a safe place. Responsible people should be aware of where these documents are. So the beneficiary can make their claim with the insurance company.
- Make sure that an alternate beneficiary is named if the primary beneficiary dies before the insured.
All of the individual components of life insurance must be carefully considered. They should be reviewed during the buying process.