When purchasing a life insurance policy, whether for family protection or estate planning, an integral part of the process is ensuring that the insurance proceeds are paid out on one’s death to the intended beneficiaries. This may seem simple, but there are many issues and considerations to ensure it is set up properly as per your wishes.
A “beneficiary” is defined as the person, persons, or entity that the eventual life insurance proceeds will be paid to. Only the owner of the policy can determine the beneficiary designation. In most cases the insured person and owner are the same, except for business-owned policies where the company itself is usually the beneficiary.
Life insurance proceeds flow directly to named beneficiaries, to an estate or to a personal representative under the Insurance Act. There’s a difference between the beneficiaries of a policy done by way of a declaration, and those who are beneficiaries of the estate or a personal representative by the Will. The beneficiaries of the estate or a personal representative would have rights arising from a Will, court order or some provincial statute other than the insurance act.
This means that the Insurance Act provides certain rights for beneficiaries under a policy or declaration that are not provided to a personal representative or a beneficiary of an estate.
Life insurance beneficiaries can be designated by the policy owner when the policy is applied for or by way of a subsequent “declaration”, which is a document that enables the policy owner to change a beneficiary to the policy. Tom Drake from canadianfinanceblog has an article on why you need to update your beneficiares that simplifies this information. It’s very important to inform the life insurance company of any change in beneficiary. This ensures the proceeds don’t get paid out to the wrong party such as a divorced spouse, if the intent was to have the life insurance proceeds paid out to a current spouse.
Protected class of beneficiaries provides unique protection for certain family beneficiaries. Insurance legislation in most provinces specifies that a life insurance policy will be protected from creditors while the life insured is living and the named beneficiary is their spouse, child, grandchild or a parent.
Beneficiaries can be designated revocable or irrevocable. The common designation is revocable, which means beneficiaries can be changed at any time. Irrevocable designations are used in some cases such as protecting or guaranteeing certain beneficiaries such as children of a divorce. Making an irrevocable designation can seriously limit the owner’s ability to make changes to the policy in the future, as the irrevocable beneficiary must agree to any changes. Care must especially be taken if irrevocable beneficiaries are minors.
When specifying an irrevocable beneficiary, the policy owner must get the consent of the beneficiary do any of the following:
• Alter or revoke the beneficiary designation
• Assign the policy to a lender
• Withdraw cash
• Transfer ownership
• Change the policy coverage
As with all things that relate to wills, trusts and beneficiaries, it’s important to consult with a qualified legal professional to avoid any traps and to maintain your policy’s creditor protection status. It’s also important to have your policies reviewed on a regular basis by a licensed life insurance professional to ensure there has not been any change to your intended beneficiary or any life changes that could have an impact on the policy.
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