What is a life insurance beneficiary?
What is a life insurance beneficiary? Learn types (primary, contingent, revocable, irrevocable), Québec differences, and tax basics in Canada. For eligible applicants.
On this page
- Key Takeaways
- What is a life insurance beneficiary?
- Who can be a life insurance beneficiary?
- How do you choose your life insurance beneficiary?
- What are the different types of beneficiaries?
- What happens if you don’t name a beneficiary?
- What happens if your beneficiary passes away before or at the same time you do?
- How long does it take for beneficiaries to receive proceeds from life insurance?
- What’s a life insurance beneficiary – Conclusion
- Frequently asked questions about the beneficiary meaning life insurance Canada
Deciding what a life insurance beneficiary should look like for your policy is an important part of financial planning. The person or organization you choose can directly affect how smoothly your loved ones receive support after your passing. In Canada, designating and maintaining your beneficiaries requires thoughtful consideration, especially when life events like marriage, divorce, or having children come into play.
Understanding how beneficiary designations work, the differences between revocable and irrevocable options, and how they align with your overall estate plan ensures your life insurance fulfills its purpose of protecting those who matter most.
What is a life insurance beneficiary?
A life insurance beneficiary in a policy is the person or entity chosen by the policy owner to receive the death benefit once the insured dies.
When you buy your life insurance, the company typically asks you to name a primary beneficiary and a secondary or contingent beneficiary. Additional beneficiaries are needed in case the primary beneficiary passes away before you. A contingent beneficiary automatically becomes the new primary beneficiary if the primary beneficiary dies before the owner of the asset.
This is not a “set it and forget it” process. It would be best if you kept up with life changes. For example, one or more beneficiaries may pass away, or you may change your mind about who should be the beneficiary, primary or contingent. You need to notify your life insurance carrier in writing of the changes.
Who can be a life insurance beneficiary?
In Canada, a beneficiary can be any natural person or an entity, such as a trust, charity, or estate. However, some beneficiary designations have certain advantages and limitations. We will cover those in more detail below.
How do you choose your life insurance beneficiary?
There is much to consider when you designate a beneficiary for your life insurance policy. The first consideration is why you are buying life insurance. Is it to provide for your dependents in the event of your death? If so, you want to name them as beneficiaries with some provisions.
If you die and your dependents are still minor children, you may need to appoint a legal guardian or set up a trust.
You also want to have primary and contingent beneficiaries in case the primary beneficiary should die before you do.
Considerations for naming the beneficiaries for your life insurance policy
Decide whether you want to name a beneficiary as a revocable or irrevocable beneficiary.
Revocable beneficiary
- You can choose who you want to receive your life insurance benefits and change your beneficiary at any time without their consent. This means that in all provinces in Canada (except Quebec), you can freely change your beneficiary as life changes without having to ask the beneficiary for permission. For couples in Quebec, legally married spouses are automatically considered irrevocable beneficiaries unless indicated as revocable.
- In Canada, life insurance is regulated by federal and provincial governments. In all provinces except Quebec, the policy owner decides who the policy’s beneficiary should be. In Quebec, however, the person whose life is insured by the policy is the one who chooses the beneficiary (this is only applicable where the life insured is not the policy owner).
Irrevocable beneficiary
- You can choose who receives your life insurance benefits, but you cannot remove or make changes without the beneficiary’s consent. If the policy owner wants to change the beneficiary, both parties must sign off on this change for it to be valid. This is done to protect the beneficiary’s interests.
- Irrevocable beneficiaries are often used in situations like marriage separation or divorce settlements. They guarantee that the beneficiary (in this case, the ex-spouse) cannot be removed from the policy later on. Consider local laws as well. For instance, if you live in Quebec and name your spouse as a beneficiary, the designation is automatically irrevocable.
- Some policies also require that the named beneficiary have an “insurable interest” in you. This means that the beneficiary would suffer financially or emotionally upon your death.
Suppose others outside your immediate family, such as parents or grandparents, depend on your support, you might want to include them as beneficiaries. Individuals typically choose immediate family members as beneficiaries to ensure financial support for them after their death.
What are the different types of beneficiaries?
Aside from deciding between people and entities as your beneficiaries, there are important attributes of each to consider.
- Primary and contingent beneficiaries: If you die, the named primary beneficiary will be the first person to receive the policy’s death benefit. If they have also passed away, the contingent or secondary beneficiary will become the life insurance policy beneficiary.
- Revocable and irrevocable beneficiaries: The policy owner can remove revocable named beneficiaries as beneficiaries of the death benefit at any time. However, irrevocable beneficiaries cannot be removed without the beneficiary’s written consent.
What happens if you don’t name a beneficiary?
If you do not have a designated beneficiary on your life insurance policy, your estate becomes the beneficiary. Unfortunately, that means the death benefits could end up somewhere you did not intend for them to go. This is because the payout will become part of the estate. As a result, whoever has a claim against your estate may receive all or a portion of the proceeds. If no beneficiary is named, the proceeds from a life insurance policy will go to the policyholder’s estate, which can delay access to funds and increase costs.
The disadvantages of taxes and delays are also part of settling an estate. While insurance proceeds are usually tax-free, an estate has to pay tax, which will take a bite out of your insurance death benefit.
What happens if your beneficiary passes away before or at the same time you do?
Suppose you did not name a contingent beneficiary or secondary beneficiary. In that case, the death benefit may become part of your estate. This is why it’s essential to name your contingent beneficiary when you get your life insurance.
You are also allowed to name more than one beneficiary so that if one dies, there will be others to collect the life insurance payout. This will prevent it from rolling over to your estate.
When should beneficiaries be updated, changed, added, or removed?
It is essential to keep your designated beneficiaries updated. You can change beneficiaries when one of them dies or, in most cases, simply when you change your mind. Changes in life circumstances, such as marriage or divorce, should prompt a review of your beneficiaries.
How long does it take for beneficiaries to receive proceeds from life insurance?
The typical time to receive a payout after filing a life insurance claim is between two weeks and two months if the life insurance company receives a claim with the required paperwork, such as a death certificate and any other requirements by the company.
If there are complications, such as when the primary beneficiary dies, and the contingent beneficiary is to receive the payout, this can delay the process. In addition, if anyone contests the validity of the beneficiary, that can make matters complicated.
What’s a life insurance beneficiary – Conclusion
Beneficiary choices determine who gets paid, how fast, and how cleanly. In most cases, name people or a trust (not your estate), list contingents, and keep designations revocable unless a legal agreement requires otherwise. Quebec’s default spousal rule is unique, mark the designation revocable if you want flexibility.
Review after every major life event, and coordinate with your will and estate plan to avoid surprises. A few minutes now can save your family months of delay later.
Frequently asked questions about the beneficiary meaning life insurance Canada
What does it mean to be the beneficiary of a life insurance policy?
A beneficiary designation means the beneficiary will receive the life insurance death benefit when the insured dies.
How do I know if I’m the beneficiary of a life insurance policy?
In most cases, the policyholder will inform you if you are named as a beneficiary on the life insurance policy. If you are a household member, you can also look through the deceased person’s documents. You can also look through safes at home or safe deposit box records if available.
How are life insurance beneficiaries paid out?
Life insurance proceeds are typically paid to the beneficiary or beneficiaries in a lump sum.
Is being a beneficiary the same as an inheritance?
There is a marked difference between being a beneficiary of a life insurance policy and receiving an inheritance when someone dies.
A beneficiary of life insurance benefits is specifically named on the policy to receive the death benefit when the insured person dies.
An inheritance is a part of settling an estate when someone dies. There may be a will involved, or the relatives of the deceased may just be subject to estate settlement law to get whatever portion of the estate belongs to them after taxes and expenses.
How long after someone dies can you claim life insurance?
Life insurance policies do not generally have a time limit by which a claim on the benefits can be made. It can be claimed by the beneficiaries as long as the policy was active at the time of the policyholder’s death, premiums were paid, and there were no grounds for dismissal from the insurance company. Some policies will explicitly state a timeframe within which a claim must be made, so it’s important to be aware of the details of your policy. But usually, as long as you file within a reasonable time, you shouldn’t have any problems.
Who has the authority to change the beneficiary on a life insurance policy?
The policy owner or someone with the proper power of attorney is the only one who can change the beneficiary on a life insurance policy. If there is an irrevocable beneficiary named, that named beneficiary would also have to sign off if they are to be removed or replaced.
Do beneficiaries pay taxes on life insurance policies?
Generally speaking, life insurance money paid to beneficiaries is not subject to taxes.
Can you have two primary beneficiaries?
Yes, a life insurance policy can name multiple primary beneficiaries. A good practice is to name each beneficiary along with the portion of the death benefit each is to receive.
How do you split life insurance beneficiaries?
The percentage of life insurance proceeds that each beneficiary is to receive is a personal and private decision. Factors such as need, age, and the beneficiary’s financial status may play a factor in the decision, although there is no set rule.
Can a beneficiary be changed after death?
Life insurance companies do not allow changes to the beneficiary designations after the policyholder’s death.
Who gets life insurance if the beneficiary dies?
If there is only one beneficiary, and they have passed away before the insured, the proceeds of the life insurance policy will become part of the policy owner’s estate and will be distributed according to applicable estate settlement law.
Can family contest a life insurance beneficiary?
A family member may contest the rightful beneficiary in a life insurance policy. This happens when the insured has had significant life changes such as marriage, divorce, or adopted children and has not updated the beneficiaries on the policy.
Disputes also arise when there is suspicion that the beneficiary was named under duress or the policyholder lacked the mental capacity to do so. You should update your beneficiaries promptly as needed and have witnesses to the event so these disputes can be settled quickly.
What happens if the beneficiary does not claim life insurance?
If an insured person passes away and there is no claim on the proceeds of the policy, the estate of the insured will be the recipient of the life insurance proceeds.
Choosing your life insurance beneficiaries should be carefully thought out. You may need to talk to your financial planner, attorney, or CPA for guidance to protect yourself and your heirs from unintended consequences.
Sources:
- Canada Life, “What is a beneficiary?”
