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What is a life insurance beneficiary?
A life insurance beneficiary is an individual (or multiple individuals) you choose to receive your life insurance payout, or death benefit, if you pass away. This person receives a lump-sum, tax-free payout equal to your coverage amount, which can be used to cover any expenses or financial obligations.
Can you have more than one life insurance beneficiary?
Yes, in most cases, you can have more than one life insurance beneficiary. You just have to include each of them by name in your policy.
If you have multiple life insurance beneficiaries listed, your total payout is split among them as allocated. For example, let’s say you have a spouse, two children, and $500,000 in life insurance coverage. You may choose to allocate 50% of your death benefit to your spouse and 25% to each of your children. If you pass away, your spouse receives $250,000, and each of your children receives $125,000.
What happens if you don't name a beneficiary?
If you don’t name a beneficiary in your life insurance policy, the payout goes to your estate. Your estate is essentially everything you own at the time of your passing, including any property, savings, and assets—including any undesignated life insurance benefits.
The executor of your estate then distributes these funds based on the wishes outlined in your last will and testament. If you don’t have a will, the funds are distributed along with the rest of your estate based on the intestacy laws in your province.
When you name a beneficiary in your life insurance policy, the death benefit is paid out to them directly upon your death. If you don’t name a beneficiary and the funds go to your estate first, the money can be tied up in a legal process called probate, subject to fees, and used to settle any outstanding debts first. This can delay the payout that your loved ones’ are counting on for their financial well-being.
Who can you name as a life insurance beneficiary in Canada?
There aren’t many restrictions when it comes to life insurance beneficiary rules in Canada. Quebec does have some more specific requirements, but for the most part, you can choose almost anyone you’d like. Most Canadians will designate a spouse, children, or other family members. The idea is that you list the people you want to take care of financially if you’re no longer around.
It’s worth noting that your beneficiary doesn’t have to be an individual. You can also choose to list an organization, such as a charity, as a life insurance beneficiary.
Can you name a minor as a beneficiary in Canada?
Yes, you can name a minor as a beneficiary. For example, many Canadians will list their children.
If your beneficiary is still a minor when you pass away, the funds won't go to them directly but will instead be placed in a trust. When naming a minor as a beneficiary, you should also name a trustee (either someone you know or a professional) who will manage the money until your beneficiary reaches the age of majority in the province where they reside.
Can you name a trust or estate as a beneficiary?
Yes, you can designate a trust or an estate as a beneficiary. For example, if you already have a trust set up for a minor, you can choose for the payout to go into that trust.
Your estate is usually the default beneficiary if no individuals are named. While it’s usually best to designate the person (or people) you want to receive your death benefit as beneficiaries, some Canadians may prefer their life insurance payout to flow through their estate.
Life insurance: Primary vs. contingent beneficiaries
Your primary beneficiaries are your first choice of who you want to receive your life insurance payout. But life often doesn’t unfold as planned, so if your primary beneficiaries are no longer alive when you pass away, the payout goes to your contingent beneficiaries.
While contingents act as a backup, it’s still important to update your life insurance policy if your primary beneficiaries pass away. Note that your contingents will receive the payout only if ALL your primary beneficiaries pass away before you. For example, if you name your spouse and two children as primary beneficiaries, and your husband passes away before you, the payout from your life insurance policy will be split equally between your two children when you pass.
How to change or update a life insurance beneficiary
You may need to change your life insurance beneficiaries as life evolves. For example, if you get married or grow your family.
Life insurance beneficiaries are typically revocable, which means you can change them at any time, unless you specifically designate them as irrevocable.
Having an irrevocable beneficiary means you need the beneficiary's consent to remove them or change their allocation. Irrevocable beneficiaries are common when a life insurance policy is required as part of a divorce settlement or spousal support agreement. In Quebec, a spouse listed as a beneficiary is automatically considered to be irrevocable unless they are specifically designated otherwise.
The exact process for changing or updating a life insurance beneficiary will depend on your insurer. Usually, the process is as simple as submitting a form or updating your choices online.
Common mistakes to avoid when choosing a beneficiary
Choosing a beneficiary for your life insurance policy is usually a straightforward process. But getting it wrong can mean significant delays, unnecessary taxes, or prevent your payout from going to the person you intended. Here are the most common mistakes to avoid:
- Not listing your beneficiaries by name: Using generic terms like “my spouse” or “my children” can lead to legal complications, especially in blended families.
- Naming your estate as the beneficiary by default: When the death benefit goes to your estate, it prevents your loved ones from quickly receiving the tax-free payout they may be counting on.
- Failing to name a contingent: If your primary beneficiary dies before you, the payout automatically goes to your estate.
- Naming a minor beneficiary without appointing a trustee: Since the payout cannot go directly to a minor, a court will have to appoint a trustee on your behalf.
- Forgetting to update beneficiaries after a major life event: Even after a divorce or remarriage, your named beneficiaries still stand. For example, an ex-spouse could receive the entire death benefit even if your will states otherwise.
- Assuming your will controls your life insurance: The beneficiary form filed with your insurance provider is a legal contract that supersedes your will.