After your death, it’s too late to finish the things left undone or fix the things done poorly. This includes choosing a beneficiary under your life insurance policy. You should know the correct way to designate a beneficiary, the different types of beneficiaries, and the unique arrangements you can make for each.
Failing to name a beneficiary
Naming a beneficiary ensures that the proceeds from your insurance policy will go to that individual. They will not form part of your estate, and will not be subject to the claims of creditors. If you fail to name a beneficiary, the money you planned to provide for the person you love could end up in someone else’s hands.
Naming a beneficiary
A beneficiary is named in a written document called a “declaration.” This may be part of the insurance contract, or in a separate document. You can change the beneficiary at any time by completing a “change of designation” declaration. For example, separation or divorce does not automatically revoke the designation of your former spouse. If you want to change your beneficiary, a new declaration is essential.
You can name an “irrevocable” beneficiary. However, while that person is living, you cannot change your beneficiary without his or her consent.
You should make an irrevocable designation carefully. Certain provinces require a signed statement verifying that you understand the effects. Your financial advisor must sign a similar statement confirming that all outcomes have been explained. An irrevocable designation is not effective until it is filed with the insurance company’s main Canadian office.
You can also make an insurance beneficiary declaration in your will. But this declaration cannot be irrevocable. For example, you name your spouse as life insurance beneficiary in your will. A year later, you change the beneficiary to your child on the insurance company’s declaration form. The insurance money will go to your child at the time of your death.
A contingent beneficiary is another option to consider. If your primary beneficiary dies before you do, the contingent beneficiary will receive the benefits. This ensures your wishes will still be met if you are unable to change your designation. For example, you may have been seriously injured in an accident that killed your beneficiary. More commonly, you may simply forget to change your declaration after a loved one dies.
Generally speaking, a minor should not be designated as a beneficiary. In most situations, a better alternative would be to appoint a trustee to receive the insurance proceeds on behalf of a minor. The trustee is then responsible for managing and using the funds in accordance with your instructions. The laws covering minors and trustees are complex, and differ from province to province. If you want to leave funds to a child, ask your advisor to help ensure your wishes will be met.
You should choose your life insurance beneficiary carefully. Qualified insurance agent or broker can advise you about beneficiary designation.