When buying life insurance, designating a beneficiary may at first seem pretty simple.  But there are a few things you need to consider to make an informed decision.

What exactly is a beneficiary?

A beneficiary is the person who will receive the proceeds of a life insurance policy following the death of the insured individual.

This individual may not exist at the time the life insurance policy is taken out, but will at the time of the claim. For example, you may designate your children and even unborn children as beneficiaries.

The beneficiary may also be a stock company (also knowns as a corporation) or a not-for-profit organization.

What about the contingent beneficiary?

Also called subrogated beneficiary in Quebec, designating a contingent beneficiary is a little like having a plan B in case the insurance proceeds can’t be paid out to your primary beneficiaries.

If there are no contingent beneficiaries, the proceeds will go to the estate of the policy holder or owner.

What is the difference between a revocable and irrevocable beneficiary?

A revocable beneficiary means that you can change your mind about your beneficiary and designate someone else at any time.  You don’t need their permission to withdraw their name from the life insurance policy.

On the other hand, you cannot withdraw or replace an irrevocable beneficiary without obtaining their written consent beforehand.  It should be noted that a child under age 18 or an adult declared incompetent cannot give their consent to such a change.

In general, unless you check the irrevocable box, beneficiaries are deemed revocable.

Different in Quebec

In Quebec, if you designate your spouse with whom you are married or in a civil union (not to be confused with “common-law partner”) your spouse is automatically considered an irrevocable beneficiary, unless you check the “revocable” box, or write “revocable” in the designation.

Some advantages of designating your beneficiaries

By designating one or more beneficiaries for your life insurance policy, you prevent the policy proceeds from going to your estate.

In such a case, the life insurance proceeds could be used to pay your debts and any claims against your estate. The remainder (if any) would then be paid to your loved ones.

With very clear information about your beneficiaries in the insurance contract, the settlement is faster and you have peace of mind that the policy proceeds will be paid according to your wishes.

6 tips for designating beneficiaries

  1. Give the name of the person you want to designate as beneficiary as well as their relationship to you.  You’ll avoid any ambiguity.
  2. Enter “born or unborn children” or “born or unborn grandchildren” if your beneficiaries are your children or grand-children.
  3. You may change your mind one day, so designate your beneficiaries as revocable.
  4. If you have more than one beneficiary, indicate the percentage of insurance for each one.  If you don’t, the policy proceeds will be divided equally among all of your beneficiaries.
  5. Designate another beneficiary after a divorce or in case your beneficiary dies before you.
  6. In Quebec: In general, the legal guardian (usually the surviving parent) will administer the minor’s assets.
    Elsewhere in Canada: If the beneficiary is a minor, remember to appoint a trustee to administer the policy proceeds until your minor beneficiary is of age.

Ask your advisor for help

If you have any doubts about the designation of your life insurance beneficiaries, speak with your advisor.

They will help you make an informed decision or even assist you with a beneficiary change should you change your mind.