Why it’s important to keep your life insurance beneficiary current

What would happen if the beneficiary named in your life insurance policy was someone you no longer had a relationship with? Would they still receive the proceeds of your policy? The short answer is: Yes.

Is that still the case even if your Last Will and Testament named a different beneficiary? Also, yes. A Beneficiary named in your will is separate and apart from the beneficiary you may name in a life insurance policy. The person named in the policy will always receive the insurance proceeds, just by virtue of being named.

As the years roll by, it’s easy to overlook revisiting insurance policies and keeping them up to date. But it’s a critically important task to ensure your final wishes align with your life circumstances at that time.

It’s fairly straightforward to make beneficiary changes. It involves completing and signing a beneficiary change form, one available through the employer, financial professional or insurance company  (e.g., Manulife) the policy is with.

A life insurance beneficiary is the person/persons or entity/entities (e.g., charity, trust) that you want to ‘benefit’ from or become entitled to the proceeds of your insurance policy when you die. You may have heard different names or language used to describe types of life insurance beneficiaries. They include:

• The primary beneficiary: The main person or entity that’s first in line to receive the insurance payout
• A contingent beneficiary: The person or entity that’s a ‘secondary’ or ‘backup’ beneficiary in line to receive the payout if the primary beneficiary is deceased or unable to receive the payout.
• An individual beneficiary: A specific person named to receive the insurance policy proceeds. The individual beneficiary could also be a contingent or secondary beneficiary if the primary beneficiary cannot or is unable to receive the payout.
• An entity beneficiary: An organization (e.g., charity or trust) named to receive the proceeds.
• Your estate, as primary beneficiary: Where you direct the policy proceeds to form part of your estate. If you name your estate as beneficiary, there may be tax implications to be aware of. In that case, it may be helpful to discuss the decision with a financial advisor or insurance specialist who knows your personal circumstances.
• A revocable beneficiary: This type of beneficiary can easily be changed. Most beneficiaries tend to be designated as revocable.
• Irrevocable beneficiary: This type of beneficiary requires the person named as an (irrevocable) beneficiary to approve any change of beneficiary. They would be required to sign a form that confirms their agreement to being removed from the policy as the beneficiary.

A policyholder can designate almost anyone to be a beneficiary of their life insurance policy. In addition to persons, family or friends, they can also designate a charity, trust or institution to be a beneficiary.

One of the main reasons people decide to buy life insurance is to help family members financially, if the policyholder were to suddenly pass away. That’s especially the case if you’re the main source of income for your family. Insurance proceeds can help put family members onto a more solid financial footing while they grieve and become accustomed to their new reality, without their loved one. There’s no restrictions on how the insurance proceeds get used, and they’re typically not subject to income tax for beneficiaries in Canada (unless the policy proceeds form part of the policyholder’s estate).

Yes, life insurance policies can name more than one beneficiary. It’s up to the policyholder how many they name. If you want to leave the money to more than one person, or (for example) to one person plus a charity, during the payout, the insurance company (e.g., Manulife, if it’s the insurance company that holds the policy) would be required to distribute the funds directly to the named beneficiaries as requested by you in your policy.

For example, if you named three beneficiaries (e.g., two children and a charity), each one would receive one-third of the death benefit. For a policy valued at $75,000, the beneficiaries would therefore receive one-third, or $25,000 each.

While it’s true that a minor can be named as a beneficiary of life insurance in Canada, they would not be in a position to receive the funds directly until they reach the age of majority (i.e., 18 or 19 years of age, depending on the province or territory). If you decide to name a beneficiary who’s a minor, it would be important to name a legal representative or trustee to manage the funds and be held accountable to preserve them for the child’s benefit until they reach the age of majority. Details on how the proceeds would get managed would be set out in a trust document, as per your instructions. A financial or legal advisor could help ensure all needed paperwork would be in order.

Generally, policyholders choose to name individuals close to them as beneficiaries, those who would feel the greatest impact were the policyholder to suddenly pass away. This tends to be spouses, children, grandchildren, or other family members or close friends. In other instances, a person may choose to leave policy proceeds to a favorite cause, charity or even an institution (e.g., a post-secondary school). It’s a way to support a certain organization’s work and make a positive and meaningful impact on something you care about.

Choosing your beneficiary is a highly personal decision and not to be taken lightly. For that reason, consulting legal or financial advisors during the process may be helpful to ensure the choices you make align best with your wishes, personal values, and are optimal from a financial perspective.