Life Insurance policies are designed to provide financial assistance for your loved ones in the event of your death. The payout can be used in any number of ways, and you get to decide who makes those decisions by naming a beneficiary.
In this guide, we’re going to break down the often-confusing world of insurance beneficiaries. Spoiler alert: choosing a beneficiary isn’t as simple as picking your favourite child or the one friend who promised to water your plants. But by the time you’re done reading, you’ll have the confidence to navigate this essential part of your policy, and sound super smart at your next dinner party.
Understanding the importance of beneficiaries in insurance policies
Life Insurance policies are designed to provide financial assistance for your loved ones in the event of your death. The payout can be used in any number of ways, and you get to decide who makes those decisions by naming a beneficiary.
Beneficiaries can be individuals or organizations that you choose to receive the benefits from your insurance policies upon your passing.
By carefully selecting your beneficiaries, you can:
- Ensure financial support for your loved ones
- Pay off debts
- Help kids with post-secondary education
- Minimize potential disputes or legal complications
- Exercise control over the distribution of your assets
- Provide for charitable organizations or causes you care about
- Cover final expenses like funeral costs
Skipping out on designating your beneficiaries or forgetting to keep them up-to-date can lead to unwanted surprises. Without a beneficiary, your life insurance payout goes to your “Estate,” which can lead to significant delays in getting the funds to those who need it. There could also be disputes about who should get those funds and there are tax implications (which as a CPA, you probably already know). It can be very complicated for your loved ones if beneficiaries are not clear and up-to-date.
Thoughtful beneficiary designation ensure that your life insurance policy does what it is intended to do.
Types of Beneficiaries
There are a number of different beneficiary types you’ll encounter when designating who should receive benefits from your insurance policies. The two main types are primary and contingent, and understanding what each means is crucial for making informed decisions.
Primary Beneficiaries
Primary beneficiaries are the individuals, charities or entities you initially designate to receive the benefits from your insurance policies. These are the first in line to receive the policy payouts. Remember to carefully consider your primary beneficiaries, as they will be the direct recipients of your insurance benefits.
The most common choices for primary beneficiaries of an insurance policy include:
- Spouse or partner
- Children
- Parents
- Siblings
- Business Partner
Contingent Beneficiaries
Contingent beneficiaries are the secondary or backup beneficiaries who will receive the benefits if your primary beneficiaries are unable or unwilling to do so. There are several reasons this may occur, one being that the primary beneficiary is also deceased. It happens from time to time, so it’s always a good practice to consider a backup plan and always keep it up-to-date.
The role of a contingent beneficiary becomes especially significant when:
- Predeceased Primary Beneficiary: If your primary beneficiary passes away before you or at the same time, the contingent beneficiary would then become the recipient of your insurance proceeds.
- Declined Inheritance: In some cases, a primary beneficiary may choose to decline or disclaim the inheritance for personal or financial reasons. In such instances, the contingent beneficiary would receive the benefits.
- Multiple Primary Beneficiaries: When you have designated multiple primary beneficiaries, contingent beneficiaries can step in to receive the portion intended for a primary beneficiary who is unable or unwilling to accept the benefits.
By carefully selecting contingent beneficiaries, you can ensure that your insurance benefits are distributed according to your intentions, regardless of the circumstances. This proactive approach can help mitigate potential disputes or legal complications, providing peace of mind for you and your loved ones.
Designating a minor as your beneficiary
Many people want to leave their Life Insurance policy to their children, but it’s important to know the rules around minor children beneficiaries. In Canada, a minor cannot legally receive the death benefit from a Life Insurance policy. So if you want to name a child under the age of majority as your beneficiary, you will need to designate a trustee to safeguard the funds until the minor becomes an adult.
Consider speaking with a Licensed Advisor for more information on your options here.
How to designate beneficiaries in insurance policies
Designating beneficiaries for your insurance policies is a straightforward process, but it’s essential to approach it with care and attention to detail.
Here are the general steps to follow:
- Obtain the Appropriate Forms: Contact your insurance provider or employer (for group policies) and request the necessary beneficiary designation forms. These forms may vary depending on the type of insurance policy or account.
- Gather Relevant Information: Have the full legal names, dates of birth, and contact information for your intended primary and contingent beneficiaries readily available.
- Review and Update Existing Designations: If you already have beneficiaries listed, carefully review the current designations to ensure they align with your current wishes.
- Clearly Indicate Primary and Contingent Beneficiaries: On the beneficiary designation form, clearly indicate who your primary and contingent beneficiaries are, including their relationship to you and the desired percentage or amount of the benefit they should receive. Remember if you are naming a minor as beneficiary, you will also need to name a trustee.
- Consider Naming a Trust or Estate: Sometimes, you may want to name a trust or your estate as the beneficiary, especially if you have complex estate planning needs or wish to provide for minor beneficiaries.
- Sign and Date the Forms: Carefully review the completed forms for accuracy and then sign and date them as required.
- Submit the Forms to Your Insurance Provider: Follow the instructions provided by your insurance company or employer to submit the completed beneficiary designation forms.
- Keep Copies for Your Records: Always keep copies of the completed forms for your records and store them in a secure location.
To sum it up
If you need help designating beneficiaries or have complex needs, we recommend contacting one of our experienced Advisors. They can guide you through the process and ensure your beneficiary designations align with your overall goals.
While the world of insurance beneficiaries might seem complicated at first, getting a handle on the basics is key to making sure your wishes are actioned.
Don’t forget to keep your beneficiary designations up to date, especially after all of life’s big moments—like getting married, having kids, or experiencing a financial shift. By staying on top of these details and seeking expert advice when needed, you can make sure your insurance benefits do exactly what they’re meant to. Our customer portal allows you to log in and review your beneficiaries at any time.
Now you’re ready to take control of your insurance beneficiaries.