What is a Life Insurance Beneficiary?

Welcome to our blog about What’s a Life Insurance Beneficiary. A life insurance beneficiary is a person or entity designated by the policyholder to receive the death benefit of a life insurance policy upon the policyholder’s death. The policyholder can name one or more primary beneficiaries and one or more secondary beneficiaries, and can specify the percentage of the death benefit each beneficiary should receive. It is important to carefully consider and choose your beneficiaries, as they will receive the financial benefits of the policy upon your passing. This blog will cover the different types of life insurance beneficiaries in Canada, irrevocable and revocable beneficiaries, who can be a beneficiary, why you should keep your beneficiaries up to date and more!

In this article:

• What is a Beneficiary?
• Who Can Be a Beneficiary?
• Can You Change Your Beneficiary?
• Types of Beneficiaries
  • Primary Beneficiaries
  • Contingent Beneficiaries
  • Irrevocable
  • Revocable
• Naming Your Beneficiary
  • Naming an Individual
  • Naming Your Estate
  • Naming a Trust
  • Naming a Charity
  • Naming a Minor Child
• What Happens If You Don’t Name A Beneficiary?
• How Do Beneficiaries Split Their Payout?
• Do Beneficiaries Have to Pay Taxes Upon Payout?
• Filing a Life Insurance Claim
• How Long Does it Take to Receive Life Insurance Payout After Submitting Claim
• Can Beneficiaries be Denied a Life Insurance Payout?
• Conclusion: What is a Life Insurance Beneficiary?
• Frequently Asked Questions (FAQs) about Beneficiaries

What is a Beneficiary?

A life insurance beneficiary is a person or entity that is designated by the policyholder to receive the death benefit of a life insurance policy upon the policyholder’s death. The policyholder can name one or more primary beneficiaries and one or more secondary beneficiaries, and can specify the percentage of the death benefit each beneficiary should receive.

There are several types of life insurance beneficiaries, including individuals, trusts, and charitable organizations. It is important to carefully consider and choose your beneficiaries, as they will receive the financial benefits of the policy upon your passing. When selecting beneficiaries, it is important to consider their financial needs and responsibilities, as well as any potential tax implications. For example, if you name a minor child as a beneficiary, a legal guardian may need to be appointed to manage the funds on their behalf.

In some cases, the policyholder may choose to name a trust as the beneficiary of their life insurance policy. This can be useful for managing the distribution of the death benefit, as well as avoiding probate and other legal issues. It is also possible to name a charitable organization as the beneficiary of a life insurance policy. This can be a way to make a charitable donation and support a cause that is important to the policyholder. it is important to carefully consider the choice of beneficiaries for a life insurance policy, as this will determine how the death benefit is distributed upon the policyholder’s passing. It is also essential to keep beneficiary designations up to date to ensure that the death benefit is distributed according to the policyholder’s wishes.

Who Can be a Beneficiary?

A life insurance beneficiary can be any individual or entity that the policyholder wishes to name in their policy. This can include a spouse, children, parents, siblings, friends, or a business partner. The policyholder can also name a trust or charitable organization as a beneficiary. It is important to carefully consider who to name as a beneficiary, as they will receive the death benefit of the policy upon the policyholder’s passing. 

It is also important to keep beneficiary designations up to date to ensure that the death benefit is distributed according to the policyholder’s wishes. It is also crucial that you find out the percentage of the payout that each beneficiary should receive. You can also name a beneficiary that is not residing in Canada, nor a citizen of Canada. There may be a requirement to explain the insurable interest of a beneficiary where you basically just mean that the beneficiary will be affected emotionally or financially due to your death. 

Can You Change Your Beneficiary?

Yes, it is generally possible to change the beneficiary of a life insurance policy. The process for changing a beneficiary will depend on the specific terms of the policy and the insurance company that issued it. This can become more complicated if you have an irrevocable beneficiary, because an irrevocable beneficiary is a permanent designation that gives the beneficiary full rights to their share of the death benefit of a life insurance policy. The policyholder cannot remove an irrevocable beneficiary or change their share of the death benefit without the beneficiary’s consent. If the policyholder wishes to cancel the coverage, they must inform the irrevocable beneficiary first. The only way to remove an irrevocable beneficiary is if they agree to forfeit their rights to the proceeds of the policy. It is important to carefully consider the choice of an irrevocable beneficiary, as this designation is permanent and cannot be changed without the beneficiary’s consent.

However, in most cases, the policyholder can change the beneficiary of their life insurance policy by filling out a beneficiary change form and submitting it to the insurance company. The insurance company will typically require the policyholder to provide proof of identity and may require additional documentation, such as a death certificate for a deceased beneficiary.

If the policyholder wants to change the beneficiary of their life insurance policy, it is generally a good idea to consult with the insurance company and a life insurance advisor to ensure that the change is properly made and that the policyholder’s wishes are carried out according to the terms of the policy.

Types of Beneficiaries

There are several types of beneficiaries available for when it comes to beneficiaries and it is important to know the different types of beneficiaries so you can designate the right amounts to the right beneficiaries. There are 4 main types of beneficiaries: primary beneficiaries, contingent beneficiaries, irrevocable beneficiaries, revocable beneficiaries. 

Primary Beneficiaries

A primary beneficiary is the person or entity designated by the policyholder to receive the death benefit of a life insurance policy upon the policyholder’s death. The policyholder can name one or more primary beneficiaries and specify the percentage of the death benefit each primary beneficiary should receive.

The primary beneficiary has priority over any secondary or contingent beneficiaries in receiving the death benefit. If the policyholder names multiple primary beneficiaries, they can specify the percentage of the death benefit each primary beneficiary should receive.

Contingent Beneficiaries

A contingent beneficiary is a secondary beneficiary who will receive the death benefit if the primary beneficiary is unable or unwilling to receive it. This can be useful in case the primary beneficiary predeceases the policyholder or is unable to accept the death benefit for any reason.

Irrevocable

An irrevocable beneficiary is a permanent designation that gives the beneficiary full rights to their share of the death benefit of a life insurance policy. The policyholder cannot remove an irrevocable beneficiary or change their share of the death benefit without the beneficiary’s consent.

Revocable

A revocable beneficiary is a beneficiary designation that can be changed by the policyholder at any time without the consent of the beneficiary. The policyholder can add, remove, or change the percentage of the death benefit that the revocable beneficiary should receive.

Naming Your Beneficiary

You luckily have many options of naming a beneficiary and it doesn’t only have to be an individual. You can easily name your estate, a charity, a trust or even a minor child as your beneficiary. This being said, it is good to know the options available to you so take a look at your options for naming a beneficiary. 

Naming an Individual

These are individuals, such as a spouse, children, parents, siblings, or friends, who are designated to receive the death benefit of the policy upon the policyholder’s passing. The policyholder can specify the percentage of the death benefit each individual beneficiary should receive.

Naming Your Estate

If you name your estate as the beneficiary of your assets, it means that the assets will pass to your estate upon your death, and will be distributed according to the terms of your will or trust, or according to the laws of intestacy if you do not have a will or trust.

There are a few things to consider when deciding whether to name your estate as the beneficiary of your assets:

Probate: If you name your estate as the beneficiary of your assets, the assets will generally have to go through the probate process before they can be distributed to your heirs. This can be a time-consuming and costly process, depending on the laws of your state and the complexity of your estate.
Control: Naming your estate as the beneficiary allows you to have control over how your assets are distributed, as you can specify in your will or trust who you want to inherit your assets and in what proportions.
Tax implications: Depending on the size of your estate and the applicable tax laws, there may be tax implications for your heirs when they inherit your assets. It’s a good idea to consult with a financial advisor or an attorney to understand the potential tax consequences of naming your estate as the beneficiary of your assets.

Ultimately, whether or not to name your estate as the beneficiary of your assets is a personal decision that should be based on your specific circumstances and goals.

Naming a Trust

A trust is a legal entity that can hold assets and manage their distribution according to the terms of the trust agreement. The policyholder can name a trust as the beneficiary of their life insurance policy, which can be useful for managing the distribution of the death benefit and avoiding probate and other legal issues.
Naming your trust as a beneficiary can be a smart way to ensure that your assets and possessions are distributed according to your wishes. Your trust can provide for the orderly transfer of property, investments, and other assets to your designated beneficiaries. By naming your trust as a beneficiary, you can ensure that the designated beneficiaries receive their inheritances without the hassle and expense of probate, the lengthy and costly court-supervised process of validating a will. You can also provide for those who are not legally able to manage their inheritance or to provide for those with special needs. Additionally, with a trust, you can provide for the long-term management of your assets and their distribution over time. Your trust can also provide for tax planning and charitable giving, reducing your estate’s tax burden and benefiting organizations of your choice.

Naming a Charity as a beneficiary

It is possible to make a charitable organization the beneficiary of a life insurance policy. This can be a way for the policyholder to make a charitable donation and support a cause that is important to them.

To make a charity the beneficiary of a life insurance policy, the policyholder will need to name the charity as the primary or secondary beneficiary in the policy. The policyholder can also specify the percentage of the death benefit that the charity should receive. It is important to carefully consider the choice of a charitable beneficiary, as the charity will receive the death benefit of the policy upon the policyholder’s passing. It is also important to keep beneficiary designations up to date to ensure that the death benefit is distributed according to the policyholder’s wishes. In some cases, the policyholder may choose to set up a charitable trust as the beneficiary of their life insurance policy. This can be a way to manage the distribution of the death benefit to the charity, as well as avoid probate and other legal issues.

Overall, making a charity the beneficiary of a life insurance policy can be a meaningful way for the policyholder to support a cause that is important to them, while also providing financial support to the charity upon the policyholder’s passing.

Naming a Minor Child

Naming a minor child as your beneficiary can be a difficult decision to make. It is important to consider if the child is mature enough to handle the responsibility of managing the funds. It is also important to determine who would be responsible for the funds and how they would be managed. If the minor child is not sufficiently mature to manage the funds, it is important to consider appointing a guardian. Additionally, it is important to consider the tax implications of naming a minor as a beneficiary. It may be beneficial to set up a trust or other legal entity to manage the funds, so that the child can receive all of the funds in the future. It is also important to update the beneficiary designations periodically to ensure that the funds are going to the right person.

What Happens If You Don’t Name A Beneficiary?

If you do not specify a beneficiary for your life insurance policy or if the beneficiary you have named dies before you and you do not update your beneficiary designation, the death benefit from your policy will be paid to your estate. This means that the proceeds from your policy will go through the probate process and may be used to pay expenses and debts before being distributed to your heirs. This can be a lengthy and costly process, and it may also mean that your heirs do not receive the full amount of the death benefit. To avoid this outcome, it is important to carefully consider and name a beneficiary for your life insurance policy, and to review and update your beneficiary designations as needed to ensure that they reflect your current wishes.

How Do Beneficiaries Split Their Payout?

If you have multiple beneficiaries for a life insurance policy and you have not specified how the payout should be divided among them, the beneficiaries will typically split the payout equally. However, if you have specified a different percentage or amount for each beneficiary, the payout will be divided according to your instructions.

For example, if you have two beneficiaries for a life insurance policy and you have specified that one beneficiary should receive 60% of the death benefit and the other should receive 40%, the beneficiaries will receive the death benefit in those proportions.

If you have multiple beneficiaries and you want to specify how the payout should be divided among them, it’s important to include this information in your beneficiary designations. This can help to avoid potential disputes among the beneficiaries and ensure that your assets are distributed according to your wishes.

Do Beneficiaries Have to Pay Taxes Upon Payout?

In general, life insurance proceeds are not considered taxable income in Canada. However, there are some exceptions to this rule. If the policy was owned by a business and the death benefit was paid to the business, the benefit may be subject to income tax. Additionally, if the policy was owned by a corporation and the death benefit was paid to shareholders of the corporation, the benefit may be subject to income tax.

In most cases, however, the death benefit from a life insurance policy is paid in a lump sum and is not considered taxable income for the beneficiary. This means that the beneficiary does not have to report the death benefit as taxable income on their Canadian tax return.

Keep in mind that there is a possibility that your beneficiaries can be taxed. For example, if your beneficiary chooses to receive the proceeds from a life insurance policy in instalments rather than as a lump sum, the insurance provider may pay interest on the outstanding amount. In this case, the beneficiary may be required to pay income tax on the interest.

Also, if you have named your estate as the beneficiary of your life insurance policy, or if you have not named a beneficiary at all, the death benefit may be subject to tax. This is because in these cases, the proceeds of the policy will be paid to your estate, and they may be considered taxable income.

Filing a Life Insurance Claim

Filing a life insurance claim is typically a straightforward process, but it can vary depending on the insurer and the specific policy. Here are the general steps involved in filing a life insurance claim:

• Gather the necessary documents: You will need to provide the insurer with proof of death, such as a copy of the death certificate, as well as a copy of the life insurance policy and any other relevant documents.
• Contact the insurer: Contact the insurer to inform them of the policyholder’s death and request a claim form. The insurer may be able to provide the form over the phone or online, or they may send it to you by mail.
• Complete the claim form: Fill out the claim form as accurately and completely as possible. You may need to provide personal and financial information about the policyholder and the beneficiaries, as well as details about the policy and the circumstances of the policyholder’s death.
• Submit the claim form and supporting documents: Submit the completed claim form and any supporting documents, such as the death certificate and a copy of the policy, to the insurer.
• Wait for the insurer’s decision: The insurer will review the claim and assess whether it is eligible for payment. This process can take several weeks or longer, depending on the complexity of the claim and the availability of supporting documentation.
• Receiving the payout: If the claim is approved, the insurer will pay the death benefit to the designated beneficiary or beneficiaries.

It’s important to note that the specific steps and requirements for filing a life insurance claim can vary, so it’s a good idea to review the terms of your policy and follow the insurer’s specific instructions.

How Long Does it Take to Receive Life Insurance Payout After Submitting Claim

The length of time it takes to receive a life insurance payout after submitting a claim can vary depending on a number of factors, including the complexity of the claim and the availability of supporting documentation. In general, it can take several weeks or longer to process a life insurance claim and pay out the death benefit.

After you submit the claim form and supporting documents to the insurer, the insurer will review the claim to assess whether it is eligible for payment. This process can take several weeks, as the insurer may need to review the policy and gather additional information or documentation.

If the claim is approved, the insurer will typically pay the death benefit to the designated beneficiary or beneficiaries as soon as possible. The payment may be made in a lump sum or in instalments, depending on the terms of the policy and the preferences of the beneficiary.

Can Beneficiaries be Denied a Life Insurance Payout?

In general, a life insurance beneficiary is entitled to receive the death benefit from a policy as long as the policy was in force at the time of the policyholder’s death and the policy’s terms and conditions have been met. However, there are some circumstances in which a beneficiary may be denied the death benefit.

For example, a beneficiary may be denied the death benefit if the policy was terminated or lapsed before the policyholder’s death, or if the policyholder failed to pay the premiums. In these cases, the policy would no longer be in force at the time of the policyholder’s death, and the beneficiary would not be entitled to receive the death benefit.

Additionally, a beneficiary may be denied the death benefit if the policy contains exclusions that apply to the circumstances of the policyholder’s death. For example, some policies exclude coverage for deaths resulting from certain activities or causes, such as suicide or war. If the policyholder’s death falls within one of these exclusions, the beneficiary may be denied the death benefit.

It’s important to carefully review the terms and conditions of a life insurance policy before purchasing it to understand any exclusions or limitations that may apply.

Conclusion: What is a Life Insurance Beneficiary?

To conclude our blog about What is a Life Insurance Beneficiary, you should know that life insurance is an important part of financial planning, and it is important for individuals to understand the process of designating beneficiaries for their life insurance policies. Beneficiaries can be family members, friends, or even charities, and should be chosen carefully to ensure that the policyholder’s wishes are respected. Taking the time to research and understand the importance of life insurance beneficiaries can help ensure that the policyholder’s wishes are honored in the event of their death but also it can give you the peace of mind to fill out your life insurance beneficiaries appropriately. To fully understand your life insurance beneficiary options please contact our life insurance brokers to find out more!

Frequently Asked Questions (FAQs) about beneficiaries

Assigning the right beneficiary

Finding the right beneficiary will give you the peace of mind that you need. Assigning your life insurance beneficiary must be done right so that your wishes are met when your life insurance policy is paid out in the event of your death.

To schedule a consultation about your income protection goals, or if you have any questions about insurance in Ontario or Canada, please contact Protect Your Wealth or call us at 1-877-654-6119 to talk to an advisor today! We’re proudly based out of Hamilton, and service clients anywhere in Ontario, British Columbia and Alberta  including areas such as Ottawa, Guelph, Grande Prairie, and Kamloops.