Choosing your life insurance beneficiary is just as important as deciding on the type and amount of life insurance that suits your needs. This decision not only impacts your legacy but also conveys a meaningful message to those who will manage matters after you’re gone.
To make the best decision for your beneficiary, it’s crucial to consider several factors. That’s why understanding how to choose a life insurance beneficiary is essential.
In this blog post, we’ll explain what a life insurance beneficiary is and provide valuable tips on selecting a life insurance beneficiary in Canada.
What is a Life Insurance Beneficiary, and Why Name One?
The beneficiary of life insurance is the person, people, or organization you pick to get the money (called the death benefit) from your life insurance if something happens to you. It doesn’t matter what your will says, what the court says, or what your family thinks – your insurance company, like PolicyMe, will give the money to your chosen beneficiary.
You can name more than one beneficiary and say how much money each person gets. For example, if you want your insurance money to help your business, you can choose your company as the beneficiary.
You can have a primary beneficiary and one or more backup beneficiaries, called contingent beneficiaries. The primary one gets the money when you pass away. But if the primary beneficiary can’t get it – maybe they’re no longer around or don’t want it – then the contingent beneficiary steps in and gets the money.
11 Tips on Choosing a Life Insurance Beneficiary
Even though it might seem like just another form to fill out, deciding who gets the money from your life insurance policy is an important choice.
When you buy life insurance, the company will want to know who should get the money when you’re no longer around.
Here are some tips to help you make a smart decision and avoid common mistakes when picking the right life insurance beneficiary for you.
1. Know the Options Available To You
When it comes to choosing who should receive your life insurance payout, you have more choices than just your spouse and kids. You can designate a trust, a charity organization, or your estate as your beneficiary.
For instance, if you have minor children and want to ensure their financial security, or if you want to avoid disputes in case of divorce, a trust might be the way to go. However, naming your estate can result in reduced funds for your loved ones due to taxation.
2. Ask Yourself Who Needs the Benefit the Most
Choosing a beneficiary for your life insurance is a way to ensure that the money goes to the right place when you’re no longer here. Who gets this benefit depends on why you’re getting the insurance in the first place.
If you’re married and getting life insurance to protect your family and provide support if something happens to you, your spouse is the logical choice. The death benefit can help replace your income, cover daily expenses, and handle any debts you might leave behind.
For single parents, securing your child’s financial future is crucial. Consider who you’d trust to care for your child and name them the beneficiary. This guardian can use the payout to meet your child’s needs and save for their future. Alternatively, you can establish a trust and name your child as the beneficiary.
If you have ageing parents who rely on your financial support, your death benefit can provide them with a safety net. You can choose multiple beneficiaries to ensure your parents are cared for and divide the benefits among them.
As a single parent with no dependents, you can name a charitable organisation as your beneficiary. If you’re passionate about environmental conservation or helping underprivileged children, you can transform your death benefit into a charitable gift.
3. Have A Backup/Contingent Beneficiary
When you pick the main person who gets your life insurance money when you pass away, you can also choose some backup people, just in case. These backups are called “contingent beneficiaries.”
If, for some reason, your main beneficiary can’t be found, has passed away, or doesn’t want the money, then the backup, or “contingent,” beneficiary steps in to receive it. This way, you ensure your insurance money goes to the right person.
So, you must be careful when picking your main beneficiary and the backup, or contingent, beneficiary.
4. You can Have Multiple Beneficiaries, Only Be Specific and Clear
Instead of choosing just one person, you can pick multiple people or a group of people to receive your life insurance money. But it’s better to be super clear and say each person’s name and how much they should get. This stops any confusion and fights later on.
For example, writing “all children” means all your kids, even the adopted ones, can get the money. And if you were friendly with your stepkids, they might argue they should get some, too. So, say exactly which child should get what to avoid arguments.
5. Distribute your Payout between Your Beneficiaries
When you pick more than one person to get your life insurance money, make sure to say how much each person should get. You can say what percentage of the total money each person gets or write down the exact amount.
You have two ways to share the money among them. In the first way, called “per capita,” each person only gets money if they’re still alive when you pass away. If they’re not alive anymore, their share goes to the others.
In the second way, called “per stripes,” if someone you chose passes away before you, their share gets divided equally among their surviving kids or relatives.
6. Keep Your Beneficiary Designations Up-To-Date
Remember to check your beneficiary choices regularly. If your family situation changes or one of your beneficiaries dies, update your life insurance policy immediately.
This helps ensure that your life insurance money goes to the right person or people. For instance, you need to update your policy if you got married after naming your mom as your beneficiary when you were single. If you don’t, the money will still go to your mom.
So, remember to update your life insurance to keep things in order when you experience big life events like getting married, divorced, having kids, taking care of someone, or losing a loved one.
7. Ensure That Your Will Matches Your Life Insurance Beneficiary Choices
Ensure your will and life insurance agree on who gets the money when you’re gone. When you change your life insurance, also update your will right away.
If they don’t match up, the person named in your life insurance gets the money, not the one in your will. For instance, if your will says your child gets the money, but your life insurance lists your spouse, your spouse gets the life insurance money, not your child.
8. Don’t Name a Person Dependent on Government Assistance as a Direct Beneficiary.
If the person you choose to receive your life insurance money is disabled, elderly, or relies on government aid like ODSP for money, getting a large life insurance payout might make them ineligible for that government help. This can cause problems because their regular benefits could stop or get smaller. So, it’s important to think about this and follow government rules.
If your chosen beneficiary needs other government benefits after you pass away, ensure your life insurance money doesn’t interfere with those benefits. Instead of making your special needs child or dependent your direct beneficiaries, it might be smarter to create trust for them.
In the trust, you can appoint someone to manage the money and use it for expenses the government doesn’t cover. This way, they can still get government help while using the trust money for other necessary things.
9. Never Name Minors as Beneficiaries
Avoid naming a child as your beneficiary when picking who should get your life insurance money. In Canada, the law doesn’t allow insurance companies to give money directly to kids.
So, think about how old your chosen beneficiary is. If they’re still below the age of majority according to Canadian or provincial rules when you pass away, the court will pick a guardian to handle the insurance money until they grow up.
But there’s a way around this. You can create something called a trust and make it the beneficiary of your life insurance. The person in charge of the trust, known as the trust manager, will make sure the money is looked after until your beneficiary is old enough to receive it legally.
10. Seek Counsel Before You Name an Irrevocable Beneficiary
When you name someone as an “irrevocable beneficiary” for your life insurance, it means that if you pass away, they’re guaranteed to receive the money from your policy. But here’s the catch: if you change your mind and want to remove their name from the policy, you must agree. You can’t just remove them without their say-so, and that’s why it’s called “irrevocable.” If they don’t agree to be removed, their name stays on your policy.
Not all beneficiary choices should be permanent. Even if your marriage or partnership seems rock-solid now, things can change, and you might regret making someone irrevocable. So, before you decide to make someone an irrevocable beneficiary, it’s a good idea to talk to an insurance expert. They can help you understand the potential complications and ensure you make the right choice for your life insurance payout.
11. Be Aware of Provincial Laws
Some provinces have different rules regarding who you can name as your beneficiary. In some provinces, your spouse can legally claim part of your death benefit regardless of who you name as your beneficiary.
Who Should Be Your Life Insurance Beneficiary: Spouse Or Child?
Deciding who should be your life insurance beneficiary depends on why you have the insurance in the first place. Most people get life insurance when something big happens in their lives, like getting married or having kids.
If you buy life insurance to ensure your spouse and children are financially secure if you’re not around, it makes sense to name your spouse or common-law partner as the main beneficiary on your policy. This is important because when you’re gone, your spouse will have to care for things like raising your kids, paying for the house, child care, the mortgage, and school expenses.
By picking your spouse as the beneficiary, you ensure they have enough money to handle these responsibilities and cover everyday living costs.
But what if you’re not in a relationship with your child’s other parent? You can choose your adult child as your life insurance beneficiary to ensure they’re looked after. If your child is still a minor, you can create a trust for them and make the trust the beneficiary of your policy.
Another option is to name your children as the backup beneficiaries (contingent beneficiaries) and your partner as the main beneficiary. This way, your partner gets the money if they’re still around, but if not, it goes to your children.
So, whether it’s your spouse, adult child, or a combination of beneficiaries, your choice should match your unique family situation and the financial responsibilities you want to protect.
Who You Should Never Name As Beneficiary
Before you decide who should get your life insurance money, it’s essential to consider certain situations. Making the wrong choice can create problems for your loved ones, leading to delays and taxes. To clarify these issues, let’s discuss who you should avoid naming as beneficiaries on your life insurance policy.
- Never Choose a Minor: Canadian law says that minors can’t directly receive insurance money. So, if you pick your minor child as a beneficiary and assign a trustee, the money goes to the trustee. They’ll hold onto it until your child reaches the legal age. If there’s no trustee, the court manages the funds until your child grows up. However, if a minor is an irrevocable beneficiary, even a parent or guardian can’t change it. The best way to handle this is to create a trust and make it the irrevocable beneficiary. Trustees will then manage the money for your minor children.
- Avoid Naming Someone with a Disability: If the person has a disability and is getting government benefits in Canada, inheriting your life insurance money could disqualify them from those benefits.
- Don’t Name Your Estate: If you make your estate the beneficiary, your death benefit payout might be subject to probate fees. This means less money for your loved ones.
Can Life Insurance Beneficiary be Changed After Death?
Usually, you can’t change who gets the life insurance money after someone has passed away because only the person who owns the insurance policy can do that.
Once the policyholder has passed away, the money goes to the person they had chosen as the beneficiary when they were alive.
But sometimes, there can be disagreements about who should get the money; in those cases, the beneficiary choice might be challenged.
Final Thoughts on How to Choose A Life Insurance Beneficiary
Life insurance isn’t fun to contemplate, but being specific about your wishes can spare your family and loved ones the stress from legal entanglements and provide them with a secure financial future.
Knowing how to choose a life insurance beneficiary is essential because if you fail to select your beneficiary or make mistakes in documenting them, other persons you don’t want can receive your payouts.
If you are worried or concerned about how to choose a life insurance beneficiary in Canada, a professional insurance advisor can help you ensure your intentions are clearly spelt out.
