After your death, it’s too late
to finish the things left undone or fix the things done poorly. This includes choosing a
beneficiary under your life insurance policy. You should know the correct way to designate
a beneficiary, the different types of beneficiaries and the unique arrangements you can
make for each.
By naming a beneficiary, insurance proceeds do not
form part of the estate and are not subject to the control of creditors. If you fail to
name a beneficiary, the money you planned to provide for the person you love could
actually end up taking care of someone else or in the hands of creditors.
A beneficiary is named through a written document
known as a declaration, which may be made as part of the insurance contract or in a
separate document; you can change the beneficiary at any time during your life by
completing a "change of designation" declaration. For example, a failed marriage
does not automatically revoke the designation of a spouse as a beneficiary. If you want to
change this designation, a new declaration is essential.
You can designate an irrevocable beneficiary.
However, while the beneficiary is living, you cannot revoke or alter the designation
without the beneficiary’s consent.
An irrevocable designation should be made with sound
judgment. Certain provinces require a signed statement which verifies that you understand
the effects, and your life insurance or financial advisor must sign a similar statement
that confirms all outcomes have been explained. An irrevocable beneficiary designation is
not effective unless and until it is filed with the insurance company’s main Canadian
office.
A beneficiary designation can also be made by an
insurance declaration in the will. But the declaration cannot be irrevocable. For example,
if you signed a will in 1994 designating your spouse as a beneficiary to your insurance
policy, and a year later made a designation on the company’s form changing the
beneficiary to your child, the insurance money at the time of your death will go to the
child.
A contingent beneficiary is another option you can
consider. If the primary beneficiary is deceased at the time the benefits are payable, the
contingent beneficiary will receive the benefits. This avoids any difficulties if the
primary beneficiary dies before you, and a new declaration has not been made.
A minor should not be designated as a beneficiary.
However, an insured may, in a contract or by a declaration, appoint a trustee for a
beneficiary who is a minor. The trustee is responsible for the management of the insurance
money. Specific instructions should be left to give the trustee direction to how the money
is to be used.
It is important to carefully consider all your
options when choosing a beneficiary. The assistance of a member of the Financial Advisors Association of Canada
(Advocis) can help you ensure that your
money goes to the people you choose. Advocis members have the specialized training to
provide answers to questions about your beneficiaries and your life insurance policy.
