Naming your Beneficiary – How and How Not To Make a Very Simple Decision

It’s not a decision most people readily think about, which is surprising given that it’s the primary reason people presumably buy their life insurance.  Your beneficiary listed on your life insurance policy may just be a name, but what’s in a name?

Your beneficiary should be the most important factor in your decision to buy life insurance. There’s a number of things you shouldn’t do when selecting one, and a few things you should consider before you do.

#1: Don’t Choose Your Estate as a Beneficiary

Often times when Canadians, particularly seniors, buy life insurance – it’s as part of a wider debt coverage or expense coverage plan. For example, it’s rather difficult to execute a will when your estate is holding tens of thousands or more in outstanding debt.  Common sense would say you should take care of your house before you take care of others, but willing your life insurance policy to your own estate is a poor way of doing it.

Bear in mind that life insurance is a tax-free windfall that is paid directly to a person or group that doesn’t oblige them to legally manage your debt.  As an example, your cousin’s debt isn’t your debt and vice versa. However, if you name your estate as the beneficiary, your debt can be collected through your beneficiary – as you’re technically the recipient even after death.

Some debt is required to be paid off as part of the inheritance process, and some debt can be written off or negotiated. You won’t know the status of that debt until long after you’ve died, meaning you can lose or ear-mark your life insurance policy’s benefits towards obligations you didn’t necessarily need to fill. You can also lose money to probate fees, through the legalities and intricacies of that process depends on your province.

Benefits paid to your estate is the default form of payment should no other beneficiaries be established on your application. Failing to name a beneficiary can leave your benefits floating in the wind and open season to debt collection.

#2: Change in Beneficiaries Should be Updated ASAP

Between when you buy your policy to the end of your life, it’s very likely your personal and professional relationships will change and evolve – and not always for the best. Lost connections, the death of a family member, or a simple change in financial priorities can require you to make adjustments to your beneficiaries and the amount to be paid to them.

Without exception, you should be reviewing your policy annually. This is also a good time to look at your beneficiaries and decide if the current allocation of your death benefit is pertinent or wise given your personal situation or the situation of your beneficiaries. One example may be that a child in your beneficiary form has had a child of their own, and they may require a larger piece of your coverage. Unfortunately, lost or damaged relationships may also require that you reduce or remove certain beneficiaries as well.

The quicker you update your beneficiary list to better reflect your present circumstances, the better your policy represents the intention of your policy. Your advisor can help you figure out what needs to be changed, and this service costs you nothing except a slice of your own time and responsibility.

#3: Consider the Benefits of a Trust Fund

Trusts are extremely advantageous tools to allocate and control the proceeds from a life insurance benefit. While most trusts tend to concern themselves with holding money on behalf of a minor, trusts can be established for all types of people for all manner of reasons.  By setting up a trust, you can avoid the technicality of estate fees, probate fees, and all manner of potential headaches for your beneficiary.

There’s a laundry list of reasons why you might want to set up a trust, but here are some of the big ones:

  • It can control the beneficiary’s use of your benefit. A big reason for wanting this control is to allocate money for minors so it can be better used towards foundational expenses (education, child care, business decisions), but can also be a check for a relative who may not be responsible or prudent with their own money.
  • It protects insurance proceeds from creditors in the event there is litigation against your estate.
  • Any tax implications that do arise from the proceeds your policy are treated separately from the income of the beneficiary.  An advisor should be able to help tell you if any of your beneficiaries would be on the hook for taxable assets.
  • Privacy purposes. For some reasons, it may be prudent to protect the privacy of your beneficiary, especially if they’re a minor or vulnerable in any way.  In particularly volatile family situations, this can prevent a select beneficiary from being singled out in the event of an inheritance dispute.
  • Preserve disability benefits. A bit esoteric of a reason for a trust, but highly important. If a beneficiary is eligible for disability benefits through a provincial disability plan, a trust can ensure their income isn’t adjusted to a level higher than the qualification requirement for that disability plan.  This ensures you can will money to a disabled loved one and not affect their eligibility for disability payments.

#4: Quebec Operates Different than Other Provinces

It’s a little difficult to go into much detail from the perspective of a common-law province dweller, but Quebec estate and probate laws work much differently than they do in other provinces.

Our recommendation, void of any particular advice on the matter, is to find an advisor with good experience in Quebec estate rules if you’re buying and owning a policy within Quebec.

#5: Copy, Store, and Document The Important Details

Specialty Life receives about 30 questions per month regarding policy owners with missing, lost, or incomplete insurance information. When it comes from the policy owner themselves, it’s a hassle and a burden for them to track down their policy details. When it comes from a family member of a deceased policy owner, it can be enormously stressful and confusing.  Furthermore, many people learn of a death in the family but never learn that the deceased even owned a policy at all, making it nearly impossible to collect.

If you own a policy, you owe it to your beneficiaries to keep clear and complete instructions in a secure place that they can access in the event of your death. You won’t be around to guide them step-by-step through the process, but you can leave behind a clear plan that gives them somewhere to start.

After all, without beneficiaries, what’s the point of life insurance at all? It’s an investment in the people you care about, and those people need to know that you’ve made that investment. Keep your records, keep them up to date, and keep them accessible — your family will thank you.

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