BY: ANDREW STEWART
Naming a life insurance beneficiary should be an easy and uncomplicated process. A beneficiary is the person or institution that you choose to receive the death benefit of your life insurance policy, retirement accounts or pension. While it can be straightforward in many cases, there are a number of potential legal, financial and tax-related problems that can occur if you don’t take the time to name your beneficiaries properly. Therefore, it’s important to find out how you can avoid making simple but potentially costly mistakes. When choosing a beneficiary, it is important to consider who would suffer the most financially from your death, such as your family.
However, we live in a dynamic world in which the “typical” family may not be so typical. Consider these statistics about Canadian families:
- Between 2006 and 2011 the number of common-law couples rose 13.9%
- The 2011 census reported there were more than 64,500 declared same-sex couples and about 33% of those same-sex couples were married
- By 2011, while the majority of children in single parent families lived with a divorced or separated parent (56.2%), over one-third (37.4%) lived with a single parent who had never married
- Blended families or stepfamilies were counted in the 2011 census for the first time. They comprised 12.6% of Canada’s 3.7 million families with children, those families are home to nearly 558,000 children aged 14 and under, about 10% of all those living in a private household.
The person or people you name as a beneficiary are a choice only you can make, but it’s a vitally important choice. So how do you designate a life insurance beneficiary legally? There are two basic types of life insurance beneficiaries; primary and contingent beneficiary. A primary beneficiary is the person that you designate to receive all the proceeds from your death benefit. However, the primary beneficiary estate will not receive any proceeds if he or she dies before the death of the named insured. A contingent beneficiary is your back up beneficiary. The contingent beneficiary will not receive any of the life insurance proceeds if the primary beneficiary is still alive when the insured person dies. Your benefit plan or life insurance policy may allow you to choose more than one primary and contingent beneficiary.
There are two classes of beneficiaries known as revocable and irrevocable beneficiaries. Revocable beneficiaries: the policy owner has the right to change who the beneficiary is at any point without consent of the previously named beneficiary. Irrevocable beneficiaries: the owner of the life insurance policy cannot change the designation of the beneficiary without the consent of the original beneficiary.
How do you choose who should be your life insurance beneficiary? If married, most people choose their spouse as their beneficiary. Typically, you want to select the persons who would suffer financially from your death and therefore you want your death benefits to pass to them as quickly as possible. If you are unmarried with no dependents, you may want to consider choosing a close friend or family member as your beneficiary. Consider choosing someone who could benefit from the money and who is unlikely to pass away before you.
If you have children who are adults, you may want to choose them as your beneficiary. You can assign a percentage of the death benefit to each of them either equally or unequally. Many clients use this as their children’s inheritance. When they are minors, you must be much more careful. In Canada, minor children cannot receive the proceeds from a death benefit from a life insurance policy. Instead, policyholders must select a trustee to manage the proceeds until the child is eighteen. The standard of care required of a non-professional trustee in administering a trust has to act like they would in managing their own affairs. As long as the trustee preserves the proceeds and invests them in authorized investments with ordinary prudence, the trustee will meet this standard care.
You can also name your favorite charity, church or hospital as either the primary or contingent beneficiary.
Beneficiary mistake to avoid: you should not choose your estate to receive your death benefits, because your heirs will have to wait a long time to receive the funds. The proceeds will go to the executor or administrator of the estate. As part of your estate, your death benefits can be used to pay off creditors instead of passing directly to a beneficiary.