The responsibility of naming a beneficiary for a life insurance policy can be daunting. After all, it combines two subjects most of us don’t like to dwell on: mortality and finances. But it’s also an essential step in ensuring the financial security of the people you leave behind, whether it’s spouses, children, or others—even fellow employees—who are dependent on your work and income. And it’s something that requires more than a quick signature. Here’s a look at how you can feel confident in your choice of beneficiary when it comes to setting up your life insurance policy.
Revocable Beneficiaries vs. Irrevocable Beneficiaries
This is an important distinction to make. Revocable beneficiaries can be changed at any time, without the current beneficiary’s consent. Irrevocable beneficiaries, meanwhile, can only be changed if the current beneficiary is present and agrees to the change in writing. Yes, the latter can feel riskier for the policyholder, and it’s a common stipulation after separations and divorces to guarantee child support or spousal support payments without the policyholder being able to change such payments as they please. In Quebec, a spouse selected as a beneficiary is irrevocable by default, while in most other cases, beneficiaries are revocable unless otherwise specified. If your decision is the slightest bit shaky, it’s obviously better to keep the beneficiary revocable… just make sure to follow the next step if that’s the case.
Revise Your Choice
You should come back to your life insurance policy intermittently and make sure it’s still to your liking. You’d be surprised how many people seal the fate of their life’s work with a quick initial and then forget about it. Reconsidering a beneficiary goes hand-in-hand with revising your will, and should be done as often. Divorces, having children, and marriages are just a few examples of experiences that could alter who you want to receive your money after your death.
Naming an Estate
In many cases, a person will name a spouse, child, parent, or even their favourite charity as beneficiary, who will then receive the money directly (without being subject to taxes), upon the policy owner’s death. But sometimes a person will choose to name their estate as the beneficiary, instead; this is also the default if an individual is not named.
When an estate is named, the money is distributed only once the policy owner’s will is probated: this can be an issue if it’s needed by a dependent immediately, as the money is distributed to inheritors much less quickly or directly than with a single, named beneficiary. Estate beneficiaries are also subject to estate taxes (you can read more about Ontario’s Estate Administration Tax here).
However, naming one’s estate can be a useful option for those unsure of whom to name as their beneficiary or those who want to circulate their wealth more broadly via the designations of their will. Estate money will also often be collected to pay off creditors and outstanding debts.
A Few Other Points to Consider
There are a number of additional thoughts to keep in mind when deciding on a beneficiary. In the case of financially protecting young children, you must set up a guardian or other individual as a trustee who can properly manage the funds until the child is old enough to receive them. You can also name a contingent beneficiary, who will receive the death benefit if your primary beneficiary were to die before you or at the same time as you. Contingent beneficiaries are especially common in situations where a spouse or someone older has been named the primary beneficiary.