Fact CheckedWhat is a life insurance beneficiary anyway?
The insurance industry is full of buzzwords, and beneficiary is one of the most common. As an agent, it’s easy to forget that this term isn’t always as clear as we think it is.
Simply put, a life insurance beneficiary is the person, people, or legal entity you choose to receive the payout from your life insurance policy when you pass away.
While selecting coverage often gets the most attention, choosing the right beneficiary is one of the most important decisions you’ll make when setting up life insurance in Canada. And contrary to what many people assume, it’s not a “set it and forget it” decision.
Life insurance policies should be reviewed periodically to make sure they still align with your goals. Life changes… marriages, divorces, children, deaths, and financial shifts all happen, and your beneficiary designations need to reflect those changes.
Failing to update them can create delays, legal complications, or outcomes you never intended. That’s why it’s worth taking the time to understand how beneficiaries work and where potential roadblocks can arise.
Let’s walk through the most common ones.
The 9 Most Common Life Insurance Beneficiary Pitfalls
1. Forgetting to Name a Life Insurance Beneficiary
Yes, unbelievably, this still happens.
This is one of the biggest reasons I always recommend working with a knowledgeable independent agent. At Policy Architects, we walk clients through the entire process and review every detail to make sure nothing important is missed.
Many people buy life insurance specifically because the payout is generally not taxable and is meant to make life easier for their loved ones. But if you fail to name a beneficiary, the death benefit is typically paid to your estate instead.
That means probate.
Probate creates delays, additional costs, and legal complexity… exactly what most people are trying to avoid. Even a relatively simple estate can take six to twelve months to settle.
Sigh.
The good news? This is one of the easiest mistakes to prevent. Naming a beneficiary properly ensures the money goes directly to its intended recipient, without unnecessary complications.
If you’ve ever asked yourself whether you need life insurance, proper beneficiary planning is a big part of that answer.
2. Failing to Update Your Beneficiary After Divorce, Death, or Major Life Changes
Which brings us to the next issue.
Life changes… marriages end, relationships shift, and people pass away. Yet many policyholders continue paying premiums year after year without ever reviewing their beneficiary designations.
This leads to some truly painful outcomes.
I’ve seen situations where large sums were paid to unintended beneficiaries simply because the policy was never updated after a divorce.
Ouch.
If a named beneficiary has passed away and no update was made, the payout may once again go through the estate, triggering probate delays and potential disputes.
Even worse, outdated beneficiary information can open the door to litigation, family conflict, or lost inheritances. Contesting a life insurance beneficiary is not the kind of legacy anyone wants to leave behind.
The solution is simple: review your beneficiary designations regularly and update them whenever a major life event occurs.
Knowing how life insurance works in Canada explains why beneficiary designations override your will.
The Classic Worst Case Is You Get Divorced, Your [Ex-]Wife Is Named As Beneficiary And You Never Change The Form
3. Naming a Minor as a Beneficiary Without Designating a Trustee
This is a big no-no.
Children are not legally able to manage large sums of money. If you name a minor as your life insurance beneficiary without appointing an adult trustee, the courts will step in.
That means a judge may appoint someone to manage the funds on your child’s behalf, and unfortunately, it may not be the person you would have chosen. This process can also delay access to the money when it’s needed most.
In the worst-case scenario, your child may not be able to access the funds at all until they reach the age of majority.
The solution is simple: designate a trusted adult as a trustee to manage your child’s funds on their behalf. Just as important, make sure you clearly communicate your wishes to the person you choose, so there’s no confusion about how the money should be used.
Important note:
If any of your beneficiaries are under the age of 18, you should always designate a trustee.
Remember that choosing trustees and beneficiaries should go hand in hand with determining how much life insurance you need.
4. Naming a Child With Special Needs or a Dependent Adult as a Beneficiary
This is an area where well-intentioned decisions can have serious unintended consequences.
Naming a child with special needs or a dependent adult directly as your beneficiary may affect their eligibility for government assistance programs, such as Ontario Disability Support Program.
While life insurance proceeds are generally paid tax-free, they can still be counted when income or asset thresholds are assessed for federal or provincial support programs. Over time, the loss of these benefits can add up significantly.
A common solution, when appropriate, is to establish a Henson Trust and name the trust as the beneficiary instead of the individual. A Registered Disability Savings Plan (RDSP) can often be used alongside the trust to help preserve long-term financial support while maintaining eligibility for government benefits.
Because this area involves both legal and financial considerations, it’s essential to seek advice from a lawyer who specializes in trusts and disability planning. This is one situation where getting it right the first time truly matters.
The Henson Trust Was First Used In Ontario In The Late 1980s. It Became Of Wider Interest When The Supreme Court Of Ontario Ruled In 1989 That The Trust Assets Were Not Vested In The Beneficiary And Thus Could Not Be Used To Terminate Government Benefit Programs.
5. Failing to Name Secondary (Contingent) Beneficiaries
Most people name their spouse as their primary life insurance beneficiary. That makes sense. In many cases, the surviving spouse will be responsible for the children and household expenses.
But life doesn’t always unfold the way we expect.
Your spouse could pass away before you, or you could both die at the same time. If no secondary beneficiaries are named, the policy can once again end up in limbo.
That’s where contingent beneficiaries come in.
Contingent beneficiaries receive the payout if the primary beneficiary cannot. You can name more than one, and you should always specify the percentage split between them.
For example, if your spouse is your primary beneficiary, you might name your children as equal contingent beneficiaries. This ensures the proceeds flow directly to them — tax-free — without probate delays, even in an unexpected tragedy.
It may feel overly cautious, but it’s a simple safeguard that prevents major complications.
A properly structured beneficiary setup is part of choosing the best life insurance policy, not an afterthought.
6. Assuming Your Will Overrides Your Beneficiary Designation (It Doesn’t)
Do you have a will?
It’s one of those things people like to put off, just like life insurance. Yet more than half of Canadians still don’t have one.
If you don’t clearly outline what should happen to your estate, someone you’ve never met may end up making those decisions for you.
Here’s the critical point many people misunderstand:
Your life insurance beneficiary designation overrides your will.
Even if your will says one thing, the beneficiary named on your policy is the person who receives the proceeds. If those two documents don’t align, the policy wins.
The takeaway is simple: make sure your beneficiary designations are filled out correctly and reviewed whenever your estate plan changes.
7. Not Being Specific Enough
Vague beneficiary designations create problems.
Listing “my kids” or “my children” without full details can delay claims and create confusion. Always use full legal names, and include addresses when possible, especially if beneficiaries live separately from you.
If you name multiple beneficiaries, you should also specify how the proceeds should be divided. If you don’t specify otherwise, insurers typically split benefits evenly.
Clarity here helps ensure your loved ones receive the funds quickly and without unnecessary administrative hurdles.
8. Forgetting to Tell Your Beneficiary You’ve Named Them
This one surprises people, but many life insurance policies go unclaimed.
If a beneficiary doesn’t know a policy exists, they can’t file a claim. Insurers are not always proactive in tracking down beneficiaries, and unclaimed benefits can sit for years.
The solution is simple: tell your beneficiary.
Let them know a policy exists, where it’s held, and how to contact the insurer. Even emailing them a copy of the policy details can make all the difference.
It’s a small step that ensures the money you’ve paid for actually gets where it’s supposed to go.
Please remember this when you are planning your funeral insurance.
9. Naming an Irrevocable Beneficiary When It’s Not Required
When you complete a life insurance application, you’ll be asked whether your beneficiary is revocable or irrevocable.
A revocable beneficiary can be changed at any time by the policy owner.
An irrevocable beneficiary, however, must give written consent before any changes are made to the policy, including beneficiary updates or, in some cases, policy modifications.
Irrevocable designations are sometimes required in divorce or separation agreements, particularly when life insurance is used to secure child support obligations. In those cases, they serve a legitimate purpose.
Outside of those situations, irrevocable beneficiaries can create serious problems.
I’ve seen cases where policyholders couldn’t make necessary updates because the irrevocable beneficiary had moved, disappeared, or could not be located. That can completely block changes when you need them most.
Bottom line: don’t use an irrevocable beneficiary unless you are legally required to do so.
Why You Should Speak With Policy Architects
If you’re in the process of setting up or reviewing your life insurance coverage, a conversation with a knowledgeable advisor can make a meaningful difference.
At Policy Architects, we work with multiple Canadian life insurance companies and take the time to understand your health, finances, and long-term goals. The details matter, and they often don’t surface through quick online forms or automated tools.
Life insurance isn’t just about finding a policy. It’s about structuring it correctly and making sure it continues to work as your life changes.
We believe good advice doesn’t stop once the policy is issued. Questions, updates, and reviews are part of the process, and we actually enjoy them.
If you want guidance from someone who’s in it for the long haul, we’re here to help.
