What is a life insurance beneficiary anyway?
There are a lot of buzzwords we use in the life insurance industry and “beneficiary” is one of them. As an insurance agent, I often take this knowledge for granted, so I’m writing a series of basic articles for those of you looking for more information.
In simple terms, a beneficiary is a person or legal entity that receive some sort of benefit from a benefactor. For our purposes, a beneficiary is the person/people or legal entity you choose to receive the proceeds from your life insurance.
This is one of the biggest decisions you’ll make when you set up coverage. I think a lot of clients think this is just a set it and forget it sort of decision, but it’s not.
Selecting a beneficiary is something you should do with a lot of care and forethought. This is why you should call Policy Architects today. We are well aware that purchasing life insurance coverage is only the first steps in a long term relationship. All policies should be reviewed and managed throughout your term to make sure your goals are still being satisfied. Life changes and so do your needs.
Policy Architects - Why I Love My Job
My name is James Heidebrecht and I’m the founder of Policy Architects. I’m a Dad, Husband, and Musician. In a word, I’m superhuman!
Or maybe not.
The thing is we’re all mortals. We work hard, build up our nest egg and get older. Along with that comes some of the other less palatable aspects of life like illness and death. Sure these are all topics that none of us want to discuss but they’re facts of life. I love my job because I help people plan for their family’s future. It’s funny, we all know how important it is to save for retirement – so why isn’t life insurance just part of the deal?
Of course, there are people with kids that have enough money to stay afloat should something detrimental happen to one of the main breadwinners or childcare providers, but that’s not the case for most of us. That being said, if you have dependents, debt, a mortgage, or run your own business life insurance is a no brainer. No one plans to die. It happens. BUT if you have life insurance you know your family won’t fall through the cracks.
Choose Your Life Insurance Beneficiary Well
Ok now back to the topic at hand. Selecting a life insurance beneficiary takes some serious thought. There is a lot of room for complications. So let’s take a look at the most common mistakes right now!
Not Picking a Life Insurance Beneficiary At All!
YES, incredibly this does happen…
…and this is another reason to always work with a knowledgeable independent agent. If you use Policy Architects we will work with you through the whole process. This means going through all the details to cross the t’s and dot the i’s. Most people purchase life insurance because it’s not taxable and they want to make their beneficiary’s life less difficult.
If you fail to name a life insurance beneficiary your assets will go through probate and may face the tax consequences you were seeking to avoid.
There’s an easy solution don’t forget this VERY important detail!
Failing to Update Your Life Insurance Beneficiary After a Divorce, Death or Other Significant Life Event
Which brings me to the next point. Life circumstances change. Divorces are increasingly more prevalent and people die. This is one of the many reasons you should review your life insurance coverage regularly. Sadly there are a lot of people who pay their premiums mindlessly and don’t consider these changes.
Did you know people inadvertently leave large sums of money to unintended beneficiaries because they don’t select a new life insurance beneficiary after a divorce?
Who wants to subject their loved ones to possible litigation or a lost inheritance.
If your beneficiary is dead once again, you’re going to run into probate issues. Want to avoid this sort of situation? Review your life insurance coverage to make sure everything is in order. Contesting a life insurance beneficiary is not an inheritance you want to leave your loved ones.
“The classic worst case is you get divorced, your [ex-]wife is named as beneficiary and you never change the form,”
Naming a Minor as a Beneficiary Without Designating a Trustee
This is a no-no.
We all know kids are not capable of managing large sums of money. If you die and leave them as your beneficiary without designating an adult (Trustee) to manage the money, a Judge will appoint someone else to handle the cash on their behalf. Unfortunately, this may not be the person you would have chosen. Not to mention, this will create delays for the money to be used to benefit your children. Worst case scenario? Your kids don’t have any access to the funds until they turn 18 years of age.
Avoid this issue altogether, by designating an adult trustee to manage the money on behalf of your children. Even better, set up a trust to manage the funds in the event of your death. Most importantly, communicate with the person who handles the life insurance beneficiary trust about your wishes.
Designating a Child With Special Needs or an Adult Dependent as a Beneficiary
Naming a child with a disability as your beneficiary may make them ineligible to continue receiving benefits from Government programs like the Ontario Disability Support Program (ODSP). Even though life insurance proceeds are tax-free to the beneficiary, they may affect the income threshold test for a child qualifying for federal and provincial financial subsidies.
Over the long term, these benefits really add up. So it’s in your best interest not to do anything to jeopardize your dependent from receiving them.
One of the best solutions, assuming they’re eligible, is to set up a Henson Trust and designate it as the beneficiary. A Registered Disability Savings Plan (RDSP) can be used in conjunction with the trust to ensure continued support from government benefits programs.
It’s important to do your research and get proper advice from a lawyer who specializes in trusts. This is something you want to get right the first time!
“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.”
Failing to Name Secondary Beneficiaries in the Event You and Your Spouse Die Together
People often choose their spouse to be their life insurance beneficiary. This makes sense as it’s likely they will be in charge of the children until they reach 18 years of age. But life rarely unfolds the way we expect it to.
The thing is, your spouse could perish with you or predecease you – once again leaving the policy in limbo. Why not name secondary beneficiaries to avoid this altogether? In the insurance biz, we call them contingent beneficiaries. Similar to primary beneficiaries, you can designate more than one contingent beneficiary. If you do this don’t forget to allocate the percentage split between the individuals named. It may sound a little overzealous but I think it’s a good safety mechanism to make sure your life insurance funds don’t end up in the wrong hands or subject to probate.
For example, if you list your spouse as the primary beneficiary, it may be a good idea to name your three children as equal contingent beneficiaries. This will ensure that the tax-free proceeds flow directly to them in the event you die together in a car accident.
NOTE* Make sure you designate a trustee (#3) if any of your children are under the age of 18
Assuming Your Will Outranks Your Beneficiary Designation
Have you made out a will? It’s one of those things that people like to put off. Much like life insurance, who the heck wants to talk about estate planning. Shockingly more than 51% of Canadians do NOT have a will. Hmmmm really makes you scratch your head. If you don’t lay out what you want to be done with your estate when you’re dead someone you don’t know will do it for you.
There’s really no excuse for this as you can fill out a will online for next to nothing. If you have a large estate obviously you’ll need some legal assistance, but most of us aren’t in this situation.
So here’s the deal you can list someone as the beneficiary of your life insurance proceeds on your will BUT if the information is different on your policy, the person listed on the policy will receive the funds.
The moral of the story? Make sure your life insurance beneficiary designations are filled out properly.
Not Being Specific
If you list your “kids” or “children” as life insurance beneficiaries you’re asking for trouble. The more specific the information you provide the better. So if you’re naming your children please include a first name, last name and address if it’s different from yours. That way the life insurance company will easily be able to locate them.
Another issue you may want to consider is exact dollar figures you want to assign to your beneficiaries if there is more than one. That has to be worked out if you don’t want it to be divided equally.
Forgetting to Tell Your Beneficiary You're Leaving Them Money
Sadly a lot of life insurance policies go unclaimed.
YEP, and to add insult to injury there is very little required of the life insurance companies to follow up on this. So if your life insurance beneficiary dies or simply doesn’t make a claim, the insurer will keep the funds.
All that money paid and – and the company doesn’t have to deliver on a claim?! The best way to avoid this altogether is to inform the person you wish to benefit that they have some money coming to them in the event of your passing. You can send or email them a copy of your policy details so they can follow up with the life insurance company if you happen to pass away during your term.
Designating Your Beneficiary Irrevocable When it's Not Necessary
When you’re filling out your life insurance application, you’re given the option of designating your beneficiary as either revocable or irrevocable. You must choose one.
A revocable beneficiary can be changed by the policy owner at any time without requiring anyone’s consent. All the owner has to do is fill out a form, sign it and submit it to the insurance company. The changes will then be made.
An irrevocable beneficiary means the policy owner has to get the consent in writing of said beneficiary in order to make any changes to the policy. This designation can be useful in a divorce or separation agreement where one or both parties are required to hold in force life insurance for the benefit of their children. In cases like this, the ex-spouse would be listed on the policy as an irrevocable beneficiary.
If you’re not required to use an irrevocable beneficiary designation then don’t. It can make modifying your policy at a later date very problematic. I’ve personally encountered people not being able to locate an irrevocable beneficiary because they’ve moved out of the province. Making it impossible to make timely changes to their policy.
Why You Should Contact Policy Architects TODAY!
If you’re in the process of nailing down your life insurance coverage you should give us a call at Policy Architects.
It’s interesting, there’s a lot of promotion of quick and easy processes on the internet. Simply log in to a site and plug in your deets and you’ll find the best possible policy at the cheapest rates.
I beg to differ. In life insurance, the personal touch really does make all the difference. Nuances in health, personal circumstances, and finances are often revealed only after I go through a clients background in detail.
…but that’s not all. Having a life insurance adviser that cares about your circumstances AFTER the sale is as important as finding a good one to start with.
Questions are our jam.
If you’re looking for information about your life insurance beneficiary we have the answers, we also follow up with you to make sure your policy still fits your needs.
A call center or AI won’t do that.
Why not give us a ring today. We can help.