Life Insurance Beneficiaries

In this post we review how beneficiary designations work and discuss considerations for your coverage.


With more time at home, it might be a good time to review your life insurance coverage, including your beneficiary designations.


The purpose of a beneficiary designation in a life insurance policy is to ensure that if you passed away, the money from your policy would end up in the hands of the individual or entity that is intended.


It’s an important part of your estate planning as your life insurance is designed to provide money for last expenses, tax liabilities, or provide equalization between heirs.


How is a beneficiary designated?

Beneficiaries can be designated in several ways:

  1. In the application process

  2. A subsequent declaration such as a beneficiary change form

  3. A declaration in a will

Any beneficiary changes must be submitted to the insurer and note that divorce and separation won’t cause a designation to be revoked automatically by carrier.


Ensure that if you have separated from your spouse, you revisit all beneficiary designations – both for individual insurance contracts and group insurance contracts.


What are the types of beneficiaries?

Revocable beneficiaries mean that the policy owner is free to change the policy, and revocable beneficiaries can be changed at any time without their consent. Insurance companies generally pay proceeds of a life insurance policy to the last beneficiary that they have on file, but if there is any question about who should receive the proceeds, the insurer will pay the proceeds to the court.


Irrevocable beneficiaries: This type of beneficiary limits the rights of the policy owner and must be filed with the insurer. Irrevocable beneficiaries must provide consent for almost any change to a policy. Irrevocable beneficiaries are usually employed in situations were creditor protection is required or to comply with separation agreements or court orders.


Irrevocable beneficiaries offer creditor protection. If there is a named beneficiary other than the insured’s estate, the policy proceeds would avoid probate and creditors of estate. Provincial legislation prevents creditors of policy owner from seizing contract during the insured’s lifetime as long as the beneficiary is part of the preferred class (spouse, child, grandchild, or parent).


Disabled beneficiaries: A Henson Trust can be considered if a life insurance beneficiary is disabled. This is a type of discretionary trust that gives the trustee complete discretion over disbursements from the trust. This type of trust ensures that any benefits from government sources would not be lost if insurance proceeds are paid out. The parameters around Henson Trusts vary by jurisdiction.


Minor beneficiaries: If you are naming beneficiaries under the age of 18, note that you have to assign a trustee or guardian of property. A formal trust document is preferred for several reasons as it provides a formal arrangement for the distribution of insurance proceeds.


Multiple Beneficiaries

Insurance proceeds can be distributed to more than one beneficiary. Different beneficiaries can receive different amounts of insurance proceeds. If one beneficiary pre-deceases the insured, then the proceeds will be paid to the remaining beneficiaries on a pro-rated basis.


Contingent or secondary beneficiaries: Contingent or secondary beneficiaries would only receive the proceeds of a life insurance settlement if the primary beneficiary had passed away. It is always wise to name a contingent beneficiary. Otherwise, insurance proceeds will fall to the estate of the insured.


Your current beneficiary is outlined on your annual review letter from Vital Partners. Please let us know if you need to review or change your current beneficiary.