Life Insurance and Probate

Generally, life insurance payouts pass outside probate, but there are some rare exceptions.

Knowing what probate is and how to avoid your life insurance policy from becoming entangled in it can help your loved ones receive the death benefit upon your death without any delays or deductions.  

What is probate?

Probate is the formal legal process of authenticating your will and approving your named Executor to pay all debts and taxes and distribute the remaining estate to your heirs, according to the instructions left by you. An estate is the sum total of a person’s assets and liabilities at any given point in time. In other words, an estate is everything you own, including a home, bank accounts and a car, and everything you owe, including credit card payments and mortgages.  

If you die with a will, your will is likely to go through probate. If you pass away without a will, you will be said to have died “intestate.” In this situation, the court appoints an estate administrator — who may or may not be the person you had in mind — to ensure your assets are distributed to your heirs according to the provincial statutes and regulations. That means if you die intestate, the provincial laws decide who receive what, and not you.  

Does Life Insurance Require Probate?

Life insurance is a legally-binding contract between you and the insurer. The insurance carrier promises to pay the proceeds from your policy to the designated beneficiary upon your death in exchange for regular premium payments. When you buy a life insurance policy, you must name the person — called the beneficiary — whom you want to receive the death benefit.  

Life insurance does not go through probate, except in a few situations. The death benefit goes directly to the beneficiary named in the policy.  

However, if the beneficiary predeceases you or passes away after you but before the proceeds can be issued and there is no secondary beneficiary listed, the policy must go through probate. The court will decide who receives the policy’s benefits and their share.  

Your policy will also go through probate if the listed beneficiary is untraceable. Another situation in which your policy will go through probate is when the court needs to appoint a guardian for a minor beneficiary. In this case, the life insurance policy itself does not require probate, but the process of naming a guardian after the insured’s death does.  

The probate process delays the release of the payout. Generally, the insurance companies settle a death claim within 30 days of receiving the claim form. However, when a policy goes through probate, it takes much longer than that. But the worst part is the intended beneficiaries will not receive the entire payout.  

If your policy goes through the probate process, its proceeds will become a part of your estate and as such will be first used to pay off unpaid debts and legal fees. Only after these have been paid is the remaining payout distributed among your heirs.

What Life Insurance Scenarios End in Probate?

In most cases, insurance carriers pay the death claim directly to beneficiaries without the need of probate. However, there are some rare exceptions. A life insurance policy may go through probate in the following scenarios:  

• The policyholder did not name any beneficiaries.
• None of the designated beneficiaries is alive.

• The estate is named as the policy beneficiary.
• A minor is the beneficiary of the policy.

How to Avoid Probate Court by Choosing a Beneficiary

Avoiding probate saves both time and money. How can you ensure your life insurance policy does not go through probate after your death? We have listed some guidelines.

Update the beneficiary designation after the death of the initial beneficiary

When you take out a life insurance policy, the insurer asks you to designate a beneficiary. But since life insurance contracts generally last a long time, a lot can change during this period. You might get divorced or the primary beneficiary may die before you. Whenever a major life event occurs, you should review the beneficiary designation and update it, if necessary.  

One of the mistakes many people make is failing to name a new beneficiary after the death of the initial beneficiary. For example, let us say a wife buys a policy in her name and lists her spouse as the beneficiary. But the husband predeceases her and she forgets to name someone else as the policy beneficiary. Two years later she passes away. Because there is no one to receive the payout, her policy will go through the probate court.  

Avoid naming a minor as the beneficiary

You can name a minor as your beneficiary, but the insurance provider cannot pay the death benefit directly to a minor. If your beneficiary is under the age of majority when you pass away, the probate court decides what to do with the payout.  

The court will name a guardian, who will manage the minor’s estate until the child attains the age of majority, usually 18 or 19 in Canada. This is not an ideal scenario, partly because of the associated costs and partly because the court may assign someone you do not approve of. In other words, the probate process may prevent the proceeds from your policy from being utilized the way you had intended.  

You can avoid these challenges by naming a trust as the beneficiary and appointing someone in whom you have full faith as the trustee. This person will manage your child’s estate, including the payout from your policy, until the child reaches the age of majority.  

You cannot change the policy beneficiary through a will

You cannot change the beneficiary designation of your life insurance policy through your will. For example, let us say you buy a life insurance plan and name your brother as the beneficiary. A few years later, you decide you would rather have your sister receive the payout and name her in your will as your policy’s beneficiary — but that is not going to happen. It is your brother who will receive the proceeds upon your death, not your sister.  

The life insurance policy beneficiaries are final and a will cannot override them.  

Name a contingent beneficiary

Life insurance beneficiaries are either primary or contingent. The primary beneficiary receives the death benefit upon your death. But if they predecease you or cannot be located, the insurer issues the payout to the contingent beneficiary.  

Naming one or more contingent beneficiaries reduces the risk of your policy going through probate because the intended beneficiary is no longer alive or not reachable.  

Update your policy after divorce to avoid unwanted consequences

Divorce is one of those major life events that call for a review of the life insurance beneficiary designation. If you and your spouse have legally separated, but you did not replace the ex-spouse as the beneficiary before your death, your policy could end up going through probate.  

In some provinces, a divorce may automatically revoke the designation of an ex-spouse as the policy beneficiary. If this revocation happens and the policyholder does not name a new beneficiary, there will be no one to collect the death benefit upon death. That means the policy must pass through probate.  

Avoid naming your estate as the beneficiary

Life insurance is an important estate planning tool. As such, you may be tempted to name the estate as the beneficiary, especially if your will contains instructions regarding how you want the proceeds to be distributed among your heirs. However, naming the estate as the policy beneficiary can have serious ramifications for your heirs.  

When the estate is named as the beneficiary, the life insurance payout will have to go through probate. That means this money will be used for paying off probate fees, other legal costs, and any unpaid debts before it can be distributed to your loved ones. In other words, your heirs will neither receive the death benefit immediately nor all of it.  

‍Why You Should Assign a Beneficiary to Your Life Insurance Policy?

Most people buy a life insurance policy to secure the financial future of their loved ones. Perhaps the same holds true for you. In that case, you would want the insurer to issue the entire death benefit to your dependents without delay. If you have designated a beneficiary or beneficiaries, that is exactly what will happen. A beneficiary could be your spouse, child, parent, or anyone whom you want to receive the proceeds from your insurance policy.  

However, if you do not name a beneficiary, your estate will be considered as the beneficiary by default. As a result, the payout will require involvement from the probate court.  

Can You Use a Will to Change Your Life Insurance Beneficiary?

No, you cannot use your will to change the life insurance beneficiary. A will cannot supersede the beneficiary designation listed on a life insurance policy.

Conclusion

Generally, the payout from life insurance policies does not go through probate — a legal process that validates and approves a will. But there are some exceptions.  

If no one is listed as the beneficiary, the insurer is unable to locate the beneficiary, or a minor is the beneficiary, your policy must pass through probate. The insurer will hand the proceeds from your policy to the probate court, and the latter will deduct probate fees and other costs before distributing the balance among your heirs according to the terms of your will.

If you did not make a will, the remainder will be distributed according to the provincial laws.