What is a Life Insurance Beneficiary?

A life insurance beneficiary is a person or an entity that receives the death benefit upon the policyholder’s death. You can name more than one beneficiary on your life insurance policy. If you have multiple beneficiaries, you must designate how the proceeds are to be distributed.

You can pass on the policy amount to anyone you wish:

• You can name a single beneficiary. Upon your death, this person or entity will receive the entire death benefit amount

• You can name multiple beneficiaries and have the money split as per your wishes

• You can name a charity or your estate as the policy beneficiary

• You can name a trust as a beneficiary

In addition, you can also name a minor as a beneficiary. However, you must then also appoint a guardian for managing the assets until the minor reaches adulthood. Since the process of setting up a guardian can be costly, most people avoid naming a minor as their beneficiary.

A better option is to create a trust for the minor and name it as a beneficiary. If the minor is not of the legal age at the time of your death, the trustee will manage the assets until they are.

If you pass away without naming anyone, the proceeds will go to your estate by default.

How Do You Name Insurance Beneficiaries?

You must provide accurate information about the person or people to whom you want the proceeds to go. For example, you must enter their correct name, birthday, and contact information. If you want to designate two or more persons as beneficiaries, outline the percentage of the death benefit that each should receive.

Lastly, double-check before submitting to ensure everything is correct. In case of an error, legal issues could arise that can delay the payout.

For example, let’s say you write “spouse” in the beneficiary field. A few years down the line you get divorced and then remarry without making any changes to your policy. After your death, both your current and former spouses might try to claim the benefit.

Because “spouse” is not clear, you have created a legal problem that could lead to a delayed payout. The problem is you have not specified whether you wanted the proceeds to go to the person who was your spouse when you bought the life insurance policy or to the person who was your spouse at the time of your death.

As a result, a fight over the death benefit may occur. With all the heartache and stress that usually accompanies the death of a loved one, you do not want to add confrontations over money, not to mention legal fees.

Primary and Contingent Beneficiaries

Often it makes sense to name a contingent beneficiary as well. If your primary beneficiary dies before you, the contingent beneficiary will receive the benefit. The contingent beneficiary also receives the proceeds if the insurer fails to locate your primary beneficiary. If you want, you can name multiple contingent beneficiaries and designate the percentage (or the amount) that each should get.

Let’s assume you buy a $2 million life insurance policy and name your spouse as the primary beneficiary. Upon your death, the entire death benefit amount will go to your spouse.

However, there is always a possibility that your spouse may die before you. If that happens, your estate will receive the proceeds by default. If you would rather have the death benefit distributed equally between your three children, name them as contingent beneficiaries.

Per Capita and Per Stripes

You can choose per capita or per stripes to dictate how the policy value should be distributed if the primary beneficiary passes away and no other contingent beneficiaries are listed.  

Per capita is the default, and a much simpler designation. If one beneficiary dies, their share is distributed equally between the remaining ones.

For example, say you have listed your three children as primary life insurance beneficiaries. But one child passes away before you. In this case, each surviving beneficiary will get 50% of the policy amount instead of one-third.

A per stripes arrangement is a little complicated. If a beneficiary passes away before you, their children (if they have them) will get their share. Continuing with the above example, let’s say the deceased beneficiary is survived by three children. So now, their share will be distributed equally between their children. That is, each of your grandchildren will receive one-ninth of the life insurance policy value.  

Who Can Change the Life Insurance Beneficiary?

Only one person can add a new beneficiary or remove an existing one, and that is the policyholder. Consider updating the beneficiary designation after important life events, like:

• Marriage

• Divorce

• Childbirth

• Beneficiary’s death

As a policyholder, you can make changes to your policy’s beneficiary designation any time. Some life insurance companies allow you to make a beneficiary change online; some others require you to fill in a hardcopy beneficiary form.

Do Beneficiaries Pay Taxes on Life Insurance Proceeds?

Life insurance proceeds are usually not taxable as income. However, in some situations, the life insurance benefits may be subject to income tax like the life insurance death benefit.

The death benefit amount is typically paid in a lump-sum, one-time payment. If your beneficiary receives the entire policy value at once, the payout is not taxable. Regardless of the coverage amount, your beneficiary would not have to report it as taxable income on their Canadian tax return.

However, in the following two scenarios, the policy proceeds may count as a taxable income.

Your beneficiary decide to receive the payout in installments

If your beneficiary chooses to receive the proceeds in installments, the provider is likely to pay interest on the outstanding amount. In such a case, the beneficiary will have to pay tax on the interest.

Your estate is the beneficiary

If you have named the estate as the beneficiary, the payout may be subject to tax. The same is true when you do not name a beneficiary. That is because in this case the proceeds of your policy will go to your estate by default.

Most people purchase life insurance to secure their family’s future. Therefore, it is all the more important that you ensure your loved ones receive the payout after you pass on. By regularly updating your life insurance policy you can safeguard their financial future.

Can a Life Insurance Beneficiary be Denied the Death Benefit?

While most life insurance claims are paid, in rare instances, an insurer may decide not to pay out.

Your provider can reject the life insurance claim in three scenarios:  

You lied on your life insurance application

Life insurance policies include a contestability period of two years. If you die within this period and the insurer finds out that you lied, they can turn the claim down, or they may pay a partial death benefit to your beneficiaries.  

You die from suicide within the first two policy years

Life insurance coverage includes a suicide clause. Most policies do not cover death by suicide within the first two years. After this exclusionary window, life insurance generally pays out in the event of suicide.

So, if you commit suicide within the first two years of your policy, your beneficiary might not receive the death benefit.

You die within the waiting period

Some life insurance policies include a waiting period, usually two years. If you die from a natural cause within this period, the insurer will not pay the life insurance policy amount. Instead, they will refund the premiums paid into the policy, plus interest.

In some cases, the insurer may pay a partial policy amount in the event of a natural death within the waiting period. Generally, the payout in such cases is 50% of the policy value.

Conclusion

A beneficiary receives the proceeds of your life insurance policy upon your death. You can name anyone as your beneficiary. If you want, you can designate multiple beneficiaries. The insurer will distribute the payout between them according to your wishes. Consider consulting with an experienced insurance advisor, like Dundas Life, about how to best designate the policy amount so that all your loved ones are sufficiently protected.

Frequently Asked Questions

How many beneficiaries can be on a life insurance policy?

There is no set limit to the number of beneficiaries on a life insurance policy. You have the option of designating several persons, trusts, charities, or organizations as beneficiaries. However, to minimize future conflicts, you should specify the percentage of the death benefit that each beneficiary should receive. As your life circumstances change, remember to check and update your beneficiaries.

How is life insurance paid out to beneficiaries?

When filing a life insurance claim, beneficiaries must provide the insurer with the policyholder's death certificate. After claim approval, the death benefit is usually given as a lump sum. Some policies, however, may allow payouts as annuities or installments.