Fact CheckedWhat is a life insurance beneficiary anyway?
In the insurance industry, we use many buzzwords, and “beneficiary” is one of them. As an agent, I often take this knowledge for granted.
For our purposes, a beneficiary is the person/people or legal entity you choose to receive the cash from your life insurance policy.
This is one of the most significant decisions you make when establishing coverage. Many clients think this is just a set-it-and-forget-it decision, but it’s not.
All policies should be reviewed and managed long term to ensure your goals are still on target.
Life changes, and so do your needs. Let’s review some potential roadblocks!
The 9 Most Frequent Life Insurance Beneficiary Pitfalls
1. You Forget to Select a Life Insurance Beneficiary!
YES, incredibly, this does happen…
It’s another reason to always work with a knowledgeable independent agent.
If you use Policy Architects, we guide you through the whole process. This means reviewing all the details to cross the t’s and dot the i’s.
Most people purchase life insurance because it’s not taxable and want to simplify their beneficiary’s life.
If you fail to name a life insurance beneficiary, your assets go to your estate and then through probate. This causes big delays and You may face the consequences you sought to avoid. Did you know it can take 6 – 12 months to settle a small estate?
Sigh.
There’s an easy solution, so don’t forget this crucial detail!
2. Failing to Update Your Life Insurance Beneficiary After a Divorce, Death, or Other Significant 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 regularly review your life insurance coverage.
Sadly, there are a lot of people who pay their premiums mindlessly and don’t consider these changes.
Did you know some people inadvertently leave large sums of money to unintended beneficiaries because they don’t change their information after a divorce?
OUCH!
Who wants to subject their loved ones to possible litigation or lost inheritance?
If your beneficiary is dead, you will once again encounter probate issues.
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”
3. 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 funds, a Judge appoints someone else to handle the cash on their behalf.
Unfortunately, this may not be the person you want. It could also delay using the money to benefit your children.
Worst case scenario: Your kids will not have access to the funds until they turn 18.
You can avoid this issue altogether by designating an adult trustee to manage the money on behalf of your children.
Most importantly, communicate with the person or family member you select as trustee about your wishes.
“NOTE* Make sure you designate a trustee if any of your children are under the age of 18
4. 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 add up. So it’s in your best interest not to do anything to jeopardize your dependent from receiving them.
A good solution? Assuming eligibility, set up a Henson Trust and designate it as the beneficiary. A Registered Disability Savings Plan (RDSP) can be used with the trust to ensure continued support from government benefits programs.
It’s essential to research and get proper advice from a lawyer specializing in trusts. You want to get this 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.”
5. Failing to Name Secondary Beneficiaries in the Event You and Your Spouse Die Together
People often choose their spouse as their life insurance beneficiary. This makes sense, as the spouse will likely be responsible for the children until they reach 18.
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, remember to allocate the percentage split between the individuals named. It may sound a little overzealous, but it’s a suitable safety mechanism to ensure your life insurance funds aren’t 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 secondary beneficiaries.
This will ensure that the tax-free proceeds flow directly to them in the event you die together in a car accident.
6. Assuming Your Will Outranks Your Beneficiary Designation (Hint it Doesn’t)
Do you have a will? It’s one of those things that people like to put off.
Much like life insurance, who wants to talk about estate planning? Shockingly, more than 51% of Canadians do not have a will.
Hmm, that makes you scratch your head. If you don’t lay out what you want done with your estate when you’re dead, someone you don’t know will do it for you.
There’s no excuse for this; you can fill out a will online for next to nothing. Of course, you’ll need legal assistance if you have a large estate, 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 receives the funds.
The moral of the story? Make sure your life insurance beneficiary designations are filled out correctly.
7. 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 name your children, please include their first and last names and addresses if they differ from yours.
That way, the life insurance company can quickly locate them.
Another issue you may want to consider is the exact dollar figures you wish 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.
8. 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, the life insurance companies do very little to follow up on this.
So, if your life insurance beneficiary dies or doesn’t make a claim, the insurer keeps the funds.
Yikes!
All that money paid—and the company doesn’t have to deliver on a claim?! The best way to avoid this is to inform the person you wish to benefit that they will receive some money in the event of your passing.
You can email them a copy of your policy details so they can contact the life insurance company when you pass away.
9. Designating Your Beneficiary Irrevocable When it’s Not Necessary
When you fill out your life insurance application, you can designate your beneficiary as either revocable or irrevocable. You must choose one.
The policy owner can change a revocable beneficiary anytime without anyone’s consent.
The owner must fill out a form, sign it, and submit it to the insurance company.
An irrevocable beneficiary means the policy owner must obtain the beneficiary’s written consent before making any changes to the policy.
This designation can be helpful 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 is listed on the policy as an irrevocable beneficiary.
Don’t use an irrevocable beneficiary designation if you’re not required to. It can make modifying your policy at a later date very problematic.
I’ve encountered people who cannot locate an irrevocable beneficiary because they’ve moved out of the province, making it impossible to implement 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.
We have access to the best life insurance companies in Canada.
Interestingly, the internet is full of promotions for quick and easy solutions. Log in to a site and input your details to find the best possible policy at the cheapest rates.
I beg to differ. In life insurance, the personal touch does make all the difference. Nuances in health, individual circumstances, and finances are often revealed only after I detail a client’s background.
…but that’s not all. A life insurance advisor who cares about your circumstances AFTER the sale is as important as finding a good one.
Questions are our jam.
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