Beneficiary designation is a part of an insurance contract that is a simple yet important step.

An insured may designate anyone as beneficiary of the proceeds of his life insurance policy. This person will be paid the death benefit (insurance amount) when the insured dies.

Revocable or irrevocable beneficiary

The insured must also decide if the designation is "revocable" or "irrevocable". The insured may change the designation of a revocable beneficiary, but cannot change an irrevocable designation without the beneficiary's consent.

When beneficiary is designated

When a beneficiary is designated under an insurance policy, the death benefit is not part of his estate. It is paid directly to the beneficiary. The benefit cannot be seized by the insured's creditors if the designation is irrevocable. If the designation is revocable and the beneficiary is a member of the insured's immediate family (e.g. your legal or common-law spouse or your ascendants or descendants), the benefit is also protected from creditors.

When no beneficiary is designated or estate is beneficiary

Alternatively, if a beneficiary has not been named or if the estate is named as the insured's beneficiary, the death benefit is paid to the estate (or the rightful heirs). In this case, the benefit is subject to creditors' claims. It is also subject to probate fees (executory measure taken by a court) when the estate is settled. Probate is not required in Quebec.

Primary and secondary beneficiaries

The insured may also name more than one primary beneficiary (e.g.: his children), as well as several secondary beneficiaries.

The primary beneficiary is the first beneficiary named. The insured may also name a secondary beneficiary in case the primary beneficiary pre-deceases the insured.

If the insured and the primary beneficiary (e.g.: the insured's spouse) die at the same time, the beneficiary is considered to have died first. As a result, the insured's death benefit is paid to the secondary beneficiary (and not to the primary beneficiary's estate). If the insured has not named a secondary beneficiary, the benefit will be paid to the estate.

Divorce or dissolution of a civil union

In Quebec, if the spouse is named as beneficiary, the designation is automatically revoked in the event of divorce or dissolution of a civil union. This automatic revocation applies to both revocable and irrevocable beneficiaries.

In this case, the insured must therefore name a new beneficiary (including the former spouse, if so desired), otherwise the death benefit will be paid to the estate.

In every province, this automatic revocation does not apply in the case of common-law or civilly wed couples who separate. In all cases, insureds must change the designation themselves, if desired.

Minor beneficiary

Another important point to remember is that a death benefit cannot be paid directly to a minor, that is, a beneficiary under age 18. A legal guardian (including one of the parents) or a trust must be appointed to administer the benefit on the minor's behalf. The rules vary depending on the province.

Designation must be written, signed and dated

Finally, the beneficiary designation must be written, signed and dated, and the original sent to the life insurance company or, in the case of a group insurance plan, kept by the plan administrator.

Should reflect any changes

Ideally, any beneficiary designation should be reviewed at least once a year or following a major event like the birth of a child or a divorce.

Questions?

If you have any questions on the designation of a beneficiary, consult a lawyer, a notary (in Quebec) or your insurance representative.