One of the best ways to ensure your assets follow through with your wishes is by designating a contingent beneficiary on a life insurance policy. Your life insurance estate benefit will be received by a contingent beneficiary in case your primary beneficiaries have also passed. Naming a contingent beneficiary is important as it helps to ensure the benefit bypasses probate. It also follows through on your wishes to make sure the people you love and care about receive the proceeds quickly, and on a tax free basis.
You should always name a primary beneficiary when setting up a life insurance policy. These can be changed at any time during your lifetime unless you name that primary person as “Irrevocable”. There are occasions where an “irrevocable” beneficiary is required but in general terms, a beneficiary designation can be changed at any future date so long as it’s revocable. The primary beneficiary or beneficiaries are the first in line who will receive your benefits upon the passing of any life insured.
On a personal owned policy, often the spouse of the life insured is named as the primary beneficiary. It is also common for a portion to be left to parents. For example, you may have your spouse 90% primary beneficiary and 5% to your mother and 5% to your father. If you and your spouse were to predecease your parents they would then equally split 100% of the benefit amount.
You should also name a contingent (or back up) beneficiary that is the next person in line in case your primary beneficiaries predecease the life insured person. As a result, you will be able to avoid this benefit from being tied up in probate. Even more important than the probate issue is that time it can take to settle an estate. If the insurance proceeds land in the estate they could be held up in court if any legal issues were to transpire. If there is a named beneficiary, the tax free death benefit is paid directly, bypassing probate and the estate. If there is a person listed who is no longer alive their portion is distributed to the survivors who are named. This will avoid any unforeseen delays of distribution of your assets to your heirs and it provides the critical influx of capital that is typically necessary to help the surviving members of the family to take time and have the resources to cope with the loss of a loved one. For business owners…this influx of capital could be the difference in the business that you have spent a lifetime building actually surviving. Often businesses will fail when the business owner or a partner dies. A capital injection could carry forward what the business owner has put all of their energy into.
Primary beneficiary: this is the first party or parties who received the insurance death benefit. While the term includes the word “primary,” you can name more than one person or entity to receive insurance proceeds. For example, a single parent often selects all of their children for equal shares to receive the money and therefore all children would be named as primary beneficiaries. In addition, where a life insured person with no dependents or children, may elect to name their church, and or a number of charities they care deeply about as the primary beneficiaries. It is thought this large giving many hospitals and care facilities are able to build new facilities and purchase lifesaving equipment. Likewise parks and facilities are often renamed for the contributions of folks who give in this manner.
Contingent beneficiary: this is the second in line after the primary beneficiary. The only way a contingent beneficiary can receive death benefit proceeds is when all of the primary beneficiaries cannot be located or are otherwise deceased. It is very important to name a contingent beneficiary. If a married couple goes on a vacation and both perish but they were named as the primary beneficiary on one another's policies with no contingents listed the funds would be paid to the estate. If there are children they would now have to wait and often disputes arise at this stage when proceeds are being divided.
Another instance, if you name your daughter as a primary beneficiary and your son as a contingent beneficiary; your daughter will be the only one that receives the death benefit proceeds when you die. Your son will only become the recipient if your daughter predeceases you or cannot be found. However, if you name both of them as primary beneficiaries, they will both receive the proceeds according to the percentage you specified or whoever remains will receive the entire benefit if one passes before the other as is the likely case.
Alternatively, you could name your spouse as the primary beneficiary and your children as the contingent beneficiary. In this case, your spouse will receive all of the proceeds, your kids will only receive the proceeds if your spouse is predeceased. If you wanted both your children and spouse to collect the assets, you can list all of them as primary beneficiaries. In case your spouse dies before you, your kids would still be the primary beneficiaries. If the children are under the age of majority then a trustee must also be elected to look after the funds until the minor children come of age.
Many Parents want to make sure their minor children are taken care of if premature death were to occur. Minors cannot receive the benefit of life proceeds until they reach the legal age of majority. When applying for coverage or when changing beneficiaries at a future stage a trustee is chosen by the policy owner (who may or may not be the life insured person). This is the trusted person that is tasked with caring for the proceeds of a life policy on behalf of the minor children until they reach legal age of majority. Therefore the children are the beneficiaries but the benefit amount is held in trust for them by the named trustee. Often a family member such as an aunt, uncle or grandparent is named as a trustee. Other common examples would be a god parent or close trusted family friend who has been involved in the children's lives. If you have elected a guardian for your children this person is a logical choice to also be trustee for any proceeds.
Anyone that is close to you or an organization you care about can be named as a contingent beneficiary.
The annuity settlement option allows for distribution over time which is commonly referred to as a “Gradual Inheritance Strategy”. It can provide a scheduled stream of income payments in multiple ways to a beneficiary. For example, one million dollar benefit pays a lump sum of $100,000 to 3 children at age 18, then a schedule of annual payments of $12,000 per year for 20 years. In this way the policy owner can plan how the death benefit proceeds can be used before they themselves die.
Having the wrong beneficiary means that the people the policy is meant to protect might never get the protection. For example, it is not advisable to name your estate as the beneficiary. While it may be tempting to list your estate as your beneficiary, and many legal professionals may recommend it, it can have severe consequences for your loved ones left behind after you pass away. In fact, a death benefit payout to your estate can mean your dependents don’t get the entire benefit or anything at all for that matter. How often have you heard of people having issues created with an estate where cirital money is needed and everything gets tied up in an expensive and time consuming legal battle? Instead, consider consulting with an estate planning attorney, who can make recommendations about what to identify in your will as legally enforceable instructions as to how you want the beneficiaries to use the funds they receive upon your death. In this way the will provides your final and last wishes and sets the intent of what you want to see happen, but the actual proceeds are not tied up and subject to creditors and other legal/ time constraints should the will be contented.
How will your estate be handled after your death? It may go through probate, a court proceeding that will first determine the debts the estate owes. The debts will first be paid to the creditors before the remaining amounts are distributed to your dependants as per your wishes. This of course assumes everything goes as planned which you will have no control over.
If the primary beneficiary is dead or can't be found and there is no contingent beneficiary, the assets are put in the general estate before going to probate. If you have a legally enforceable will, assets would be distributed according to your wishes. If there is no will, assets would be distributed to your heirs according to probate laws and guidelines of your jurisdiction (Province of Canada).
We have expert financial advisors and coaches that can help you review and understand how contingent beneficiary designations work in a life insurance policy. Enroll for the on demand training and we can put you in touch with our financial advisor in Calgary to have a personalized conversation.