What is a beneficiary?
Generally, a beneficiary is a person or organization that you name to receive your money and belongings after you pass away. It could be things like your savings, life insurance, retirement accounts, other property and possessions, or investment accounts.
For most types of assets or property, including insurance policies, you can have more than 1 beneficiary as well, and you can also designate a charity or non-profit organization. You may choose to split assets between your spouse and children or other family members. There’s usually no limit to how many beneficiaries you choose – it’s all about who you want to benefit when you’re gone.
If you live in Quebec, there may be different rules around beneficiaries.
What are the benefits of having a beneficiary?
Financial security for loved ones
When you choose a beneficiary, you’re ensuring that the people you care about, like family or close friends, receive a financial benefit when you’re not there anymore. It may also help you reduce stress knowing your loved ones can be financially supported.
For example, if you have an insurance policy on your life, the person you name as the beneficiary will receive the proceeds at the time of your death, which they can then use for their family, pay off debts, pay funeral costs, put towards a downpayment on a home, or invest, etc. This is a great gift to leave behind for your loved ones.
Smooth distribution of assets
Having a beneficiary in place can play a role in how smooth your assets are distributed after you’re gone. Depending on the type of asset, naming a beneficiary other than your estate, may avoid having to include the asset as part of the administration of your estate.
When it comes to life insurance policies, your beneficiary (except when you name your estate) can get quicker access to the insurance payout by providing the right documentation to the insurer. This can reduce stress for your loved ones knowing they can get quicker access to funds they can use.
If you don’t have a designated beneficiary on your life insurance policy, your estate becomes the beneficiary. This could mean that your family would have to go through a more time consuming and costly legal process to get access to your insurance payout, which will be distributed through your estate. Canada Life offers access to Estate at Ease, which is a service that can be an effective estate administration tool.
You have control
When done correctly, naming a beneficiary allows you better control how some of your assets are dealt with after your death. You get to tailor your financial legacy according to your personal wishes and priorities. You get to communicate your preferences and the financial plans that you want carried out when you die and may also help avoid misunderstandings among your loved ones after you’re gone.
Flexibility to customize
An advantage of designating a beneficiary on your life insurance policy is the flexibility to customize the distribution of your insurance payout by designating different percentages to multiple beneficiaries.
Let’s look at an example. Brad wants to designate different percentages of a life insurance policy to multiple beneficiaries. He designates his spouse, Lisa to receive 50% of the life insurance payout, with the remaining 50% being split equally between his 2 children, Morgan and Taylor, each getting 25%.
The above example is for illustrative purposes only. Situations will vary according to specific circumstances.
If you have a revocable beneficiary or beneficiaries on your life insurance policy, you have the flexibility to update or change them along with what percentage they should receive. You may wish to do this following events affecting you or your beneficiaries such as marriages, divorces, births, deaths, or shifts in personal relationships.
Maintaining privacy
Beneficiary designations in a life insurance policy to someone other than the estate, typically operate outside of the estate administration process. As a result, your choice to benefit someone other than your estate with the proceeds of the policy wouldn’t form part of a probate application and can remain private depending on the province.
What are different types of beneficiaries?
Primary beneficiary
A primary beneficiary can be more than 1 person or entity you choose to receive your assets first, usually a spouse or children. They’re the main recipient of your assets or property once you’re no longer here. These assets or property could be life insurance payouts, some retirement funds, property and possessions, businesses, or investment accounts to name a few.
Contingent beneficiary
If a contingent beneficiary is named, they automatically become the new primary beneficiary if the primary beneficiary(ies) dies before the owner of the asset.
Revocable beneficiary
In the context of an insurance policy, a revocable beneficiary designation is one you can change at any time without needing the beneficiary’s permission. Let’s say you initially chose your sibling as the beneficiary of your life insurance policy, but later, you decide you want to make your child the beneficiary instead. With a revocable beneficiary designation, you have the freedom to make that change without the need for your sibling’s permission. It’s all about keeping your plans up to date to reflect your most current wishes.
Irrevocable beneficiary
In the context of an insurance policy, a irrevocable beneficiary designation cannot be changed unless the beneficiary consents. As an irrevocable beneficiary, the person or entity you have named as beneficiary has certain rights and control regarding the policy.
Trust as beneficiary
You may name a trust as the beneficiary of an insurance policy and name a trustee to receive the proceeds of the policy on behalf of the trust. The trustee is responsible for overseeing the trust assets and ensuring they are distributed to the beneficiaries of the trust. Trusts are often used for specific purposes, such as providing for beneficiaries who are minor children, charitable giving, or protecting assets.
Charities and non-profits
If there’s a cause or organization you really care about - maybe it’s helping animals, supporting sick kids, or saving the environment – you can make that charity or non-profit organization a beneficiary. This means that the asset will go to that charity or non-profit when you’re no longer here.
This is a great way for you to support a cause you deeply care about, even after your lifetime.
When and how should you change your beneficiaries?
With how unpredictable life can be, it stands to reason that you’ll eventually experience certain life changes. It’s smart to check and see if your beneficiaries are still relevant during these life changes.
- Marriage: It’s crucial to update your beneficiaries to include your spouse. This can ensure they they’re supported if something happens to you.
- Death: If a beneficiary you’ve named has passed away, this would be an instance where you’d want to update your plans.
- Divorce: After a divorce, revisit your beneficiary designations to reflect your new circumstances.
- Birth of a child or adoption: Welcoming a new family member is a joyous occasion. Update your beneficiaries to include your child or adopted child to help ensure their financial security.
- Remarriage: If you remarry, your financial priorities may shift. Update your beneficiaries to reflect your new family structure and ensure your assets go where you intend.
- New policy: If you buy a new life insurance policy or open a different type of account, make sure you add your beneficiaries to these accounts for future distribution if something were to happen to you.
- A change in financial situation: If your financial situation has evolved, so might your priorities. If you experience things like getting an inheritance, promotion at work, successful investing, or a change in living situation, it’s a good time to reassess and update your beneficiaries to ensure the right person is in place at the right time in your life.
What are some of the risks of not having a beneficiary?
Delay in access to assets
Without a designated beneficiary other than your estate, your assets might have to go through the estate administration process and probate (if needed) after you’re gone. You don’t want to leave your loved ones having to deal with the stress of costly and time-consuming court proceedings to access your assets.
Taxes
If your assets aren’t going to a designated beneficiary other than your estate, your assets may be subject to certain taxes or debts that otherwise could have been avoided if given to a loved one.
Family disagreements
Not having a beneficiary named where possible could lead to family disagreements after you’re gone. When it’s not clear who gets what, it could create confusion and disputes among loved ones.
Improper distributions
Without a clearly defined beneficiary, you run the risk of your assets being distributed to someone you may have not intended or of disputes arising about entitlement.