In the context of life insurance and health insurance, a “beneficiary” is an individual, group of individuals, or legal entity designated by the policyholder to receive the benefits or proceeds of an insurance policy upon the occurrence of a specified event, typically the death of the insured person in the case of life insurance. The beneficiary is named in the insurance policy documents and has the legal right to claim the death benefit or policy proceeds under the terms of the policy.
Types of beneficiaries
Primary beneficiary
This is the first in line to receive the policy benefits. If the primary beneficiary is alive and willing to claim the benefits upon the insured’s death, they will receive the proceeds.
Contingent (or secondary) beneficiary
This beneficiary is entitled to the policy benefits only if the primary beneficiary is deceased, unable or unwilling to accept the benefits at the time of the insured’s death.
Revocable beneficiary
The policyholder retains the right to change the beneficiary designation without the consent of the beneficiary.
Irrevocable beneficiary
Once designated, the policyholder cannot change the irrevocable beneficiary without the beneficiary’s consent.
In Quebec, naming a married or civil union spouse as beneficiary makes the designation irrevocable unless it says otherwise, and a divorce or annulment ends the spouse’s designation.
Importance of designating a beneficiary
Ensures financial protection
Designating a beneficiary ensures that the insurance proceeds go directly to those whom the policyholder wishes to protect or support financially after their death.
Bypasses probate
Life insurance proceeds paid to a named beneficiary do not go through the probate process, allowing for quicker access to funds needed for expenses like funeral costs or outstanding debts. Probate rules vary by province; in Quebec, a notarial will doesn’t need probate.
Estate planning
Beneficiary designations are an essential part of estate planning, helping to ensure that assets are distributed according to the policyholder’s wishes.
Trustee for a minor
An insurer generally can’t pay a minor directly. Naming a trustee for a minor beneficiary avoids the money being paid into court or held until the child is an adult.
Policyholders should carefully consider their choice of beneficiaries, keeping in mind the potential financial needs and circumstances of those they wish to protect. It’s also advisable to review and update beneficiary designations periodically or after major life events such as marriage, divorce, the birth of a child, or the death of a previously named beneficiary.