How to Make Your Life Insurance Benefit Your Intended Beneficiary

ontario insurance law and beneficiaries

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Insurance Issues

You buy life insurance for a variety of reasons. There is, however, usually only one reason that truly matters: you want to help take care of the ones you love even after you are gone.  Sometimes issues arise where the beneficiary of a policy is in dispute. Let us examine the reasons why this can happen. As we review them, keep in mind how important it is to clearly spell out your beneficiary designations.

Who’s who in life insurance?

There are several financial matters that can ask you to specify a beneficiary. They include personal life insurance, group life insurance, RRSPs, registered and non-registered annuities and variable annuity contracts.

When it comes to insurance products, there are primarily three parties in play:

  1. The owner or policyholder;
  2. The insured – the person whose life is insured (not necessarily the policyholder); and
  3. The beneficiary – the person who stands to benefit if the insured dies.

When you designate a beneficiary, their status can be either revocable or irrevocable. Designating an irrevocable beneficiary will limit your flexibility. You will need to get the beneficiary’s consent to make any changes to the policy that might affect them.

For these reasons, you should only designate an irrevocable beneficiary if the agreement requires it and you know all the limitations and ramifications of doing so. By naming a revocable beneficiary, you will have more flexibility when it comes to amending your policy.

The policyholder can either name a specific person (e.g., spouse or child), their estate, or a personal representative as their beneficiary.

Multiple beneficiaries

Most life insurance policies specify one insured and one beneficiary, but there could be more than one of either. Sometimes a corporation or a trust is listed as a policyholder or a beneficiary, and some policies cover more than one life.

Mortgage insurance often covers both spouses in a first-to-die contract. Sometimes joint policies can have extra provisions that will be excised upon the passing of the second person as well.

Also, it is not uncommon for businesses to cover multiple lives under one policy.

The importance of being specific

The beneficiary of an insurance policy is usually specified by the policyholder during the application process. It is crucial at this time to ensure that everything is spelled out as it should be and that all parties are in agreement.

In the case of Anderson v. Industrial Alliance Insurance, a woman insured the life of her husband with the intent to be the policyholder. She paid all the premiums up to his death. However, the policy issued showed her husband as both the owner of the policy and the insured. The original life insurance application was completed with certain areas left blank. The insurance broker said he would fill in those blanks. The only possible explanation why the husband was shown as the policyholder was that the insurance broker wrote in the husband as the proposed insured and the applicant policyholder.

Upon the husband’s death, the wife found out that her husband, believing he was the policyholder, had added other beneficiaries to the policy, reducing her benefits by 50%. In 2009, the Ontario Superior Court ordered that the broker’s error be rectified. This effectively nullified any changes the husband might have made to the policy because he should have never been listed as the owner of the policy.

It is crucial that you ensure everything is properly filled out when applying for a policy. Double check that you know all the details. If you are completing the application with the help of an advisor, ask them to explain anything you are not sure about.

Changing or revoking a beneficiary

After designating a beneficiary in the application process, a policyholder has the right to change the beneficiary by making a declaration. In doing so, they can either change or revoke their original designation and specify who the new beneficiary or beneficiaries will be.

One can change or revoke the original designation when writing a will or setting up a trust. It can be intentional, but sometimes the original designation can also be revoked by accident.

Often, the insurance company has no knowledge that the policyholder has changed the policy’s beneficiary. The policyholder may assume it will all come out in the wash upon their passing. When this happens, however, sometimes an oversight can result in the benefits going to the wrong person.

Dueling beneficiaries

When a will and insurance policy disagree about who is the beneficiary of a policy, litigation often ensues and it is up to a judge to decide on the intent of the policyholder. There may also be matters of timing and specific wording to consider.

In cases where the will and the life insurance disagree as to who is the designated beneficiary, it is the document that was signed most recently that often decides the case. So, if a will drawn up after the insurance policy designates a change in a beneficiary, the will most likely will take precedence.

There was a curious case in British Columbia in 2005, Dierk Estate v. Smithgall, where the will in question stated, “I hereby confirm that my daughter, Sonya Colleen Smithgall, shall remain as my beneficiary” of certain group benefits of his employer including group life insurance. The only problem with that? The deceased’s daughter wasn’t the designated beneficiary of the life insurance policy. The beneficiary on record was actually his Estate. His common-law wife was the residuary beneficiary of the Estate.

The British Columbia Supreme Court eventually decided in the daughter’s favor. Even though the deceased made an error assuming his daughter was already his designated beneficiary, it was clear enough where he intended the money to go. However, the deceased should have consulted with his insurance advisor before writing his will. Had he done so, the will could have been more precisely worded and a lengthy and costly legal process could have been avoided.

The funds paid out by a life insurance policy to an estate as opposed to a specific person can be used for many reasons, including:

  • paying off liabilities;
  • paying estate taxes;
  • providing income for dependents;
  • funding bequests; and
  • satisfying final estate expenses,

but it may make funds available to creditors. Giving some thought to how you would like your insurance money to be used after you pass often helps you decide who your designated beneficiary should be.

In sync

When every part of your estate plan is in harmony, you lessen the legal woes of those who survive you. You do your loved ones a favour when you ensure each piece of your estate plan complements the others.

To help illustrate this, let us examine Gaudio v. Gaudio. In this case, the deceased Mr. Gaudio had a life insurance policy that designated Mrs. Gaudio as beneficiary. Subsequently, they entered into a separation agreement in which Mrs. Gaudio contracted out of her entitlement to her husband’s estate. After Mr. Gaudio’s death, his Estate argued that Mrs. Gaudio was not entitled to the life insurance. The Ontario Superior Court decided that had the covenants in the separation agreement did not waive or revoke the right of the named beneficiary to the proceeds of the insurance policy, and the ex-wife received the life insurance proceeds.

Avoid mistakes and double-check everything

Merely being under the impression that no further action is necessary may not be good enough in the eyes of the law. In the example above, had Mr. Gaudio contacted the insurance company directly and changed the beneficiary properly, the case likely would have never gone to trial. The deceased’s wishes would have been better served.

To ensure that your estate money goes to the appropriate recipient, it is important to review your life insurance’s beneficiary designation periodically. Making sure that your intent is clear and consistent is the best way to avoid legal challenges that could otherwise arise after your passing.

Get your affairs in order with a little help from Mackesy Smye

The complexities involved in estate planning require technical expertise. You need a law firm that will coordinate every aspect of your estate to better protect you and your interests. Estate planning is a sensitive issue. At Mackesy Smye, we will put together a plan that covers your needs in a comfortable and stress-free way.

Take one step closer to knowing your estate is in trusted hands and contact our wills and estates team at Mackesy Smye today.

Get Started Today with a Free Consult

If you would like to avoid issues when things go wrong, or just want to better understand the particulars with setting up your estate, contact us for a no-obligation consultation.

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