What are beneficiaries?

Did you know researchers have found that humans make 35,000 choices every single day? That’s a lot of things to consider, so you’re forgiven if you find it tempting to put off decisions. Here’s the thing, though – making certain decisions can be really helpful, and picking a beneficiary for your insurance policy can be one of the most important choices you can make.

Deep down, a lot of us already know it’s important to consider what happens when we are no longer around. Most Canadians (82%) say we would “hate” to leave the burden of final expenses behind, according to a poll from North Cover. Plus, 72% of us want to provide some financial support to family after passing away.

Making sure your final wishes are fulfilled can be easier if you designate a beneficiary (or beneficiaries). But you might be wondering what exactly they are, what they do, and how to pick them. If so, read on – we’ve got it covered.

What is a beneficiary?

A beneficiary is a person or entity (such as a charity) who will receive your assets after you pass away. When you purchase a life insurance or final expenses insurance policy, you can name a beneficiary or beneficiaries who will receive the payout from your policy, once they make a claim.

If you choose not to name a beneficiary when you buy an insurance policy, the payout will become part of your estate and distributed according to the terms of your will. However, that means it can take longer for your loved ones to access financial support after you pass away.

Why you need a beneficiary

Designating a beneficiary or beneficiaries is a good way to not only make sure your final wishes are known, but that your assets are distributed the way you want.

When you name a beneficiary for your final expenses insurance policy, the payout will go directly to them, bypassing your estate. If you don’t name a beneficiary, your estate becomes the beneficiary and your family will have to work with the legal system to access any assets in your estate, including the cash from your policy. A life insurance claim is typically paid out shortly after a person’s death, while any money or other assets from a will may take longer to distribute.

You can name your estate as a beneficiary but as mentioned by the Financial Services Commission of Ontario, the death benefit becomes part of your estate and will be subject to estate administration tax. This tax is charged on the total value of your estate, so your family may get less money than they would have if they had been named as beneficiaries.

But here’s another reason why naming a beneficiary for your insurance policy can be a good thing: it can also give you peace of mind that the people you care about most will have financial support after you pass away.

How many beneficiaries can you have?

The number of beneficiaries you can name may vary depending on your insurance provider. North Cover Final Expenses Insurance policies let you choose up to five beneficiaries, with the ability to divide up your benefit amount between them however how you see fit.

Who can be a beneficiary?

When designating a beneficiary, you’re pretty spoiled for choice. You can name:

• A spouse or partner
• Children
• Dependents
• Family members
• Friends
• Charities

Robin Hammond, the founder of 12th Mile Law, a boutique wills and estates firm in downtown Toronto, says there’s no one-size-fits-all approach to designating a beneficiary. “It’s more about who the client wants to benefit and why, and what issues that may bring up,” she says.

For example, Robin works with her clients to make sure they aren’t overlooking legal obligations that survive death. One of the key ones is about minors (people under age 18). In Ontario, for example, minors cannot be named as beneficiaries. Instead, a trust needs to be set up – an arrangement where someone (a trustee), is responsible for managing the benefit until the minor turns 18 and can receive the benefit directly.

“Let’s think about why we might (or might not) want, or can’t afford a long-term trust,” Robin cautions. “Are the funds sufficient to warrant the expenses of a trust? Are we concerned about spendthrifts?”

In short, naming children under 18 as beneficiaries can be tricky and potentially expensive.

How long after a person dies will the beneficiaries be notified?

It’s a good idea to talk to the people you’ve named as your beneficiaries to make sure they know how to submit a claim when the time comes. If for some reason your beneficiaries aren’t aware of your policy and don’t know to make a claim, they may become aware of your policy through the estate process.

In the case of North Cover Final Expenses Insurance, we aim to let beneficiaries know when they’ll receive their payout within about a week of a claim being submitted.

Do beneficiaries pay tax on inheritance in Canada?

Good question – after all, you probably want the people you love to benefit as much as possible. There is no inheritance tax in Canada, so the beneficiaries of a will won’t have to claim any assets they receive, such as real estate or investments, as additional income.

That’s because the Canada Revenue Agency collects tax directly from the deceased estate (in other words, all their assets are considered part of their income, not the beneficiaries). The remaining values of the assets are then distributed to the beneficiaries, but keep in mind that this can take several months or even years. So, it’s worth designating beneficiaries when you take out your life insurance policy, rather than having your claims payout go to your estate.

An insurance payout is also typically not taxable, so your beneficiary or beneficiaries won’t have to report it as extra income on their taxes.

What does an executor have to disclose to beneficiaries?

The executor is the person responsible for administering the estate after someone passes away, including executing the terms of the will. It could be a legal representative, family member, or friend chosen ahead of time. If you don’t name an executor, the courts will appoint someone.

Regardless, executors do have responsibilities to beneficiaries. They must notify the people with an interest in the estate and what benefits (if any) the will sets out for them in a timely manner, plus keep beneficiaries informed as the process to close an estate goes on. That said, executors don’t have an obligation to consult with beneficiaries about decisions related to the estate.

Are beneficiaries entitled to a copy of the will?

In Canada, the executor does not have to disclose the contents of someone’s will to others simply because they ask, even if they were related to the deceased or likely stand to legally benefit from the will. However, if someone has a legal interest in the will and is not the executor, they may ask the courts to intervene so they can see the terms of the will.

How to choose a beneficiary

Most insurance policies have a specific form that you can fill out to designate your beneficiary. You can typically choose more than one (in the case of North Cover policies, you can choose up to five).

Your primary beneficiary – the first person or entity named – will be the first in line to receive benefits from your policy, followed by the others. If your primary beneficiary happens to pass away before you, your secondary beneficiaries will receive their benefits. This is an important point to note, especially if you plan on naming older friends of family as beneficiaries.

While you might want to set it and forget it when it comes to end-of-life planning, checking in once in a while is important.

“So many of these considerations lead me to recommend that clients review their will at least every three years because things change,” Robin says. “Children grow up, people become incapable or die, and relationships fail or grow.”

Find out more about how North Cover can help protect those you love from your end-of-life costs with final expenses insurance.