It’s understandable that most people don’t want to think about who gets their life insurance money when they die. Naming life insurance beneficiaries feels like planning for the worst, and that’s not something anyone enjoys doing. But this decision is actually one of the most important choices you’ll make when you have a life insurance policy.

Consider what happens if you don’t name anyone to receive your death benefit. Your family could be in for some unpleasant surprises.

Without designated beneficiaries, your life insurance money typically goes to your estate when you pass away. That means it could get tied up in probate, subject to taxes, and reduced by legal fees before your loved ones see any of it. The financial protection you thought you were providing might end up being much less than you planned.

But you can control how smoothly your family receives this support. When you name beneficiaries properly, the insurance company can pay them directly, avoiding probate delays and extra costs. Your loved ones get the full amount you intended during what’s already a difficult time.

More than just filling out a form, choosing beneficiaries is about making sure your family is truly protected when they need it most.

Understanding Life Insurance Beneficiaries

A life insurance beneficiary is simply the person (or organization) who receives your death benefit when you pass away. They don’t have any responsibilities other than filing a claim with your insurance company to collect the money.

You have several options when naming beneficiaries. Your primary beneficiary is first in line to receive the payout. But what happens if your primary beneficiary dies before you do? That’s where a contingent beneficiary comes in. This person (sometimes called a secondary beneficiary) only receives the money if your primary beneficiary can’t.

You can name multiple beneficiaries and decide how much each person gets. Some people split it equally, while others might give different amounts based on each person’s needs.

Primary and Contingent Beneficiaries

Your primary beneficiary is first in line to receive the death benefit when you pass away. Think of them as your main choice. But what happens if your primary beneficiary dies before you do, or can’t be found when it’s time to pay the claim?

That’s where contingent beneficiaries come in. These are your backup choices who only receive the benefit if something happens to your primary beneficiary. Without a contingent beneficiary, your death benefit could end up going to your estate instead of the people you intended to help.

Revocable vs. Irrevocable Beneficiaries

You have two levels of control when naming beneficiaries. With revocable beneficiaries, you can change your mind anytime without asking anyone’s permission. Most people choose this option because it gives you flexibility as your life changes.

Irrevocable beneficiaries are different. Once you name someone as an irrevocable beneficiary, you can’t remove or change them without their written consent. This provides guaranteed protection for that person, but it also limits your options later. Note that in Quebec, your spouse is automatically considered an irrevocable beneficiary unless you specify otherwise.

What Happens Without Named Beneficiaries

If you don’t name anyone, your death benefit goes to your estate. This creates problems your family doesn’t need during an already difficult time. The money becomes subject to probate (a lengthy legal process), might be used to pay your debts, and could face estate taxes.

Special Considerations for Minor Children

Naming a child as your beneficiary requires extra planning. Insurance companies won’t hand over money directly to minors. You’ll need to set up a trust or name a trustee to manage the funds until your child reaches adulthood.

Without proper planning, a court might appoint someone to manage the money – and that person might not be who you would have chosen.

Keeping Your Beneficiaries Current

Life changes, and your beneficiaries should reflect those changes. Review your designations every year or after major events like marriage, divorce, having children, or when a beneficiary dies.

Your beneficiary designations override whatever you write in your will. Plus, life insurance money paid directly to a named beneficiary avoids probate fees and estate taxes. That means more money goes to the people you want to help.

Who Can Be a Beneficiary?

Beyond family members, you can name various entities as beneficiaries. Some people choose charitable organizations as “a last good deed”. If you have minor children, you might set up a trust to manage the money until they’re old enough to handle it responsibly. Business owners sometimes name their company as a beneficiary, especially for key person insurance or business partnership agreements.

Multiple Beneficiaries and Distribution

You can name several beneficiaries and decide exactly how to split the money between them. For example, you might give 50% to your spouse and 25% each to your two children. You can even adjust the percentages based on each person’s needs or circumstances.

There are also specific ways to handle distribution if a beneficiary dies before you. Per stirpes distribution divides money by family lines, while per capita splits it equally among the remaining individuals. These methods help avoid confusion when family situations change.

The key is making sure your beneficiary choices match your overall financial plan and family situation. As your life changes, your beneficiary designations should change too.

How to Choose and Manage Your Beneficiaries

When you’re deciding who should receive your life insurance money, start by thinking about who depends on you financially. Most people choose family members like their spouse, children, or parents who would struggle without their income. But you can name anyone with an insurable interest, including friends, charities, or business partners.

Here are the key factors to consider when making your choice:

1. Review your options fully – Beyond individuals, trusts and charitable organizations can be designated
2. Consider financial dependence – Identify who relies on your income and would need support
3. Evaluate your specific circumstances – Business relationships, family dynamics, and charitable intentions all influence this decision

If you want to name your children as beneficiaries, you’ll need to set up a trust first. Insurance companies won’t pay death benefits directly to minors. Without a trust, a court would appoint someone to manage the money until your child becomes an adult, which means legal fees and delays. Even then, once your child turns 18 or 21 (depending on provincial law), they get unrestricted access to what could be a large sum of money.

Your beneficiary choices shouldn’t stay the same forever. Review them at least once a year, and definitely after major life changes like getting married, divorced, having children, or if one of your beneficiaries dies. Outdated designations can cause real problems for your family.

Updating your beneficiaries is straightforward. Contact your insurance company directly and fill out a change of beneficiary form, which you can often do online.

Watch out for these common mistakes:

• Not being specific enough when naming beneficiaries
• Forgetting to name contingent (backup) beneficiaries
• Assuming your will supersedes beneficiary designations
• Not establishing trustees for minor beneficiaries

Keep in mind that your beneficiary designations override what’s in your will. This means the money goes directly to the people you’ve named, avoiding probate delays and extra costs.

Why Maple Bay?

Choosing your life insurance beneficiaries isn’t something you do once and forget about. Life changes, and your beneficiary choices should change with it.

At Maple Bay, we understand that thinking about beneficiaries means thinking about difficult topics. We’re here to help you make these important decisions without the stress. Our brokers can walk you through your options and make sure your life insurance policy works the way you intend it to.

With the right beneficiary choices in place, you’ll have peace of mind knowing your family is protected. Contact us today to review your life insurance needs and ensure your beneficiaries are properly designated.