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What is a beneficiary?

Do you have Life or Accidental Death & Dismemberment (AD&D) insurance? Have you never submitted a beneficiary form to your current carrier or benefits plan? Then you should designate a beneficiary. 

A beneficiary is the person (or people) you choose to receive the money from your policy in the unfortunate event you pass away. This could be your spouse, kids, or other loved ones. In fact, your beneficiary doesn’t have to be a person at all - it could even be an organization like a charity. 

This article will help you understand:

Important considerations when designating your beneficiary 

There’s a lot to keep in mind when you designate (choose) a beneficiary, and we’re here to walk you through the details. 

Why you should designate a beneficiary
It’s important to designate a beneficiary so your loved ones are taken care of in the unfortunate event you pass away. While tax isn’t deducted from any money that’s paid out to a beneficiary, if you don’t have a beneficiary the money will likely go to your estate and taxes will be deducted. Ultimately this causes delays in paying out these benefits, and means your loved ones won’t get the full amount of money they’re entitled to.

Keeping your beneficiary designation up-to-date
Having an out-of-date beneficiary designation is almost as bad as not having a beneficiary at all, and can cause problems if your benefits are paid out. You should review your beneficiaries any time you experience a major life event like a marriage, divorce, birth, or death. Even if you don’t experience any major life events, it’s worth reviewing your beneficiaries every few years for peace of mind.

For example, let’s consider the following scenarios:

Scenario one: Imagine you get divorced. You update your will to leave everything to your kids, but your beneficiary is still your ex-spouse. If you pass away, your beneficiary designation is taken into account before your will, and your benefit payout goes to your ex-spouse.

Scenario two: Your beneficiary passes away, but you forget to update your beneficiary designation (because let’s be realistic, this isn’t the first thing on your mind). If you also pass away (and because your beneficiary is also deceased), the benefit payout goes to your estate.

Long story short, keeping your beneficiary designation up-to-date ensures your loved ones are taken care of. 

Designating a minor as your beneficiary
Although carriers can’t pay money out to a minor (like your kid), if you want to designate a minor as your beneficiary you have some options. In Canada (excluding Quebec) you can assign a trustee on your beneficiary form who will receive your benefit payout on behalf of the minor. If you don’t have a trustee named, the courts will hold onto the benefit payout until the minor is of age.

In Quebec, the parents or legal guardians of the minor would receive the benefit payout. You can also set up a trust for the minor, and then designate the trust as your beneficiary. 

Spousal or dependent insurance
You may have the option to enroll in Life or AD&D insurance for your spouse or dependents. If you enroll in these types of coverage, you would automatically be considered the beneficiary in the unfortunate event your spouse or dependent passes away. 

Beneficiaries outside Canada
While you can choose anyone to be your beneficiary, even if they don’t live in Canada or aren’t a Canadian citizen, if they receive the benefit payout their home country may have a different tax system. This means the amount of money they receive may be reduced by taxes in their home country or by other factors.

Beneficiary terms explained 

Overwhelmed with all the confusing terms used to explain beneficiaries? We’re here to spell them out for you.

Primary vs. contingent beneficiaries
Some beneficiary forms let you choose both primary and contingent beneficiaries. 

What you need to know about primary beneficiaries:

  • They receive all the money if your benefits are paid out.

  • If you choose more than one primary beneficiary, you need to indicate what percentage of the money you want each person to receive.

  • The total of all percentages must add up to 100%.

What you need to know about contingent beneficiaries:

  • They receive all the money if your benefits are paid out and your primary beneficiaries are also deceased. 

  • If any of your primary beneficiaries are still available to receive the payout, your contingent beneficiaries don’t receive any of the money.

  • If you choose more than one contingent beneficiary, the money will be equally split between each person.

  • If you don’t want the money to be split equally, you have the option to specify what percentage each person should receive.

Revocable vs. irrevocable beneficiaries
When you choose your beneficiary, you can also choose to make them irrevocable or revocable. The main difference to remember is:

  • You can remove a revocable beneficiary from your policy without their consent.

  • You can’t remove an irrevocable beneficiary from your policy without their written consent. 

If you live anywhere in Canada except Quebec, your carrier assumes all beneficiary designations are revocable unless you state otherwise on your beneficiary form. This means you can remove and change any of your beneficiaries without getting their consent. 

Quebec is a bit more complex. If you designate your spouse as your beneficiary, your carrier assumes they’re irrevocable unless you state otherwise. This means if you want to remove them as a beneficiary, you need their written consent. If you designate anyone else as a beneficiary, your carrier assumes they’re revocable unless you state otherwise.

Beneficiaries vs. dependents
There’s often confusion about the difference between a beneficiary and a dependent, but we’re here to clear this up once and for all. The main difference is that who can be considered a dependent is much more limited. A dependent is any person who relies on you financially (and who you claim on your tax return). This mainly includes your spouse and kids. You can add your dependents to your benefits plan, but they wouldn’t receive the money from your benefit payouts unless they’re also named as your beneficiary.

On the other hand, you can choose anyone to be your beneficiary - you aren’t just limited to people who are financially dependent on you. People often choose their spouse or kids to be beneficiaries, but you can choose other people like your parents, siblings, or friends. 

How to designate your beneficiary

Hurray, now you know what a beneficiary is! But how do you actually let your insurance carrier know who you choose? If League:

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