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Tips on Choosing a Beneficiary

TIPS on Choosing a Beneficiary

Although it may seem like one of those “required fields” you could be tempted to glaze over, specifying who will receive the proceeds of your life insurance policy or TFSA or RRSP is an important decision. Learn some Tips on Choosing a Beneficiary and how to avoid some common missteps.

 

1. If buying insurance, keep the purpose of the policy in mind.

The reasons why you’re buying life insurance should drive your choice. Do you want to provide financially for your family after you’re gone? If so, your spouse might be the best choice. If you want your company to continue, it might be your business partner, or even the company itself.

2. Know your options.

When choosing a beneficiary, there are more options than your spouse or kids. Generally, you can designate any one or more of the following examples as a beneficiary:

    • One person
    • Two or more people (and you decide how the benefit is split among them)
    • The trustee of a trust you’ve established
    • A non-profit or charity
    • Your Estate

3. Have a back-up.

On your policy, the primary beneficiary is the person(s) or entity you select to receive the life insurance proceeds upon your death. However, if your primary beneficiary can’t be located, refuses the proceeds, or is deceased at the time of your death, then a secondary (or contingent) beneficiary becomes the recipient. Make sure you follow the same advice for selecting a secondary beneficiary as you would for choosing the primary one.

4. Keep it up to date.

One of the most common oversights with a life insurance policy is not keeping the beneficiaries up to date. Say you’re single and name your wife as the primary beneficiary, but later on, you get re-married. If you didn’t update the beneficiary on your policy, then the proceeds will still go to your past wife.

5. Be specific.

In addition to keeping your beneficiaries current, remember to be specific when you name them. If you name “my children” as beneficiaries and one of them dies before you, do you want the other child(ren) to get the entire benefit or the deceased child’s heirs to get their parent’s share?

6. Avoid designating a minor.

Regulations may limit if or how much a minor child can receive from life insurance proceeds, so the court may have to appoint a guardian to administer the funds. That can be a lengthy process and one that typically requires multiple court dates. To avoid this, think about either setting up a trust or designating an adult you trust to oversee the distribution of the money to the minor.

7. Don’t unwittingly disqualify your beneficiary from other benefits.

A person who is aged, blind, or disabled and receives Governmental financial support, income could potentially have their monetary benefits reduced or suspended if their inheritance increases their income, based on program eligibility. If one of your beneficiaries needs to use these benefits after your death, consider these regulations before adding them as a beneficiary.

8. Don’t count on your Will to override your beneficiary choices.

Make sure your wishes are honoured by having your Will match your TFSA, RRSP/RRIF, or life insurance policy. If you update your Will, take the time to update your beneficiaries on the accounts you have set up to avoid Probate. In the event your Will and accounts like an RRSP/RRIF or life insurance beneficiaries do not match, your beneficiary designations will win out every time. Remember, these financial tools are contracts and will be enforced as it is written.

9. Be aware of provincial laws.

Typically, in community property jurisdictions, your spouse will have to sign a waiver if you designate someone else to be the beneficiary. Check with your lawyer and financial planner for details on this and any other questions you have surrounding designating your RRSP/RRIF, TFSA, and life insurance beneficiaries.

10. What happens if you don’t designate a beneficiary?

If you neglect to designate any beneficiaries (or all of them predecease you), the RRSP/RRIF, TFSA, and life insurance proceeds will be paid to your Estate. If that happens, the Probate court (or Provincial law—that means the Government) will decide how to handle the funds. This could take a while and possibly chip away at the proceeds. So, to get the money into the hands of those who need it as soon as possible, designating a beneficiary is the way to go.

So, while we may not have stressed the importance of this event when we have encouraged designations to avoid probate…the downside ought to be pointed out as well…another reminder that Wills/testamentary intentions ought to be reviewed periodically.

 

Read more about Why You Need a Beneficiary

Want more information?

Are you interested in a consultation with Peter R. Welsh?
Contact me at Peter@SmartWills.ca
By telephone 416-526-3121
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This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.

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