Like many Canadians, you may have discovered that term life insurance is the most affordable way to ensure your family will be financially secure if you passed away. Getting quotes is easy enough, but will you be ready when your life insurance broker asks, "Where would you like the life insurance proceeds to go after you are gone?"

What do you say?

This is often a stumbling block for people looking to buy life insurance. Essentially you have two options:

  1. Naming a beneficiary
  2. Naming your estate

Both options have their own pros and cons. The following is a guide to help you when you are discussing your options with your broker.

Naming a beneficiary

By designating a specific beneficiary, the proceeds of the life insurance policy will be made payable to that person, entity or trustee (for cases where you want your money to go to your minor children and designate someone who you believe will carry out your wishes).

A couple of common reasons people choose this option are:

  1. To avoid the costs and delays associated with probate. Probate is the legal process that confirms the appointment of the executor and the validity of your Will.
  2. To make sure the beneficiary receives all of the proceeds of the life insurance policy. Since it is not a part of your Will, provincial probate fees and lawyer fees do not apply, and creditors will not have an opportunity to get access to it.

What is an estate?

A person's estate can be defined as the whole of a person's possessions, including their property, other assets and debts at the time of their death.

What is a beneficiary?

A beneficiary is the person, persons, or entity you name on a life insurance policy to receive the proceeds of the life insurance policy upon your death.

What is a Will?

A Will is essentially a 'To-Do' list. It is a legal document that details how and to whom your assets will be distributed after your death.

When choosing a beneficiary for your life insurance policy, you will likely be advised to also choose a 'Contingent'. If your primary beneficiary dies before you, the contingent beneficiary will receive the benefits. This ensures your wishes will still be met if you are unable, or forget, to complete the paperwork needed to change your original beneficiary designation.

Naming your estate

By designating your estate on your policy, the proceeds of the life insurance policy will be made payable to your estate. Through your Will, your estate will distribute your money in the manner you have set out.

A couple common reasons people name their estate to receive the proceeds are:

  1. To set up a Trust for their young children so the money is spent in a certain manner, or made available once they've reached a certain age.
  2. To leave money to a charitable organization and through the Will specify which charities receive donations, how much they receive and which ones will act as a backup in case any of the original choices no longer exist.

Naming your estate as the beneficiary of your life insurance proceeds means that you really should have a Will and keep it up-to-date. Without a valid Will, your province's laws will determine how your estate money is distributed, including the proceeds of your life insurance policy.

Naming a beneficiary or naming your estate:
A summary
Naming a beneficiary
Naming your estate
Proceeds are paid directly to the person you want to get the money. Proceeds are paid to your estate, which then becomes part of the probate process.
How the proceeds are spent is entirely up to the beneficiary. How the proceeds are spent can be determined by the wishes you have set out in your Will.
A Will is not required to ensure your beneficiary receives the proceeds. A Will is required to ensure your estate (which includes your life insurance policy proceeds) is distributed in the way you want.
Creditors do not have access to the money your beneficiary receives from your life insurance policy. The money may be available to your creditors.
There are no provincial probate fees. All Wills go through probate. Probate fees vary by province but the general range is from .5 per cent to 3 per cent.
There are no lawyer fees. Probate is a legal process and there will be lawyer fees.
The policy owner can easily change the beneficiary. There are 2 types of beneficiaries: revocable and irrevocable. With revocable, completing a form is all that is needed. With an 'irrevocable', the owner and the beneficiary must agree to the change, and complete the forms. The majority of beneficiaries are 'revocable'. Changing the way your estate is handled means you must update or create a new Will. Only the person whose Will it is can change how the proceeds of the estate are handled. Changing a Will may involve lawyers.

Find out more and compare quotes today

Term life insurance is the most affordable way to ensure your family will be financially secure if you passed away. Compare quotes online today.

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