When was the last time you reviewed your beneficiary designations? You’ve no doubt made careful plans to ensure that your loved ones will be taken care of. However, your life circumstances may have changed, and it’s important to ensure that your beneficiary designations reflect your current wishes. Here are some considerations to help you with your beneficiary checkup.
A beneficiary is someone you designate to be the recipient of insurance policy proceeds upon your death.
If you name a beneficiary, the proceeds will be paid outside your estate, directly to the beneficiary. Payment will be relatively prompt, minimal paperwork will be required, and the funds will not be subject to probate fees. You may also designate a trust as the beneficiary, but be sure to seek legal and tax advice before pursuing this option.
If you do not name a beneficiary, the proceeds will be paid to your estate. Your estate’s executor must apply to validate your will in court and the funds will be subject to probate fees. BC’s Probate Fee Act sets out the probate fee structure, which currently approaches approximately 1.4% of the value of an average policy.
Beneficiaries aren’t for life insurance alone. Review all insurance policies, accounts, and investment vehicles for which you have designated beneficiaries. Your beneficiary designation is separate for each and supersedes any general directive set out in your will, unless your will specifically identifies the policy in question.
Types of beneficiary designations
You may wish to designate a primary beneficiary and a contingent beneficiary. The contingent beneficiary would be the recipient of your policy proceeds if the primary beneficiary is deceased. In the tragic case of you and your primary beneficiary dying at the same time, such as in an accident, insurance law deems that your beneficiary is deceased before you and proceeds will be paid directly to your contingent beneficiary. If no contingent beneficiary is named, payment will be made to your estate.
Minor children as beneficiaries
If a child under 18 is designated as your beneficiary, make sure you designate a trustee to receive the funds on the child’s behalf. If no trustee is designated, the funds will be paid into the courts and the Public Guardian and Trustee of BC will be involved.
Corporations named as beneficiary
This is a popular strategy since there is a mechanism for corporations to pay life insurance policy proceeds as tax-free capital dividends to shareholders. In addition, corporations are subject to a lower income tax rate so tax efficiencies are gained by paying corporately. Payors must align—the corporation named as beneficiary should also be paying the premiums for the life insurance policy. Speak with your accountant about whether this strategy makes sense for you.
You may name one or more charities as your beneficiary. Professional tax advice can determine if your charity designation renders your premiums tax-deductible.
It is also important to review your life insurance policy to determine if there are any old assignments. In an assignment, the policy proceeds are assigned to a lender as collateral for a loan (often a business or clinic loan). The lender receives the funds to repay the loan before the residual is paid to your beneficiaries. If you change lenders or pay off the loan, it can be easy to forget to remove the original assignment, which can cause delays at death.
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