Making a life-insurance beneficiary designationLinkedIn
There, in black and white
Bulletin NB Vol. 7 N. 3, April 2004
At first glance, the designation of a life-insurance beneficiary might seem simple. However, in order to make an informed decision, it is important to be aware of the various subtleties involved. It should be noted that several aspects treated in this bulletin also apply to pension plans. However, the various subtleties pertaining to pension plans will be discussed in a later bulletin.
Please note that there have been no recent changes to the laws governing the designation of a beneficiary, and the goal of this bulletin is only intended to inform you on the subject as well as answer a few questions that have surfaced about this subject.
Revocable or irrevocable beneficiary?
First of all, it is important to explain this fundamental concept. When naming a life-insurance beneficiary, an insured has the option of making the designation either revocable or irrevocable. With a revocable designation, the insured can change his or her beneficiary at any time; with an irrevocable designation, the irrevocable beneficiary’s signature is required in order to invalidate the designation.
However, it is important to note that, in Quebec, the designation of a married or civil union spouse is automatically irrevocable1, unless the insured stipulates otherwise. The irrevocability becomes definitive only upon receipt of the designation by the insurer or the plan administrator. Moreover, the notice on a designation form that states that the absence of information, concerning the revocability of the beneficiary implies a revocable designation, has no effect if the designated beneficiary is the married or civil union spouse. Therefore, the best way to revocably designate a married or civil union spouse is to clearly specify that the designation is revocable.
Designating the estate (or legal heirs)
Sometimes, it may seem simpler to designate the estate as beneficiary. However, it is important to know that the death benefits could then be subject to creditors’ claims and estate taxes, which is not the case if a beneficiary is named explicitly.
In these cases, it may be advisable to write a will so that the death benefits are paid to specific individuals. However, there could still be complications. For example, if the designation in the will contradicts a previous designation, the will should specifically mention the insurance policy concerned, or the intent to change the designation should be clear. It is recommended to seek professional assistance in the preparation of a will.
Designating or changing a beneficiary online?
At present, designating or changing beneficiary is done through a specific form that requires the insured original signature. However, the recent adoption by Canadian provinces of legislation on information technology2 should eventually make it possible to name a beneficiary electronically, using a legally recognized electronic signature.
We conducted a mini-survey of a few insurers, and the answers that we received indicate that Canadian insurers are not yet prepared to handle on-line beneficiary designations, and we do not expect them to use this type of approach in the near future.
Other administrative aspects
"Who should keep the original designations?" Actually, there is no simple answer to this common question. Either the insurer or the employer could very well safeguard these documents. However, in practice, most insurers elect to keep these documents (except for Administrative Services Only (ASO) plans). It is important to point out that, at the time of death, the insurer requires the original designation in order to settle the claim.
Another question arises when a change of insurer or plan occurs. "Should there be a new designation, or is the old one still valid?" Once again, both options are possible, as long as employees are very clearly informed about this. In fact, we suggest that employees receive a notice informing them that, unless they make a new designation, the old one will be passed on to the new insurer. When an employee designates a new beneficiary, the insurer or the plan administrator must then pay special attention to prior irrevocable designations in order to avoid lawsuits. Consequently, we strongly recommend employers to keep a copy of the beneficiary designation.
Although the insured is expected to ensure that the new designation does not contradict an earlier irrevocable one, the fact remains that the insurer or the plan administrator could be held liable for neglecting to carry out the verification on its own. In order to avoid a troublesome situation, in which the insurer or the plan administrator might be forced to pay insurance benefits to a new validly designated beneficiary as well as damages to a former beneficiary, it is clear that an effective communication campaign by the plan sponsor concerning this matter could avoid many disagreements.
What happens if two beneficiaries submit claims when the insured dies? Once again, we questioned insurers about their practices. In such a case, the insurer can opt to deposit the benefits and interest with the Bureau général de dépôts or a trust company, and the party that is recognized by the Court as being the duly designated beneficiary would then be responsible for undertaking the procedures to collect the amount to which they are entitled. Another option is for the insurer to provide and deposit the insurance benefits to the Court, pending the outcome of the litigation. A final option for an insurer in dealing with a contentious case is to await the Court’s decision and hold on to the benefits until the ruling is made.
Please note that this bulletin is intended to explain the basic rules that apply to naming a beneficiary, and that some exceptions may apply. We recommend that you contact a lawyer or notary regarding any questions or interpretations concerning the law or common practice.
1 Note that designations made before October 20, 1976 are not governed by the same rules. The designation of a spouse as beneficiary becomes null and void in the event of divorce, annulment of the marriage, dissolution or annulment of the civil union, but remains in effect in the case of legal separation. However, in decreeing the separation, the Court may rule that the spouse’s rights are revocable or null and void.
2 For more information, please see our December 2001 bulletin concerning the Quebec Act to establish a legal framework for information technology.
Please feel free to contact us for additional information.
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