Understanding Life Insurance and Beneficiaries

Have you ever wondered what a life insurance beneficiary is? When it comes to life insurance, understanding the importance of naming a beneficiary is crucial. 

What is a beneficiary?

To begin with, life insurance is a contract between a person and an insurance provider where a tax-free, lump sum benefit is to be paid out to a designated beneficiary, or the estate of the life insured if a beneficiary isn't named, upon their death. The person insured pays required periodic premiums as part of this contract.

The life insurance beneficiary is the selected recipient of the benefit and can be a person or an entity, such as a charity or a business. The beneficiary can use the payout however they choose. 

Do you need to name a beneficiary when purchasing a life insurance policy?

Naming a beneficiary isn’t mandatory but it could help provide direct financial support to your loved ones. Have you got a family that depends on you? The life insurance benefit can be used to replace lost income, pay daily expenses, or clear outstanding personal or business debts.

In cases where a beneficiary isn’t named, the benefit is paid to and administered through the estate of the insured person.

Is it possible to have multiple beneficiaries?

Yes, you may name multiple people or entities (charities, trust funds, or organizations) as beneficiaries. To name multiple beneficiaries, you’ll simply need to specify how the benefit will be split amongst them. 

What are the different types of life insurance beneficiaries?

The following are the different types of life insurance beneficiaries:

Primary beneficiary

This is the person or entity assigned by the policy owner to receive the death benefit should the life-insured person pass away. Examples of an entity could be charities, churches, businesses, or institutes of higher learning. The beneficiary receives the full benefit if they are alive once the life insured passes away and an eligible claim is made.

Contingent beneficiary

The contingent beneficiary is the person or entity to receive the death benefit in the event the primary beneficiary passes away before the policy owner. A contingent beneficiary could be an individual or entity. Examples of entities could be charities, churches, businesses, or institutes of higher learning. 

Life insurance beneficiaries can be further classified as:

Revocable beneficiary

A revocable beneficiary designation can be changed at any time on the policy by the policy owner. This option means you, as the policy owner, keep the authority to change the details of the insurance policy as you see fit.

Irrevocable beneficiary

With an irrevocable beneficiary designation, the beneficiary's consent is required by the policy owner to make any kind of change to the policy, including a beneficiary change.

What the difference between revocable and irrevocable beneficiary?

Since most things in life are dynamic, naming a revocable beneficiary is a more common approach as family members are usually consulted during such proceedings. In Quebec, one's spouse is automatically deemed as an irrevocable beneficiary (unless specifically designated otherwise). But there are cases where naming an irrevocable beneficiary may fit the policy owner’s circumstances; for example, a key business partner may be named as an irrevocable beneficiary to safeguard business continuity, should the life-insured partner pass away. The same can apply in a divorce decree, as the insurance could be assessed as an asset of the marriage to be passed on to the spouse. 

What to consider when choosing a life insurance beneficiary?

When choosing a life insurance beneficiary, think of the people who rely on you the most for financial support or their future. To help support those who rely on you financially, consider naming them as your beneficiary. These individuals could be a person or persons such as family members, a caretaker, or a friend. Or the beneficiary could be an entity, such as a charity or organization that you care about.

Can you change your life insurance beneficiary?

Yes, you can change your life insurance beneficiary. As the policy owner, the change can be made at your discretion. But if the beneficiary is irrevocable in which case, you must get consent from the beneficiary to make the change. 

What if your life insurance beneficiary is in another country?

It doesn’t matter where your named beneficiary resides, they can receive the death benefit upon approval of an eligible claim made to the insurer.

When to add, update or change beneficiaries?

Only the policy owner has the authority to change the life insurance policy when a beneficiary is revocable. If the beneficiary designation is irrevocable, the consent of the beneficiary is also required to make this change. A beneficiary change could be part of an overall policy review. Here are a few crucial instances when you might want to consider changing your beneficiary designation:

  • Marriage
  • Childbirth
  • Divorce
  • Death of the primary beneficiary

Learn more about TD Life Insurance

Visit us online to learn more about Term Life Insurance and Guaranteed Acceptance Life Insurance and to get started with the application.

Want to understand the definitions of important terms used in this article? Learn more with our Life Insurance Glossary.