Policyholders can name an estate as the beneficiary of their Canadian life insurance policy. This includes a long list of repercussions that we will discuss below, as well as detailing what an estate includes, why someone would choose to name an estate as a beneficiary, and how to decide if this is best for you.
Choosing beneficiaries is a big task with long-enduring consequences. Sometimes, policyholders outlive beneficiaries or no beneficiaries are named on a policy. In these situations, as well as through an executive decision, an estate can be named as the beneficiary of a life insurance policy.
An estate includes all of the belongings and property a person owns when they die. Everything compromising the net worth of the policyholder is included in the estate, as well as liabilities.
Some parts of an estate may include:
While many people immediately think of an estate as an inheritance for heirs, it’s important to note that, since it includes debts, an estate can also be a financial burden depending on the situation.
Estates do not include property or accounts that are held jointly with another person. Typically, joint accounts and property list the co-owner as the designated beneficiary upon the first owner’s death. Unless there is a stipulation stating otherwise, this property or account would transfer to the co-owner and be kept separate from the deceased’s estate.
For example, if Mr. Smith passed away, his joint bank account with Mrs. Smith would not count as a part of his estate alone. Mrs. Smith would become the sole holder of the bank account unless a formal stipulation stated otherwise.
Estates are the beneficiaries of a life insurance policy for two main reasons. First, the policyholder could have outlived their designated beneficiaries or outright negated the selection of beneficiaries.
Second, the policyholder may have designated their estate as the beneficiary to pay off their final debts with their policy’s death benefit.
All of these situations bring their own set of consequences, including different fees, processes, and timelines for distributing the death benefit.
If the policyholder outlives their beneficiaries or does not select beneficiaries to begin with, their estate automatically becomes the beneficiary.
When a Canadian insurance’s death benefit moves through an estate, it is subject to estate admin tax, also called a probate fee. After paying the fee, the benefit will then be allocated to any beneficiaries you may have appointed through an estate will.
If you do not have a will with appointed beneficiaries, Ontario law states that a trustee must be appointed to move forward. An Ontario court would need to apply for a certificate of appointment of estate trustee without a will, which is charged at 1.5% for any estate value over $50,000
Generally, if there are no children, the spouse of the deceased would inherit the entire estate. If there are children, the spouse receives the first $200,000, and the rest is split between the kids and spouse. If there is only one child, the estate is split 50/50.
For those who purposefully select their estate as the beneficiary, they may be doing so with the hopes of paying off outstanding debts before leaving the rest to their estate’s heirs.
Many may choose to do so to ensure that their life insurance goes towards things like capital gains taxes on rental properties or investments. While this is well in theory, some issues arise with this approach in practice.
Firstly, Ontario charges a probate fee of 1.5% for estates worth over $50,000. This fee is based on the total value of your estate when you die and is paid to the Ontario government when an estate is named as the beneficiary. On the contrary, beneficiary-persons typically do not have to pay income tax when receiving the death benefit of a Canadian insurance policy.
The probate fee may differ depending on the value of the insurance policy, so consult with insurance professional Sim Gakhar to understand how your policy would be affected.
In addition to probate fees, policies may also incur other estate settlement costs such as executor, legal, and accounting fees. These are due on top of any debts or taxes owed by the estate before any money makes it to the designated beneficiaries listed under the estate will.
If there is no will, after all of the above fees and taxes, any leftover amount of the death benefit will be given to heirs based on Ontario’s dying intestate outline.
It’s important to note that designating your estate as a beneficiary may also expose the death benefit to creditor claims against your estate. Because of these potential complications, we highly advise meeting with an accredited insurance agent before deciding on naming your estate as your policy’s beneficiary.
If the policyholder’s main concern is the financial well-being of their beneficiaries, general advice would be to name these individuals on your life insurance policy as opposed to naming your estate. If you feel that naming your estate is essential, be sure to have a will in place to move what is left of your death benefit to heirs after fees and debts are paid.
Choosing your beneficiaries is a decision that should be fully thought through. Investment and insurance professional Sim Gakhar has years of experience and education around the ins and outs of Ontario insurance policies.
Reach out to her office for information and guidance on how your designated beneficiaries may be impacted by your current policy. If you are looking for a new life insurance policy and need advice on where to begin, Sim is able and willing to lend you a hand.
Don’t leave your estate and beneficiaries’ futures up to chance – schedule an appointment with Sim Gakhar today.
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