Is a Life Insurance Policy Part of an Estate in Canada?

If a life insurance policy has no named beneficiaries or if the estate itself is named as a beneficiary, then the policy can become part of an estate in Canada. If a life insurance policy has named specific beneficiaries, then that policy is paid out only to those beneficiaries and is not included in the estate.

To know whether a life insurance policy is part of a Canadian estate or not, we first need to discuss what constitutes an estate. Then, we’ll look at the options around naming beneficiaries for a life insurance policy, as well as what happens when you name an estate as your beneficiary instead.


Parts of an Estate

An estate in Canada includes all property, physical or intellectual, owned by an individual. Typical parts of an estate are:

  • Property and real estate
  • Family heirlooms
  • Bank and investment accounts
  • Patents
  • Other intellectual property
  • Franchises
  • Furniture
  • Vehicles
  • Any other physical item or investment that is valuable to the estate holder

In Ontario, estates without a will are distributed through the Ontario Wills and Succession Act. This means that all estate assets will be distributed to relatives as per the Act and not according to the estate owner’s last wishes.

To protect your assets and distribute them to your liking, it’s vital to have a will addressing your estate. How does this will mix with life insurance policies? Let’s find out.


Naming a Life Insurance Beneficiary

When you hold a term insurance or permanent life insurance policy in Ontario, you will be asked to name at least one beneficiary to receive the death benefit should you pass away while the policy is active.

Your beneficiaries can receive the death benefit tax-free, which is often used to pay for funeral costs, mortgages, educational expenses, and other general living expenses.

Individuals can name one, multiple, or no beneficiaries if they wish. It is the norm and generally recommended to name your loved ones in this process. If the policyholder holds off on naming a beneficiary for too long, they risk passing away without taking advantage of their life insurance policy.

It is important to review your life insurance beneficiaries annually. According to Ontario insurance agent, Sim Gakhar, life insurance policies should be reviewed regularly and especially after large life milestones, such as a marriage, divorce, the death of a relative, or the birth of a child.

If you don’t name a person as a beneficiary of your life insurance policy and die while the policy is active, the policy will automatically assume your estate as the beneficiary, and your life insurance policy will become a part of your estate.


Naming the Estate as Your Life Insurance Beneficiary

Few people chose to name their estate as their life insurance beneficiary, but those that do usually have the intention of using their life insurance to pay off their debts before the remainder can be distributed to their loved ones.

Unfortunately, this means the death benefit will be charged the Ontario probate fee of 1.5% if the entire estate is worth more than $50,000. This fee is paid to the Ontario government should you name your estate as your life insurance beneficiary when you die.

Probate fees can vary, so be sure to double-check with an insurance professional to verify your policy and how it may be impacted.

Policies given to the estate may also incur executor, legal, and accounting fees, as well as additional estate settlement costs. Designating your estate as your life insurance policy beneficiary exposes the policy’s death benefit to creditor claims against the policyholder’s estate.

Your estate may also use your death benefit to pay off your debts and taxes before the remainder – if any – is passed on to beneficiaries listed in your will.

That being said, there are many fees, taxes, debts, and other costs that may be deducted from your death benefit if your estate is named as your beneficiary. Be sure to consult with investment and insurance professional Sim Gakhar if you are considering including your life insurance policy as a part of your estate.


Insurance Beneficiary or Will Beneficiary?

If an individual has set beneficiaries on their life insurance policy and has also created a will for their estate, click here to lean how to create a will, the two items remain separate.

There are some instances where an individual may name a beneficiary in their will that is different than the one named on their insurance policy. In this case in Canada, the life insurance beneficiary listed on the policy is always upheld before the will beneficiary.

Let’s look at an example. Mrs. A named Jane as the beneficiary of her life insurance policy. Mrs. A also has a will, however, and that will states that Bob is the beneficiary of all of her assets, even her life insurance policy.

According to Canadian law, upon Mrs. A’s death, Jane will receive the death benefit on Mrs. A’s insurance policy and Bob will receive all other assets included in Mrs. A’s estate.


Arranging Your Insurance and Estate

There are many considerations when organizing your life insurance policies and estate planning. Individuals need to consider:

  • The most tax-efficient policies and plans
  • What assets and liabilities one has
  • Which beneficiaries they would like to designate
  • Naming an estate representative

When considering fees and taxes, naming a beneficiary on your life insurance policy is a surefire way to reduce taxes paid on the death benefit; however, your beneficiaries have a right to use the death benefit to their liking, making it difficult to move the money where you’d like.

On the other hand, a living will designates your assets exactly where you want to go. This includes paying any debts or organizations before distributing the rest to your beneficiaries. Keep in mind that deemed disposition, taxable withdrawals from registered plans, and income for your year of death are all taxable upon your passing and will be taken out of your estate assets.

While there are many things to take into account when planning your estate and selecting a life insurance policy, professional guidance is always available to ensure you make the best decision for your future and your loved ones. Contact our office today to speak to insurance agent and investments advisor Sim Gakhar about all of your estate and insurance needs.


FAQs & Helpful Resources Regarding Life Insurance for Estate Planning


Other Types of Life Insurance Products You May Want To Check Out





get quotes