What Happens When Life Insurance Goes to the Estate?

If your life insurance policy lacks a beneficiary, it will become a part of your estate when you die. When this happens, the death benefit is subject to certain estate taxes and fees and may be used to pay off debts before being distributed to your heirs.

In this article you will become familiar will all things estate and life insurance related, including estate taxes and fees and how to protect your death benefit from them.


Terms to Know

Before getting into what happens when life insurance goes to your estate, you’ll need to know what constitutes an estate, will, estate executor, and probate tax.



Your estate includes all of the assets and liabilities you have when you die. These can be physical, like family heirlooms, or intellectual, such as patent rights.

Common aspects of an estate include:

  • Physical property and real estate
  • Vehicles of any kind
  • Savings accounts
  • Investment accounts
  • Franchises
  • Patents
  • Copyrights
  • Heirlooms and physical possessions
  • Liabilities such as loans, lines of credit, and other debts

Initially, your life insurance policy is not a part of your estate. It will only become a part of your estate under the conditions we discuss further below.



A will, or will and testament, is a written document, click here to learn more about how a will is created, stating your desires around your estate’s distribution. A will includes how your assets will be divided and to whom they will belong.

Your will can also name important individuals such as your estate executor (see below), Power of Attorney, health care proxy, and legal guardians for your children. For the latter three appointments, make sure you have attached the required legal documentation to the will.

A written will is essential to streamline the estate distribution process for your loved ones.


Estate Executor

An estate executor also called an estate representative, is the individual appointed in your will to arrange the distribution of your estate. This person is responsible for dealing with the assets and liabilities of the deceased according to the deceased’s wishes.

In Ontario, the estate executor must be confirmed through the probate process.



Probate is a legal process in Canada that verifies the will of a deceased individual. This process also confirms the appointment of a will executor within the provincial court. For this appointment to be finalized, there must be an official document by the Ontario court naming the individual as executor.


When Is Insurance Part of the Estate?

Life insurance policies become a part of the estate when the policy does not have a surviving beneficiary, there is a lack of a beneficiary form, or when the estate itself is named as the beneficiary of the policy. In any of these cases, the life insurance death benefit moves to the estate when the policyholder dies.


No Surviving Beneficiary

In some cases, the listed beneficiaries may die before the policyholder or at the same time. If there are no other beneficiaries listed or the form is not updated, the life insurance proceeds will pass to the deceased’s probate estate. These funds can then be used to pay the descendant’s final bills.

After paying required fees, taxes, and debts, the remainder of the death benefit will be passed down to those in the deceased’s will. If there are no beneficiaries in the will, the benefit will be distributed according to Ontario law.

For one reason or another, some policyholders may have avoided completing a beneficiary form entirely. In this case, the insurance proceeds follow the same trail as if there were no surviving beneficiaries.


Estate Is Designated as the Beneficiary

Some policyholders choose to designate their estate as their life insurance beneficiary with the intent of paying off their debts with the death benefit. In this case, the benefit becomes a part of the estate and does fulfill this intent; however, this may not be the most efficient way to deal with the deceased’s liabilities. There are fees and taxes associated with this which are explained below.


Fees and Taxes

When your life insurance policy becomes a part of your estate, it is treated as an additional asset that can pay for associated estate fees and taxes.

The first tax is called deemed disposition. This is a tax on any capital gains on property owned by the deceased, comparing the current value to the cost of purchase. Hal of the capital gain is taxable in Ontario.

The second tax associated with your estate is on any withdrawals from registered plans. If your beneficiaries or estate wants to withdraw from accounts such as an RRSP or RRIF, all amounts are taxable. While this tax typically comes out of the account itself, it can also be paid through other estate assets.

The third tax associated with your death is income tax. The deceased is still responsible for paying income taxes for the portion of the tax year when they were alive. The estate executor will file this final return on the deceased’s behalf and could use the life insurance benefits from the estate to pay anything owed.


Ontario Law for Estate Distribution

If a life insurance policy goes to an estate and no will or beneficiaries are named, Ontario law requires the remaining amount to be distributed according to Ontario’s Succession Law Reform Act.

This act distributes estate assets to spouses, children, parents, siblings, nieces and nephews, and next of kin, in that order. The spouse and children often share the inheritance, with the split determined by the number of children.



Life insurance policies distributed to an estate are subject to hefty fees and taxes. It takes much longer for the death benefit to reach the hands of beneficiaries in this process, which is why insurance professional Sim Gakhar advises to first list beneficiaries directly onto your life insurance policy.

For those concerned about paying their debts after their death, Sim is also an investments advisor with knowledge on the right strategies to meet your financial goals, while also being conscious of the right tax-exemption strategies.

Meet with a life insurance agent and professional like Sim today to create the right plan for your life insurance policy and estate.


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