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 The
Money Management Newsletter: Insurance
Products
Designating a beneficiary for a RSP/RIF or
a life insurance policy
By Martin Kosterman and Heather Friell
Money Management Newsletter, April 2005
Life insurance policies are designed as protection
against unforeseen circumstances. They provide income in the form of a
death benefit for the policy beneficiary as predetermined by the owner
and can be a great comfort for those left behind as a result of the death
of the insured.
For this reason, designating a beneficiary is a very
important decision that should not be taken lightly. As a rule, a beneficiary
designation should be given the same consideration that would be allotted
to completing a last will and testament. But what makes this decision
so important and what factors should be taken into account? Let's take
a closer look.
A beneficiary can be a person (or persons) or an entity
such as a trust or corporation. A policy holder can also appoint multiple
persons or entities as beneficiaries and can also choose to give the beneficiaries
different percentages of the proceeds from the death benefit. But regardless
of who is appointed as beneficiary, it is absolutely necessary for the
designation to be complete since any inaccuracy can complicate the proceedings
when the death benefit is paid out.
One of the benefits of naming a beneficiary for a life
insurance policy is that this allows the money to go straight into their
hands rather than having to go through your estate - thus eliminating
the need for probate (now called Estate Administration in Ontario). This
allows your beneficiary (or beneficiaries) to avoid potential probate
fees and unnecessary expenses. Without a proper beneficiary designation,
upon your death the proceeds from the life insurance policy become part
of your probate estate, which is subject to fees and other expenses. This
in turn may decrease the amount of money that your loved ones are entitled
to.
Another negative aspect of not appointing a beneficiary
is that the estate probate process may take several months to complete,
effectively leaving your loved ones to fend for themselves until probate
is completed. Life insurance is meant to provide the means to prevent
this from happening and these unfortunate circumstances can be avoided
by simply designating a beneficiary.
Who can be named as beneficiary?
Eligible beneficiaries include your spouse, children,
relatives, friends, or if you so choose, a trust, charity or organization,
or anyone else with an insurable interest.
Keep in mind however that if you designate a minor as
the beneficiary of your life insurance policy, it will be necessary to
provide supporting documentation that appoints a Trustee to receive and
manage the policy proceeds on the minor's behalf. Failure to do this can
result in delays in the administration of the policy benefits.
A good way to eliminate all doubt when making
your beneficiary designation is to make sure you list the full names of
the person or people your choose along with their relationship to you.
It may also be an idea to include their Social Insurance Number (SIN)
to remove the possibility of any mistake being made.
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