Naming a beneficiary so the money reaches your family

The designation is the whole decision

A life insurance policy has one job: move an amount of money to a named person at the worst possible moment, quickly and without argument. The size of the policy gets all the attention, but who you name decides who controls the money and how fast they get it.

With the lender's optional mortgage insurance that decision is already made. The Financial Consumer Agency of Canada states that the mortgage lender is the beneficiary of any mortgage life insurance policy. The payout goes to the lender and is applied to the balance. That is a defensible outcome, and it is also a fixed one: nobody in your family gets to weigh the mortgage against childcare, or against a year of breathing room.

With a policy you own, that choice stays in the household. The side by side comparison covers the other differences, but this one is the most personal.

What naming someone actually buys you

Three things, and they are the strongest arguments for doing it properly.

The money is tax free. The agency describes a life insurance death benefit as a one-time, tax-free payment to the people you name.

It goes around the estate. Ontario's Insurance Act says that where a beneficiary is designated, the insurance money is not part of the estate of the insured from the moment it becomes payable. That means it is not counted for the province's estate administration tax, and it does not wait on the estate being settled.

It is protected from creditors. The same section puts insurance money paid to a named beneficiary outside the reach of the insured's creditors, and while a designation in favour of a spouse, child, grandchild or parent is in effect, the policy itself is exempt from seizure.

Name your estate instead, and all three of those advantages go away. The agency is direct about it: the benefit becomes part of the estate, is subject to estate taxes, and creditors may claim it.

Naming one person, or several

You can name a single beneficiary or more than one. If you name several, the agency notes the insurance company will divide the death benefit among them, in the shares you set out.

A few practical points make a designation work smoothly.

Use full legal names, and add the relationship. "Priya Raman, spouse" leaves nothing to interpret; "my wife" can create work if a name has changed.

Name a contingent beneficiary. That is the person who receives the benefit if your first choice has already died. Without one, the money is likely to fall back to your estate, which undoes everything in the section above.

Set percentages rather than dollar amounts when you split a benefit between people. Percentages still work correctly if you later change the coverage amount.

Revocable and irrevocable

A revocable beneficiary can be changed at any time, on your own, by filing a change with the insurer. This is what most people want and what most designations are by default.

An irrevocable beneficiary cannot be changed without their written permission, and you also need their consent for certain other changes to the policy. It is a real commitment, used deliberately, most often as part of a separation agreement or a support obligation. One regional rule worth knowing: in Quebec, a spouse by marriage or civil union who is named as beneficiary is presumed irrevocable unless the designation says otherwise.

Children, and why a trust is usually the answer

Naming a young child directly feels like the obvious move and rarely works out as intended, because an insurer generally cannot hand a death benefit to a minor.

Ontario draws the line at a dollar figure. Under the Children's Law Reform Act, money owed to a child can be paid to a parent the child lives with, or to a person with lawful custody, up to a prescribed amount that is currently $35,000. A life insurance death benefit is almost always larger than that, so above the threshold the money needs somewhere proper to go: a trustee named in the policy, a guardian of property appointed by the court, or payment into court to the Accountant of the Superior Court of Justice until the child turns 18.

The standard alternative is the one the agency describes: set up a trust and designate a trustee or administrator. That lets you choose who manages the money, and set out what it is for, without a court deciding on your behalf. For most couples, the practical arrangement is to name each other as the primary beneficiary and name a trust for the children as the contingent.

Review it when life changes

A designation is not a set and forget decision. The events that should send you back to it are the ordinary ones: marriage, separation or divorce, a new child, the death of someone you named, a large change in what your family owes.

Updating your will is not a substitute. In Ontario a will can change a designation, but only where it refers to the policy or otherwise deals with the insurance money, and a designation filed with the insurer after the will was made takes priority. Go back to the insurer, file the change, and tell your lawyer what you filed.

What this means for you

Decide who you would want holding the money, not who the debt belongs to. Name them with their full legal name, name a contingent behind them, and use a trust with a named trustee if a child is involved.

Then check the designation every few years and after anything big changes. It takes a form and a signature. And if you have not chosen an amount yet, you can see what different amounts cost in about two minutes before making any of these decisions final.