Adding a Beneficiary to an Existing Life Insurance Policy

Perhaps you named your spouse years ago and now want to include a child, or you have a new partner. Adding a second person to a policy that is already in force is usually simple, but two points can complicate it: how the shares are divided and whether anyone was named irrevocably.

This article explains the general rules in Ontario so you know what to ask your insurer and when to get legal advice.

How a designation is made and changed

Under the Insurance Act, an insured designates a beneficiary in the contract or by a declaration. The insured may alter or revoke the designation by a declaration, subject to the rules on irrevocable designations.

In practice, that means you use the form or process your insurer provides to make a new declaration. Ask the insurer for its beneficiary change form and follow its instructions for signing and returning it.

Revocable or irrevocable: the key question

Before you add anyone, find out whether an existing beneficiary was named irrevocably.

An irrevocable designation is made in the contract or in a declaration filed with the insurer at its head or principal office in Canada during the insured's lifetime. After that, the insured cannot alter or revoke it without the beneficiary's consent, and the money does not form part of the insured's estate.

If the declaration was not filed as required, the designation has the same effect as if it had not been made irrevocable. An irrevocable-consent problem therefore arises only if those filing rules were met. A lawyer can review the paperwork if you are unsure.

What happens to the existing share

If more than one beneficiary is named, the insurer divides the benefit in the proportions the policyholder assigns. So when you add a person, you should state the percentages clearly for everyone, adding up to the whole.

• Decide the split first, for example equal shares or different percentages.
• Write the proportions on the form so the insurer does not have to guess.
• Remember that reducing the existing beneficiary's share is a change to their designation, which may need their written permission if they are irrevocable.

If a beneficiary dies before the insured and the contract or declaration makes no disposition of that share, the share is payable to the surviving beneficiary, or to the surviving beneficiaries in equal shares if there is more than one. Other situations depend on the wording, so it is worth confirming with a lawyer.

Children, trustees and the estate

If you add a minor, think about who will manage the money. An insured can appoint a trustee for a beneficiary in the contract or by declaration, and can alter or revoke the appointment by declaration. A payment to the trustee discharges the insurer to the extent of the payment.

If a trustee is named, the trustee should get a copy of the signed form from the insurer. It sets out whether the trustee can pay the child and when the money must be paid out. If there are no trust terms, the trustee may only hold and invest the money until the child turns 18.

With no trustee, amounts over $35,000 are paid into court or to a court-appointed guardian of property. Under $35,000, the money can go to the parent or lawful custodian, who holds it until the child turns 18.

If no one is named at all, the benefit defaults to the policyholder's estate. Money paid to the estate is distributed under the will and can be subject to estate taxes and creditors' claims.

Tax and next steps

Life insurance paid to a named beneficiary is a one-time, tax-free payment, and beneficiaries generally owe no income tax on the death benefit. Income earned on those amounts afterward is taxable.

• Ask the insurer for the current designation and whether any beneficiary is irrevocable.
• Request the insurer's beneficiary change form.
• Decide the shares and write them on the form.
• Get written consent from any irrevocable beneficiary before making changes.
• Name a trustee if a beneficiary is a minor.
• Ask for written confirmation that the insurer has recorded the change.
• Get legal advice if there is a separation agreement, a dispute or doubt about irrevocable status.

Frequently asked questions