Can a Deceased Person's Creditors Claim Life Insurance in Ontario?

A family member has died, there are bills and debts, and there is a life insurance policy. A common worry is whether the insurance money will be swallowed up by the deceased's creditors before the people it was meant for see any of it.

The answer depends mostly on who is named to receive the money. This article explains the general Ontario rules, the situations where the protection does not apply, and what estate trustees and named beneficiaries can sensibly do next.

The general rule when a beneficiary is named

Under Ontario's Insurance Act, where a beneficiary is designated, the insurance money is not part of the insured's estate and cannot be claimed by the insured's creditors from the time of death.

In plain terms, the money goes straight to the person named on the policy. It does not pass through the estate, so it is generally not available to pay the deceased's credit cards, lines of credit or other debts. The estate trustee does not collect it as an estate asset.

When creditors can reach the money

The protection applies only where a beneficiary is designated. An insured person may name themselves or their personal representative as the person to whom the money is payable. In that case the proceeds are paid into the estate, and the protection does not keep them away from the insured's creditors.

If the estate is the named recipient, the money is paid into the estate and is treated like other estate property, rather than as protected insurance money. Whether that is the case on a particular policy depends on the policy wording and designation, which is worth confirming with the insurer or a lawyer.

• Named beneficiary (other than the estate): money is outside the estate and protected from the deceased's creditors.
• Estate or personal representative named: money is paid into the estate and is not protected by that rule.

If the estate cannot pay all its debts

When insurance money does fall into the estate and the assets are not enough to pay every debt, the Crown's debts, the personal representative's debts and other creditors' debts are paid proportionately, with no debt ranking ahead of another.

There is an exception for secured creditors. The equal-sharing rule does not affect any lien the person gave over their property during their lifetime, so secured creditors keep their security.

Unless the will says otherwise, debts and funeral and testamentary expenses are paid out of the residuary estate. Insurance money that goes directly to a named beneficiary is not part of that pool.

Protection during the insured's lifetime, and the dependant support exception

While a designation in favour of the insured's spouse, child, grandchild or parent is in effect, the insured's own rights in the insurance money and the contract are exempt from execution or seizure. This is a separate protection from the one that applies after death.

The key exception concerns dependant support claims. For those claims only, certain assets that pass outside the will are treated as part of the net estate, including life insurance the deceased owned on their own life. So a dependant who applies to the court for support may have the insurance considered, even though creditors could not claim it.

An application for support cannot be made more than six months after the grant of letters probate or letters of administration. The court may allow an application at any time for any part of the estate still undistributed on the date of the application.

Once an estate trustee is served with notice of a support application, they must not distribute the estate unless everyone entitled to apply consents or the court orders it, and a trustee who distributes in breach is personally liable for the amount distributed. Reasonable advances for support are still allowed.

What to do next

The steps differ depending on whether you are the estate trustee or a named beneficiary.

• Estate trustees: find every policy and ask each insurer who is named, and whether the estate is the recipient.
• Estate trustees: if you are served with notice of a dependant's support application, do not distribute the estate unless everyone entitled to apply consents or the court orders it, apart from reasonable advances for support.
• Estate trustees: if debts may exceed assets, get advice before paying any one creditor, because unsecured creditors generally share proportionately.
• Named beneficiaries: contact the insurer with the death certificate and ask about its claim process.
• Named beneficiaries: if a dependant might apply for support, ask a lawyer how that could affect you.
• Everyone: keep copies of policies, designations and correspondence.

Because the answer turns on the exact designation and the family's circumstances, speaking with an Ontario estates lawyer before money is paid out or distributed is a sensible step.

Frequently asked questions