Can Creditors Claim Life Insurance Paid to a Named Beneficiary in Ontario?

A parent or spouse has died, debts are turning up, and you are the named beneficiary on a life insurance policy. It is natural to worry that the people the deceased owed money to will come after the payout.

In Ontario, the answer usually depends on how the beneficiary was named and on who is making the claim. This article explains the general rule, the situations where the money does end up in the estate, and what to do while you wait for payment.

The general rule: a named beneficiary is paid outside the estate

When a beneficiary is designated under a life insurance contract, the insurance money does not form part of the insured's estate and is not subject to the claims of the insured's creditors. In plain words, the insurer pays you directly, and the deceased's creditors generally have no claim on that money.

A person insured under a life insurance contract may name a beneficiary in the contract itself or by a declaration. Unless the designation is irrevocable, the insured can change or revoke it at any time by a declaration. What matters after death is who was validly named at that time.

Because the money bypasses the estate, it also does not count toward the value used to calculate Estate Administration Tax, since assets with a beneficiary designation are excluded from that value.

When the money does go into the estate

The protection depends on a real designation of a person. A designation in favour of the insured's "heirs, next of kin or estate" is treated as a designation of the personal representative. The money then goes through the estate and does not bypass it. Once it is in the estate, it is generally available to pay the estate's debts before beneficiaries receive their shares. Your lawyer can confirm how this applies to the particular policy.

• The policy names "my estate" or "my heirs" rather than a specific person.
• Other situations, such as no beneficiary being named or the named beneficiary dying before the insured, depend on the policy wording and the facts, so they are worth confirming with the insurer and a lawyer.

If the insured and the beneficiary die at the same time, or it is uncertain who survived, the money is paid as if the beneficiary died first, unless the contract or declaration says otherwise. What happens to the money after that depends on whether a backup beneficiary was named and on the wording of the policy, so it is worth confirming with the insurer and a lawyer.

Protection while the insured is still alive

Creditors may also try to reach a policy before death. While a designation in favour of the insured's spouse, child, grandchild or parent is in effect, the insured's rights and interests in the insurance money and in the contract are exempt from execution or seizure.

For this purpose, "spouse" includes married people, people in a void or voidable marriage entered into in good faith, and people who are not married but live together in a conjugal relationship outside marriage, so common-law partners are in the family class.

Dependant's support claims are different

A creditor is not the only person who may look to the estate. For a dependant's support claim under the Succession Law Reform Act, life insurance owned by the deceased is deemed part of the net estate, and so are amounts payable under a plan designation. Designated assets that skip probate can still be reached by a dependant.

There is a time limit. A dependant's support application generally cannot be made more than six months after the grant of letters probate or administration, although the court may allow a later application against any part of the estate that is still undistributed.

Whether someone qualifies as a dependant, and how much a court might order, depends on the facts. If a spouse or child of the deceased may be making a claim, get legal advice before spending the payout.

Payment, tax and what to do next

Once the insurer receives sufficient evidence of the claim, it must pay the insurance money to the person entitled within thirty days. If the insurer admits liability but cannot find a person entitled, there are adverse claimants, or no one can give a valid discharge, it may apply to court after thirty days to pay the money into court.

The CRA lists most amounts received from a life insurance policy following someone's death as amounts that are not reported or taxed. Income earned on those amounts is taxable.

If the beneficiary is a minor, other rules apply. Where a child has no guardian of property, money owed to the child may be paid to a parent the child lives with, up to $35,000; larger sums are normally paid into court unless a court-appointed guardian of property receives them.

• Get a copy of the policy and any declarations naming beneficiaries.
• Check exactly how the beneficiary is described: a named person, or "estate" or "heirs".
• Contact the insurer and provide the claim evidence it asks for.
• Keep the payout separate and avoid spending it until you know whether any support claim is possible.
• Speak with a lawyer if the policy names the estate, the beneficiary's status is unclear, or a dependant may claim.

Frequently asked questions