Family Class Life Insurance Beneficiaries in Ontario: Who Counts?

If you have been named on someone's life insurance, or you are deciding who to name, you may have heard that certain beneficiaries are 'protected'. That protection comes from Ontario's Insurance Act, and it depends on who the beneficiary is and how they were named.

This article explains who counts as family class, what the protection does and does not do, and the situations where the usual rules work differently. It is general information, not advice on your own policy.

Who is in the family class

The Insurance Act gives special protection where the designated beneficiary is the insured's spouse, child, grandchild or parent.

The word 'spouse' is wider than many people expect. It 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. Common-law partners are therefore in the family class.

• Spouse, including a common-law partner
• Child
• Grandchild
• Parent

A sibling, friend or charity is not on that list, so the family-class protection described below is not what applies to them.

What the protection does

There are two separate effects. First, once a beneficiary is designated, the insurance money does not form part of the insured's estate and is not subject to the claims of the insured's creditors. That is why a designated payout generally does not run through probate and is not used to pay the estate's debts.

Second, 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 money and in the contract are exempt from execution or seizure. This protects the policy from the insured's creditors during the insured's lifetime.

The money is also generally not reported or taxed as income to the person who receives it, although income earned on those amounts afterward is taxable.

When the protection does not work as expected

Several situations change the result, so it is worth checking each one against your own policy.

• Heirs or estate named: a designation in favour of the insured's 'heirs, next of kin or estate' is treated as a designation of the personal representative, so the money goes through the estate and does not bypass it.
• Dependants' support claims: for a dependant's support claim, life insurance owned by the deceased is deemed part of the net estate, so a designated payout can still be reached.
• Insurer restrictions: an insurer may, subject to the Authority's rules, restrict or exclude the insured's right to designate beneficiaries in the contract.
• Simultaneous deaths: unless the contract or declaration says otherwise, 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.

If a dependant's claim is possible, the time limit generally runs six months from the grant of letters probate or administration, though a court may allow a later application against any undistributed part of the estate.

Changing or locking in a designation

A person insured under a life insurance contract may name a beneficiary in the contract itself or by a declaration. A declaration is an instrument signed by the insured that identifies the contract or describes the insurance. Unless the designation is irrevocable, the insured may change or revoke it at any time by a declaration.

An irrevocable designation must be made in the contract or in a declaration, not a will, that is filed with the insurer during the insured's lifetime. While that beneficiary is living, the insured cannot change it without the beneficiary's consent. If an 'irrevocable' designation is made in a will, or in a declaration that is not filed, it has the same effect as an ordinary revocable one.

A beneficiary can also be named in a will, but that designation has no effect against a designation made later than the will. If the will is revoked, the designation in it is revoked too.

Children as beneficiaries

An insured may appoint a trustee for a beneficiary in the contract or in a declaration, which is often used for minor beneficiaries. A minor who has reached sixteen has the capacity of an eighteen-year-old to deal with an insurance contract, but this does not extend to rights as a beneficiary.

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 the prescribed amount, which Ontario's guidance gives as $35,000. Larger sums are normally paid into court through the Accountant of the Superior Court of Justice, unless a court-appointed guardian of property receives them.

What to do next

• Find the policy and read how the beneficiary is named, including any trustee or irrevocable wording.
• Check whether the designation names a person, or 'heirs' or 'estate'.
• If you are the beneficiary, send the insurer the evidence it asks for, since it must pay the person entitled within thirty days of receiving sufficient evidence of the claim.
• If the beneficiary cannot be found or there are competing claims, the insurer may apply to court after thirty days to pay the money into court.
• If creditors, a separated spouse or a dependant may be involved, speak with a lawyer before assuming the money is out of reach.

Frequently asked questions