Life Insurance Beneficiary Percentages: Splitting the Payout

You want to leave your life insurance to more than one person, perhaps a larger share to a spouse and smaller shares to your children. The insurer will pay what your paperwork says, so how you write the split matters, as does what you say about a beneficiary who dies first.

This article explains how percentage shares work in Ontario, what the Insurance Act does if a named person does not survive you, and the special issues for children and irrevocable designations. A lawyer or your insurer can confirm how this applies to your policy.

How a percentage split works

A life insurance beneficiary is the person named to receive the death benefit. If more than one is named, the insurer divides the benefit in the proportions the policyholder assigns. You make the designation in the contract or by a declaration, and you may alter or revoke it by a declaration, subject to the rules on irrevocable designations.

In practice, you will want your percentages to add up to the whole benefit, so that no portion is left without a clear owner. Use clear names, state each person's share in the insurer's own form, and ask the insurer to confirm in writing how it has recorded the split. Avoid describing shares in a separate letter or note that the insurer never receives.

• Name each beneficiary in full, with their relationship to you.
• State each share as a percentage, and check that the shares together cover the whole benefit.
• Decide what should happen to a share if that person dies before you.
• Ask the insurer for a copy of the recorded designation.

If one beneficiary dies before you

Under section 196(2) of the Insurance Act, where a beneficiary dies before the insured and the contract or declaration makes no disposition of that person's share, the share is payable to the surviving beneficiary, or to the surviving beneficiaries in equal shares if there is more than one. That can surprise people. If you named three children with different percentages and one of them dies first, the default is not necessarily a split matching your original proportions; it is equal shares among survivors.

If you want something different, such as the share going to that child's own children, say so in the contract or declaration. What happens if no named beneficiary survives you depends on the wording of the policy and the Act, so confirm that with a lawyer or your insurer rather than assuming. Reviewing your designation after a death or birth in the family is a sensible habit.

Revocable or irrevocable: can you change the split?

A revocable beneficiary can be changed at any time without telling them. For an irrevocable beneficiary, the policyholder must have that beneficiary's written permission before making a change. An irrevocable designation is made in the contract or by 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 is not filed as required, the designation has the same effect as if it had not been made irrevocable. The Court of Appeal for Ontario has said that an attempt to name an irrevocable beneficiary without following the Insurance Act's requirements leaves the designation revocable. If a separation agreement or court order requires you to name someone irrevocably, get advice so the filing is done correctly.

Children and trustees

You may appoint a trustee for a beneficiary in the contract or by declaration, and alter or revoke the appointment by declaration. A payment to the trustee discharges the insurer to the extent of the payment. This is useful when a beneficiary is a minor.

If a minor is a beneficiary and a trustee is named, the trustee should get a copy of the signed beneficiary designation form from the insurer, which sets out whether the trustee can pay the child and when the money must be paid out. If a trustee is named but there are no trust terms, the trustee may only hold and invest the money until the child turns 18. If there is no trustee, amounts over $35,000 are paid into court (the Accountant of the Superior Court of Justice) or to a court-appointed guardian of property, while under $35,000 the money can go to the parent or lawful custodian, who holds it until the child turns 18.

What to do next

Naming individuals, rather than leaving the benefit to your estate, matters. If the estate is the beneficiary, the death benefit is distributed under the will and can be subject to estate taxes and creditors' claims, whereas naming individuals keeps it away from both. If no one is named, the benefit defaults to your estate.

• Get a copy of your current beneficiary designation from the insurer.
• List every beneficiary and share, and check the shares cover the whole benefit.
• Decide what should happen to each share if that person dies first, and state it clearly.
• Check whether any designation is irrevocable before trying to change it.
• If a beneficiary is a minor or has a disability, get advice on naming a trustee before finalizing.
• Keep a copy with your other estate papers and tell your estate trustee where it is.

Frequently asked questions