Primary Beneficiary Died First: Who Gets Their Share of Insurance?

You may have just learned that one of several people named on a life insurance policy died before the policyholder. Now you want to know whether that person's share goes to the other beneficiaries, to someone listed as a backup, or into the estate.

The answer depends on what the policy and any later declarations say, and on the Insurance Act where they are silent. This article explains the general rules in plain language so you know what to look for and when to ask a lawyer.

Start with what the policy and declarations say

In Ontario, the insured designates a beneficiary either in the insurance contract itself or by a separate declaration. The insured can also alter or revoke that designation by a declaration, subject to the rules on irrevocable designations.

That means the paperwork on file with the insurer matters most. If the contract or a declaration says what should happen to a deceased beneficiary's share, for example by naming a backup or by giving the share to someone else, that wording is what the insurer looks at first. The statutory default only applies where the paperwork makes no provision for that share.

Where there are several beneficiaries, the insurer divides the benefit in the proportions the policyholder assigned. So the starting question is what percentage the person who died was assigned, and whether anything was said about that share.

What the Insurance Act says when the paperwork is silent

Section 196(2) of the Insurance Act deals with a beneficiary who dies before the insured. Where neither the contract nor a declaration makes any disposition of the deceased beneficiary's share, the share is payable to the surviving beneficiary, or to the surviving beneficiaries in equal shares if there is more than one.

In practice, this means that if three people were named and one died first, the dead person's share does not automatically fall into the estate. It generally goes to the people who are still living, split equally among them where the paperwork does not say otherwise.

What happens if no named beneficiary is alive is a harder question, and it depends on the exact wording of the policy and the current version of the Act. If that is your situation, have a lawyer review the documents before you assume the money goes anywhere in particular.

When the estate ends up as the beneficiary

If no one is named, the death benefit defaults to the policyholder's estate. When the estate receives it, the money is distributed under the will, and the federal consumer agency warns that it can be exposed to estate taxes and creditors' claims. Naming individuals keeps the benefit away from both.

This is why the details matter. A share that passes to surviving named beneficiaries is treated very differently from a share that falls into the estate, where the estate trustee must deal with debts and the terms of the will.

Special situations to watch for

• Irrevocable designations: an irrevocable designation 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, cannot be altered without the beneficiary's consent, and the money does not form part of the insured's estate. If the filing was not done as required, it has the same effect as if it had not been made irrevocable.
• Revocable designations: a revocable beneficiary can be changed at any time without telling them, so the policyholder may have updated the paperwork after the original naming.
• A trustee for a beneficiary: the insured can appoint a trustee for a beneficiary in the contract or by declaration, and payment to the trustee discharges the insurer to the extent of the payment.
• A minor beneficiary: if a child is a beneficiary and no trustee is named, amounts over $35,000 are paid into court or to a court-appointed guardian of property, while smaller amounts can go to the parent or lawful custodian, who holds them until the child turns 18.

Tax and what to do next

Life insurance paid to a named beneficiary is described as a one-time, tax-free payment, and beneficiaries generally owe no income tax on the death benefit. Most amounts received from a life insurance policy after someone's death are not reported or taxed, but income earned on those amounts is taxable. Employer death benefits are different from life insurance, and amounts above $10,000 are generally taxable to the recipient.

• Get a copy of the policy and every beneficiary designation or declaration from the insurer.
• Obtain the death certificate for the beneficiary who died first, and note the date of death compared to the policyholder's.
• Check whether the contract or a declaration names a backup or says what happens to a deceased beneficiary's share.
• Ask the insurer in writing how it intends to divide the benefit and why.
• If the estate may be the beneficiary, speak with the estate trustee about how the money fits into the estate.
• Speak with a lawyer if the documents conflict, an irrevocable designation is involved, or the insurer's answer surprises you.

Frequently asked questions