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How Life Insurance, Probate, and Wills work

by Mark Cluett
9 min read

With so much about will and final testaments in the news lately, Canadians often wonder if life insurance is part of their estate, whether it goes through probate, and if your will dictates your life insurance beneficiary. Having these questions linger in the air while failing to properly designate where you want your death benefit to go can cause costly delays in the unfortunate event of your passing.

Read on to find out why, and how to avoid any confusion to where the proceeds of your life insurance policy should go.

KEY TAKEAWAYS

  • Probate is the legal process to validate your last will and testament in order to settle your assets after your death
  • Proceeds from life insurance with a named beneficiary do not go through probate and can be easily, quickly and efficiently accessed by your loved ones
  • If you do not name a beneficiary, your life insurance death benefit goes to your estate and thus probate
  • Those you intended to receive your life insurance payout, but not named as beneficiaries on the policy, may have to wait months or years for the estate to be settled
  • Attorney and probate fees may erode the final value of your estate and in turn your life insurance payout

Let us start by quickly refreshing what “Life Insurance,” “Estate,” and “Probate” mean.

What is life insurance?

Life insurance is a contract between you and a life insurance company, whereby, if you or the proposed insured (in case you are not the person insured) die, the company will pay a lump sum of tax-free money to your named beneficiary. In exchange, you agree to pay them regular insurance premiums, which is a small amount of money over time. Head here for a more in-depth look at how life insurance works.

What is an estate?

Generally speaking, an estate encompasses all the things that you own upon your death. For example, high value items like your car, jewelry, and bank accounts as well as any property you own like your home, cottage, or land. It must be remembered that your liabilities are also part of your estate, such as any loans, lines of credit, and other debts. We’ll talk about why this is important a little further down. Thus, your assets minus your liabilities is the total value of your estate. 

If you have assets that you wish to pass onto another person when you die, then your estate (in most cases) must be probated.

What is a will?

A will (also known as a Will & Testament) is a written document that makes clear how you wish your estate to be distributed after you pass away. A written will helps your loved ones access your assets, although after completion of probate.

What is probate?

Probate is a legal process of authenticating the will of a deceased person and confirming the appointment of someone as your will’s executor. This takes place in the provincial home court of the deceased and is finalized upon the issuance of an official document by the court. 

If a person dies without a will (this is legally defined as intestate), the assets will be distributed by the court according to provincial laws.

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Who is an executor?

An executor of a will is an individual, named in a will, or appointed by a court to arrange the distribution or disposition of assets and liabilities of a deceased person. It is the executor that is responsible for the distribution of the estate assets in accordance with the terms of the will of the deceased.

Is life insurance considered part of a deceased person’s estate? Does life insurance go through probate?

The answer to these questions: it depends.

Life insurance proceeds are generally not part of your estate if you have named a beneficiary to your life insurance policy. Therefore, life insurance with a named beneficiary does not pass through probate. For instance, if you have named your daughter as the person to receive your death benefit after you die, then the named beneficiary is your daughter. She is the rightful recipient of your life insurance proceeds. The proceeds will belong to your daughter as her property, and she will be able to use the money any which way she sees fit.

But, let’s say you did not name a beneficiary to your life insurance application or policy, or the beneficiary is no longer alive; what would then happen to the life insurance proceeds upon your death?

In these circumstances, your life insurance proceeds would go to your estate and then have to go through probate. The probate process is typically time-consuming and – worse yet – is not free. More on that below.

how probate works with life insurance

Why should you designate a beneficiary to your life insurance policy?

We all want to make sure that when we die, our families are financially secure and that our loved ones receive the money from our life insurance policy without any delay or cost. By all accounts, this was your intention when you initially purchased your life insurance policy.

As discussed above, this is possible if you have named a beneficiary or beneficiaries to your life insurance policy. This person could be your spouse, children, parents or anyone else you wish to leave the money for upon your death – even groups such as a charity or association.

If you do not name a beneficiary, then by default, your estate is the beneficiary. In such cases, your life insurance proceeds (as mentioned earlier) are required to go through probate.  

Why should one avoid having their life insurance payout go through probate?

Here’s the expensive part we mentioned earlier. As part of the probate process, certain fees are paid to settle the estate, like probate fees and attorney fees. Probate fees vary by province and can range from a flat amount to a percentage of your assets. Your life insurance proceeds, if going through probate, can substantially increase the value of your assets and therefore your probate fees. Furthermore, if there are any creditor claims, debts, or taxes payable, these are also paid from the deceased’s estate. Such fees and payments can gradually reduce the life insurance death benefit if it is considered part of the estate, thus leaving your loved ones or intended beneficiaries with that much less money. 

From a privacy perspective, post-probate, a will is considered a public document. Your life insurance proceeds, if passed through probate, also become a matter of public information.

Some may purposely choose to designate their estate as the beneficiary of their life insurance proceeds; this is usually the case when the main motivation for obtaining life insurance is to pay taxes due upon the death of the insured. 

If you intend for your death benefit to be used by your family to replace your income, then it may be prudent to have a family member(s) as a designated beneficiary or beneficiaries to your life insurance policy. In such a case, your life insurance provider pays the death benefit directly to your named beneficiaries. This way, there is no probate requirement and you avoid any added delay in your beneficiaries receiving the money. Plus, your beneficiaries will receive the amount you intended they have in the first place. 

Lastly, it is a good idea to name a contingent beneficiary. This is just in case your primary beneficiary dies before you do. For instance, couples with children might want to ensure their dependents are the contingent beneficiaries in case both primary caregivers pass away simultaneously.

Can you use a will to change a life insurance policy’s beneficiary?

An insurance contract is separate from a will.  As far as life insurance policy proceeds are concerned, it is the beneficiary named on the life insurance policy that will receive the payout in the event of the death of the insured. A will cannot be used to replace such a beneficiary. Therefore, it is good to review and update the beneficiary designations of your life insurance policy after major life changes or events like marriage, births, divorce, and death.

Bottom Line

If you have named beneficiaries to your life insurance policy, such as a family member or any other person, you don’t need to worry about your life insurance proceeds getting stuck in probate. Take comfort in the fact that your life insurance proceeds will go directly to your named beneficiary upon your death. If you need any advice on how to update or augment your current life insurance coverage, give our licensed brokers a call. They are happy to help you with any insurance questions you may have.

Disclaimer – The information provided herein is for general informational purposes only. It is not intended and should not be construed to constitute legal or financial advice.

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