Who owns your policy when you die?

  • Contingent Owner

Planning is in the details.  If you own a life insurance policy and the life insured (person whose life the policy is based on) is someone other than yourself, it is vital that you appoint a contingent policy owner.  If you were to predecease the insured, the life insurance policy will remain in force since the life insured is alive.  You spent a considerable amount of effort establishing and funding your plan, complete your planning by ensuring who owns your policy when you pass away.  Consider the following scenarios:

You die without specifying a contingent owner and have a will

When this happens the life insurance policy forms part of your estate as an asset.  Where the policy will go next will be determined by your will.  You may set out an individual in the policy wording who’ll take ownership, or it may implicitly go to whomever is to receive the residue of your estate.  Also, often overlooked is the tax consequences in this situation.  Should the policy be bequeathed in the owner’s Will the property becomes part of the owner’s estate first and there is a taxable policy disposition.

You die without specifying a contingent owner and don’t have a will

If you do not have a will and there was no contingent owner specified in the life insurance policy, then what happens next will be decided by the province in which you resided.  This is known as intestate succession.  Essentially, the court will ensure once the appointed estate administrator has paid out any debts and taxes, he’ll distribute the assets to your heirs.  Should the life insurance policy have a positive cash surrender value it may be quite possible it may be surrendered in order to distribute amongst your heirs.  Similar to above, a taxable policy disposition will occur since the policy passed through intestacy.

Neither of the above are ideal.  Obviously, not having a contingent owner nor a will is the worst possible outcome.  The possibility of the policy no longer being in-force simply because it needs to be liquidated to distribute to your heirs and unravel what may have been a lifelong commitment in planning is simply not excusable.

Naming a contingent policy owner will ensure the following:

1. No loss of ownership – the policy will continue to be in-force so long as premiums are paid and fate not decided by a will or the province.

2. Tax-free Rollover – If the contingent owner is your spouse, common-law, or child it will not trigger a disposition from a tax perspective.

3. Full control – you can change the contingent owner at any time without their consent.  In fact, the contingent owner will have no authority until you have passed away.

Who owns your policy can have a profound effect on whether the individuals you want to receive the money in fact will receive it, not to mention how much they will receive.  Proper planning is more than just purchasing enough coverage – it’s in the details of the plan.  Ensure you cover these details with your advisor.

If you have any questions about this article or would like the assistance of one of our licensed professionals, please call us at 1.416.759.5453 or email us at info@lilandinsurance.com.

NOTE: The information presented here is for your information only. Liland Insurance Inc. does not provide legal, accounting, taxation or other professional advice to advisors or their clients. Always seek advice from a qualified professional including a thorough examination of your specific legal/tax situation.

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