Most employee group benefit plans include Life insurance coverage. The coverage is normally in place as long as there is an active plan and the employee is eligible and enrolled. When a plan includes Life Insurance, it is critical that each employee chooses someone to receive the benefit after their death. They can designate anyone they wish – family members, friends or a favourite charity. They can have one beneficiary, or a number of them.
Why you should choose a beneficiary
If an employee does not designate a beneficiary, then the proceeds of a death claim are automatically paid into the estate if they die. If the estate is complex, or there isn’t a will, then it will likely be held up in the courts for a very long time. Furthermore, the benefit will be taxed along with the rest of the estate. Insurance policies with a named beneficiary are normally tax free. If there is a named beneficiary, then the insurance company will pay out the benefit fairly quickly as long as the proper paperwork has been received.
There are a few other considerations when choosing a beneficiary. The most important one is to designate the beneficiary as revocable. In all of the provinces except Quebec, beneficiary choices are automatically revocable. In Quebec, it is the other way around. A revocable designation means that the employee can change the beneficiary without even notifying them. An irrevocable decision means that written permission from the beneficiary (or the trustee in the case of a minor) is required. In a divorce situation, if the ex-spouse refuses to give permission to change the beneficiary of an irrevocable life plan, the ex could receive the entire amount when the employee dies, leaving a second spouse of other members of the family with nothing.
Please name a trustee if the beneficiary is under 18
Another consideration is if the beneficiary is under 18 years old. The law requires a trustee. If the beneficiary is the employee’s child, it is easier to name the same person who is named as trustee in the employee’s will. If there is no trustee named, the court has the right to set the money aside until the child turns 18. As well, if multiple beneficiaries are indicated, employees should remember to designate how much each person receives; otherwise the benefit will be divided equally among the named beneficiaries.
Employees should review their beneficiary designations from time to time to time to ensure it still reflects their wishes. This will prevent a situation where there has been a separation or divorce or the original beneficiary has died.
Choose a contingent beneficiary
Although it is rare, there have been cases where the spouse is the beneficiary and, unfortunately, they have passed away at the same time as the employee. Choosing a contingent beneficiary ensures that the insurance money isn’t allocated to the estate.
Beneficiary designation is an important step when an employee enrols in a group plan with life coverage. It is also important to keep it current as it can be easily forgotten by an employee.
ASSOCIUM Benefits is a very unique employee group benefits provider, focused on supporting benefits advisors and their employer clients. We provide Brokers and Plan Sponsors with a range of solutions from traditional group benefits to more customized, cost and tax effective employee compensation. Let’s connect to find out how we can help.