Life insurance and beneficiaries: A brief overview
Life insurance can be used as a financial planning tool for individuals, corporations or other entities.
Updated 
10 min. read
Suzanne Désy
Director, Tax & Estate Planning, Advanced Markets
This article only applies in Quebec. For common-law provinces, please refer to Designating Beneficiaries - Life Insurance Policies and Registered Plans.
Life insurance can be an effective financial tool for the policyholder, whether that be an individual, a corporation, or another type of entity. Indeed, more and more people are discovering that life insurance, often considered as a means of protection, can also be used to diversify an investment portfolio and thus, maximize an individual’s estate value.
Even though the death benefit from a life insurance policy can, in some cases, represent a significant portion of a client’s estate value, beneficiary designation planning is too often neglected. This may explain the many disputes, often between family members, over who is entitled to insurance proceeds after the death of a loved one.
All the rules governing life insurance in the Civil Code of Québec (CCQ) cannot be covered in a single article. This text is therefore intended as an overview of some of these rules, and it suggests possible solutions to certain practical issues that may arise.
The concepts of revocable and irrevocable beneficiaries
The CCQ provides for two types of beneficiaries: revocable and irrevocable. If the holder of an insurance policy (the policyholder) names an irrevocable beneficiary, they must obtain the beneficiary’s consent if they later wish to change the designation and name someone else as beneficiary.
The CCQ also sets out the following principle: The designation of any person other than a married or civil union spouse is revocable, unless otherwise specified in the policy or in a separate writing other than a will. Beneficiary designations in a will are thus always revocable. The same CCQ article states that the designation of a married or civil union spouse as a beneficiary, when made in a writing other than a will, is irrevocable unless otherwise stipulated.
In the case of a spouse, the expression “unless otherwise stipulated” in the CCQ does not impose any particular requirements regarding the content or form of the stipulation. In practice, many insurance companies have drafted their forms to reflect the distinction between the designation of a married or civil union spouse (presumed irrevocable) and that of another beneficiary (presumed revocable). A beneficiary is considered irrevocable if they are the person with whom the policyholder is married (or in a civil union), unless the policyholder opts to make them revocable. This can be done by checking a box provided for this purpose. This clear action of checking the box for revocability makes it quite evident that the policyholder intends to provide for a contrary stipulation. For other beneficiaries, the forms usually state that the beneficiary is revocable unless the policyholder voluntarily chooses irrevocability.
Priority order of beneficiaries
The CCQ sets out the rules that apply if there is a conflict between different beneficiary designations. In general, the most recent designation will prevail. However, there are specific rules that must be considered. For example, only the designation of a revocable beneficiary can be changed without the beneficiary’s consent. In addition, the law provides that a designation or revocation contained in a will does not prevail over any other designation or revocation made after the signing of the will. In other words, the most recent designation prevails. The article also states that a designation or revocation contained in a will does not prevail over a designation made prior to signing the will, unless the will mentions the insurance policy in question or the testator’s intention in this regard is clear.
Cases where the insurance policy is clearly identified in a will generally do not give rise to disputes. This may not be the case when there is a need to determine the testator’s intention. This can become complicated and lead to litigation. It is therefore recommended to clearly identify any life insurance policy in a will, specifically by mentioning the name of the insurance company that issued the contract, the date of issuance, and the contract number.
Formal requirements for beneficiary designations
The formal requirements for beneficiary designations state that a designation is made by the policyholder in the insurance policy or in another writing, whether in the form of a will or not. No other formal requirement, such as a need for the contract holder’s signature, is specified. You must, of course, be able to prove that the writing truly reflects the holder’s intention.
The same rule applies to the revocation of a revocable designation, namely the requirement of a writing but not of a signature. Note as well that the revocation does not need to be explicit.
These relatively flexible rules often give rise to disputes among family members and have led to court rulings. Consider, for example, the case of Veilleux c. Maritime (La), compagnie d’assurance-vie, AZ-98026509 (CS), upheld on appeal (AZ-51261715), where the Court recognized a document that had been written not by the client, but by a life and health insurance broker. The broker received a phone call from his client, who was the policyholder of a life insurance policy and who informed the broker that he wanted his ex-wife to remain the beneficiary. The Court deemed the broker’s document sufficient as a writing within the meaning of the CCQ. In this case, the broker was considered the agent of the policyholder.
Case Examples
Now let’s look at the application of certain other rules set out in the CCQ by briefly analyzing the situation of your new client, Mr. Conrad Laramé. We will also comment on certain tax implications and suggest some possible solutions that could be considered.
The factsConrad Laramé, who owns a business (a corporation), has come to see you about the organization of his affairs. A few years ago, he carried out an estate freeze in order to bring his three children (aged 15, 18, and 21) into the business through a trust that holds the common shares.
It's corporate structure is as follows: footnote 1
Mr. Laramé is divorced from Lucie, his first wife and the mother of his children. He currently lives with Maryse, his de facto spouse.
He brings you a copy of his will, which provides for a specific bequest of his principal residence and his registered plans to Maryse, in full ownership, with the residue going to a trust for her benefit. He also gives you copies of three life insurance contracts that are currently in force.
Contract #1Mr. Laramé is the sole policyholder, and he and Lucie are the lives insured, with the insurance proceeds payable upon the second death. The estate of the last policyholder is the beneficiary.
Contract #2Mr. Laramé is the policyholder of another contract under which he is the sole insured. His ex-wife Lucie is the beneficiary, and his three children are the subrogated beneficiaries.
Contract #3Mr. Laramé’s management company is the policyholder of a contract under which he is the sole insured. Maryse is the beneficiary.
Here are some potential issues that could arise upon the death of Mr. Laramé with respect to these contracts.
Contract 1Mr. Laramé is the sole policyholder, and he and Lucie, his former spouse, are the lives insured, with the insurance proceeds payable upon the second death. The estate of the last policyholder is the beneficiary. Upon Mr. Laramé’s death, ownership of the life insurance policy will be transferred to the trust in favour of Maryse, his current common-law partner, in accordance with his will. Premiums may still be payable at that time. If so, the trustee would then have to use the trust’s income or capital to pay them.
Subparagraph 70(6)(b) of the Income Tax Act (ITA) sets out the conditions for a tax-free transfer to a spousal trust: On the one hand, the surviving spouse must be entitled, during their lifetime, to all of the trust’s income; on the other, no person other than the spouse may, before the spouse’s death, receive or otherwise obtain the use of any part of the income or capital of the trust.
The transfer of this life insurance policy to the trust in favour of the spouse could taint the trust. As a result, any assets of Mr. Laramé transferred to the trust under his will cannot be transferred on a tax-deferred basis, as part of the income or capital would be used to pay the insurance premiums, if any. The Canada Revenue Agency (CRA) has in fact confirmed and reiterated this position on numerous occasions. Naming the trust as the beneficiary of the insurance policy would not change this outcome. Working with his legal and tax advisors, Mr. Laramé must therefore review the various possible solutions to this problem, each of which has advantages and disadvantages from a legal, tax, and personal perspective.
Contract 2Mr. Laramé is also the policyholder of the second contract, under which he is the sole insured. His ex-wife Lucie is the beneficiary, and his three children are the subrogated beneficiaries.
Lucie, from whom Mr. Laramé is divorced, is the designated beneficiary under this contract. The law provides that divorce causes any designation of the former spouse or civil union spouse as beneficiary to lapse. The death benefit will therefore be paid to Mr. Laramé’s three children as subrogated beneficiaries. The two eldest children, who are over 18, will be able to receive and administer their benefit amounts themselves. As for the youngest, their mother Lucie, as tutor, will administer the amounts until he reaches the age of 18. It might be advisable to inform Mr. Laramé of this outcome and to make sure that he finds it acceptable. If not, naming the estate as the beneficiary and creating a testamentary trust in favour of the minor child (and even for the two older children to delay their access to the amounts until they are older) could be a solution. However, this option also has drawbacks that would need to be reviewed with Mr. Laramé.
Note that the rule regarding the lapse of a beneficiary designation of a former de facto spouse does not apply to such a spouse, who remains the beneficiary even after the separation unless the policyholder changes the designation. Furthermore, the policyholder must obtain the consent of the former spouse if he or she was designated irrevocably.
Contract 3The third contract, under which the life insured is that of Mr. Laramé, is held by his management company, and Maryse is the beneficiary.
Since Maryse is the beneficiary of an insurance contract whose premiums are paid by the corporation that is also the policyholder, Mr. Laramé must add the amount of the premiums to his annual income as a taxable benefit. This could be avoided by changing the beneficiary designation from Maryse to the corporation. It would then be necessary to ensure that all other elements, such as the will, the shareholder agreement and the characteristics of the issued shares, are planned so that the death benefit is ultimately paid to Maryse in accordance with Mr. Laramé’s wishes.
Taking out a new contractAt the end of the meeting with Mr. Laramé, he opens up more about his personal situation. He tells you that he has another child, Paul, born from an extramarital relationship and with whom he has infrequent but regular contact. Lucie and Maryse know of Paul’s existence, but nothing more. Mr. Laramé says he would like to leave Paul an inheritance, but without naming him in his will in order to minimize contact with the other members of his family. To achieve this goal, Mr. Laramé could take out a life insurance contract under which he would be the policyholder and the insured. His son Paul would be the beneficiary. Upon Mr. Laramé’s death, Paul would receive the death benefit directly from the insurance company, without going through the estate, thereby minimizing contact with Mr. Laramé’s family.
Conclusion
With life insurance products being increasingly used in financial and estate planning, not only for protection but to maximize the value of a client’s estate as well, it’s important to keep the rules specific to insurance in mind and to work with professionals in the field to ensure that death benefits are ultimately paid in accordance with our clients’ wishes, while also taking into account the legal and tax aspects of each situation.
Footnote 1 detailsStructure simplified for ease of understanding
Information contained in this article is general in nature and should not be construed as legal or tax advice. You are encouraged to seek the advice of other professionals such as legal and tax experts. Please consult the appropriate policy contract for details on the terms, conditions, benefits, guarantees, exclusions and limitations. The actual policy issued governs. Each policyholder’s financial circumstances are unique, and they must obtain and rely upon independent tax, accounting, legal and other advice concerning the structure of their insurance, as they deem appropriate for their particular circumstances. BMO Life Assurance Company does not provide any such advice to the policyholder or to the insurance advisor.
Insurer: BMO Life Assurance Company
1073E
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