Life Insurance FAQS

1. What is Life Insurance?

2. Why would I need to take out a life insurance policy?

3. What is a Life Insurance contract/policy?

4. What is a beneficiary?

5. Is a benefit paid to my beneficiary tax free?

6. What are the different policies?

7. Explain Group Life Insurance.

8. How is the designated beneficiary affected by creditor protection?

9. What is an irrevocable beneficiary?

10. What happens if a beneficiary Is a minor?

11. Can I leave money to a charity?

12. What happens if my beneficiary dies first or at the same time?

13. What happens to my life insurance payment should my spouse (the Policyholder) and I get divorced?

What is Life Insurance?

Life insurance is the monetary sum paid to a beneficiary when the policyholder dies.The insurance company takes premiums (usually a monthly sum of money) to keep the insurance active.

Why would I need to take out a life insurance policy?

If you are the primary contributor to your family's budget, your family would likely suffer financial hardship upon the event of your death. Funeral arrangements can be costly and a life insurance policy would be able to cover this and sundry costs incurred on the event of your death. If you have any other financial commitments, such as a mortgage, these will need to be met by your surviving family. A substantial life insurance policy could pay off the remainder of your mortgage.

Also, if you are a lone parent, you need to consider the welfare of your children. How will they make ends meet should something happen to you? How will they afford to go to university or college? Even if these factors no longer apply to you, you may wish to consider donating a sum of money to a charity or to a fund dedicated to researching and finding a cure for a disease (perhaps a disease that led to your own death).

What is a Life Insurance contract/policy?

The life insurance contract binds the insurance company to a legal obligation to pay your designated beneficiary the monetary sum agreed by you and the company on the event of your death.

What is a beneficiary?

This term refers to the person to whom the insurance money will be paid upon the event of your death. The beneficiary must be clearly stated in the policy.

Is a benefit paid to my beneficiary tax free?

Yes. There are exceptions but these are rare.

What are the different policies?

Essentially there are two types of life insurance: permanent and term. Permanent insurance normally covers permanent needs such as:

• Funeral expenses

• Any necessary supplementation to the income of one (or more) of your survivors

• Meeting capital gains taxes upon the event of your death

• Disabled children who may remain dependent during adulthood. Temporary needs are usually met with term insurance.

Temporary needs may include such things as:

• The mortgage

• The needs and demands of young children

• Miscellaneous business expenses and the sundry obligations therein

Explain Group Life Insurance.

A type of term insurance, it is usually provided by an employer or union to the employee until the age of 65 years. A medical examination or other proof of insurance eligibility is not normally required. You will normally cease to be covered when you leave the group. Employees with this form of insurance are urged to check that their plan will permit them to convert to an individual life policy once coverage ends.

How is the designated beneficiary affected by creditor protection?

The beneficiary designated affects whether or not insurance proceeds are protected from your creditors. The Canadian law states that the insurance money is exempt from seizure by creditors if a spouse, child, parent or grandchild is named as the beneficiary. In almost all Canadian provinces this unique protection will include adopted children. However, unless designated as an irrevocable beneficiary, ex-spouses are NOT covered by this protection.

What is an irrevocable beneficiary?

When named in the policy as an irrevocable trust or an irrevocable beneficiary, you (the policyholder), are not permitted to change or revoke that beneficiary unless the consent of the former is given. Your creditors will not be able to touch the money nor will your estate acquire it either. NOTE: One's spouse is automatically designated as an irrevocable beneficiary in the Canadian province of Quebec. To complement this condition, when the marriage ends (by divorce) this status is automatically cancelled.

What happens if a beneficiary Is a minor?

There are two options:

1) Unless the beneficiary is able to provide a valid discharge on receipt of the money (usually at 18 years of age) the money will have to be paid into court.

or

2) When the beneficiary is less than 18 years of age, he or she may need to have the money paid to a trustee.

Can I leave money to a charity?

Yes. The amount of money that you choose to donate will be given to the charity of your choice upon the event of your death. The premiums may be tax deductible if the charity is registered (e.g. with Revenue Canada).

What happens if my beneficiary dies first or at the same time?

Under insurance law, the beneficiary is declared to have died first should you both actually die at the same time (e.g., in a car wreck). If you outlive your beneficiary, the insurance money goes to your estate. The exception to this rule is that the money will go to a contingent beneficiary (if you have one designated).

What happens to my life insurance payment should my spouse (the Policyholder) and I get divorced?

Make sure your payments are insured! With either new or existing policies there will be two ways of achieving this:

1) Arrange a formal agreement with your ex-spouse to take out life and disability insurance, with you designated as the irrevocable beneficiary.

2) You may take out a life insurance policy on the life of your ex-spouse. With this policy you must pay the premiums and designate yourself as the beneficiary, thus granting you complete control of the policy.

Adapted from: "A Guide To Buying Life Insurance". The Canadian Life and Health Insurance Association Inc. Canada.