Money on deposit with a life insurance company is treated the same as a life insurance policy. This means that a beneficiary can be named and proceeds will be paid directly on death without the need for probate or the services of a lawyer. A beneficiary designation can be changed at any time avoiding the cost of re-writing a Will. Deposits with a life insurer can also be protected from creditors by using certain beneficiary designations. Pat died in mid-2015 and most of her assets passed by her Will and were therefore subject to probate. More than $200,000 was in GICs and a fairly rapid transfer of this money to her heirs would be expected.
Unfortunately, they had to wait until the spring of 2017 to receive the funds. Not only did the GICs attract legal and probate fees in excess of $10,000, but while they were waiting for their share, her kids had to pay income tax on interest earned on the money. This proved to be a hardship for some of them who were of limited means or single parents.
Pat also had two life insurance policies. The claim forms for the insurance were sent to the insurer on within 2 weeks of her passing and cheques were delivered to the named beneficiaries less than 4 weeks after her death. What a difference.
Ban used named beneficiaries as part of his estate plan to ensure that his money went where he wished without the need for legal fees or probate costs and delays. When he died, his wishes were granted within a matter of a few weeks with no cost to his estate or beneficiaries.
A couple had to file for personal bankruptcy and most of their assets were seized including bank accounts and GICs. Their life insurance policies and investment plans (both RSP and non-RSP) were safe since they were with an insurance company. As life insurance policies with each other named as beneficiary, they were protected in this circumstance. As husband and wife, they are “preferred” beneficiaries, which is one of the reasons their plans with the life insurance company were protected from seizure.
Hussein has other concerns. He worries about his beneficiary’s ability to manage money and wants to make sure that the insurance proceeds will last. He also wants to avoid the cost and potential tax issues of establishing a trust after he dies. Hussein was able to address his concerns by utilising special beneficiary arrangements. He directed that the death benefits would be paid out over a period of years in equal monthly instalments – no management costs, no trustee or legal fees and no ability for the beneficiary to get a lump-sum.
The option to provide income rather than a lump sum may be more appropriate in many situations. Another option is a lump sum for part of the proceeds (to provide for the immediate cash needs) and the rest paid out as a lifetime income.
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