Choosing life insurance beneficiaries is more than just a step in financial planning — it’s shaping your legacy. Read on for help with navigating the choices, whether it’s for family, friends, trusts, or charities. Dive in to how to split your legacy among multiple beneficiaries, understand the roles of primary and contingent beneficiaries, and know the difference between revocable and irrevocable options. You’ll also learn why naming a beneficiary is so important, and what could happen if you don’t.

Take on your legacy planning with confidence, whether you’re just starting out or you’re updating your estate plan.

Key takeaways

• A life insurance beneficiary is a person and/or entity named to receive benefits after the policyholder’s death.

• Options for beneficiaries on life insurance are broad, including individuals, trusts, charities, and businesses.

• Understanding the difference between primary, contingent, revocable, and irrevocable beneficiaries is crucial.

• Proper beneficiary designation ensures efficient asset transfer, tax benefits, and the avoidance of probate.

What is a life insurance beneficiary?

A life insurance beneficiary is the individual and/or organization you designate to receive the payout from your life insurance policy after you pass away. It’s a key component in your broader estate planning, ensuring the fruits of your hard work and savings are passed on in a way that reflects your personal wishes and priorities.

When you choose a beneficiary on your life insurance, you’re essentially deciding who will benefit from the financial safety net you’ve put in place. This can be a family member, a close friend, a trust, or even a charitable organization whose cause you support. The beneficiary you choose is a reflection of your relationships, commitments, and values. It’s about ensuring that, in your absence, your financial legacy is entrusted to the right hands, whether that’s providing for your family’s future, supporting a friend’s well-being, or contributing to a cause close to your heart.

Who can be a beneficiary on life insurance?

Choosing a life insurance beneficiary is a flexible decision. A beneficiary can be:

Family members

Commonly chosen, they can include your spouse, children, siblings, or other relatives.

Friends

Suitable for those with whom you have a close bond, or who may depend on you financially.

Trusts for minors

Ideal for managing assets for minors until they reach legal adulthood.

Charities

A way to leave a philanthropic legacy.

Businesses

Useful for business owners for succession planning or ongoing business support.

Can you have more than one life insurance beneficiary?

Absolutely! You can designate multiple beneficiaries of your life insurance policy. This allows you to spread the benefits across several people and/or organizations, ensuring that each receives a portion of the payout. You have the flexibility to specify exactly how much of the policy proceeds each beneficiary should receive, tailoring the distribution to match your wishes and their needs.

What are the different types of life insurance beneficiaries?

Life insurance policies typically have two types of beneficiaries: primary and contingent.

Primary beneficiary

This is the first person, people, or entity designated to receive your death benefit. They are typically those you want to primarily protect or support in the event of your death.

Contingent beneficiary

The designated contingent beneficiary receives the death benefit in the event the primary beneficiary can’t, often due to the primary beneficiary’s death before or at the same time as the policyholder’s, or if the primary beneficiary cannot be located, or refuses the death benefit.

The main difference between the two is their order of priority. The primary beneficiary is the initial recipient, while the contingent beneficiary is an alternate, ensuring your wishes are respected even if the primary beneficiary is unable to receive the benefits.

A contingent beneficiary is sometimes referred to as a “secondary beneficiary.”

What’s the difference between a revocable and an irrevocable beneficiary?

You’ll encounter another important decision when you set up a life insurance policy: choosing between a revocable and an irrevocable beneficiary.

Revocable beneficiary

This option offers flexibility, allowing you to change your beneficiary without their knowledge or consent. It’s most commonly used if you anticipate changes in your relationships or circumstances.

Irrevocable beneficiary

Once chosen, this beneficiary cannot be changed without their agreement (you also can’t make other changes to your policy, such as withdraw money or take out a policy loan without their consent). It’s a more permanent decision, providing guaranteed financial protection for the beneficiary. This is commonly used in marital breakdowns, blended families, and business situations.

If a minor is being considered as an irrevocable beneficiary, it should be noted that neither the minor nor their parent/guardian or even the trustee are able to provide consent to a change of beneficiary. It is usually not possible for the beneficiary designation to be changed if a minor has been designated as an irrevocable beneficiary.

Note for residents of Quebec: In Quebec, a spouse named as a beneficiary is automatically considered irrevocable, unless otherwise stated or in the case of divorce, adding a unique consideration for policyholders in this province.

Why name a life insurance beneficiary?

Choosing a beneficiary on life insurance is essential for several practical reasons.

Direct allocation

The money from your life insurance policy goes directly to the people and/or organizations you’ve chosen, exactly as you planned. This happens outside of your estate, without the time and costs associated with probate. (Probate is the legal process of the courts formally accepting a will.)

Faster access to money

Your beneficiaries usually get the money more quickly, since it doesn’t get tied up in the settling of your estate.

Avoiding legal hassles and costs

Skipping the long and often expensive legal process of probate means potentially saving on fees and time.

Keeping things private

Your financial details stay out of the public eye by not going through probate.

Making life easier for beneficiaries

The whole process becomes simpler for those receiving the money, helping them during a difficult time without added stress.

What happens if there is no beneficiary on a life insurance policy?

In the absence of a named beneficiary on a life insurance policy, the death benefit becomes part of the deceased person’s estate. This shift means the payout is subject to the probate process. Probate is the legal process to prove and gain court approval that the will is the last will and testament of the deceased individual.

Probate can be a lengthy and public process, potentially involving legal fees, if the estate is greater than $50,000, and delays in distributing the assets. Without a designated beneficiary, the streamlined transfer of life insurance benefits is lost, and the proceeds become entangled in the broader estate settlement process.

And because of estate administrative tax, your leftover assets may be much less than if you had named a beneficiary.

How to choose a life insurance beneficiary

Selecting a life insurance beneficiary is a deeply personal and significant choice, reflecting your relationships and your priorities. Consider the following when deciding who should be listed as your beneficiary or beneficiaries.

Financial dependence

Is there anyone who relies on you financially? This could be a spouse, children, aging parents, a friend, or anyone else who depends on your income.

Family considerations

If you’re married, have children or grandchildren, think about how the benefits can support their future.

Charitable intentions

You might want to leave a legacy through charities, organizations, or academic institutions that are important to you.

Business relationships

If you have a business partner, consider how your absence might impact your business and whether they should be a beneficiary.

Remember: There are no set rules for naming a life insurance beneficiary. It’s entirely your decision who receives the payout from your life insurance policy. Your choice should align with your personal circumstances, future goals, and the legacy you wish to leave.

Speak with an RBC Insurance Advisor today to help you navigate these choices with confidence and clarity. They can offer expert guidance on life insurance options and help tailor a plan that fits your unique needs and goals. Don’t hesitate to reach out and start the conversation about how you can effectively pass on your legacy to your loved ones and/or other priorities in your life.

If you’re early in your research on the different types of life insurance, getting a grasp on the basic concepts of participating whole life insurance is a good place to start. From premiums to the dividend scale interest rate, here’s a primer on policy basics, components, and how growth potential is calculated.

Key takeaways

• Participating whole life insurance policies pool your premiums, along with those from other policyholders, into a participating account professionally managed by the investment team with an insurance provider.

• A number of factors determine if the participating account experiences gains or losses, including operating costs, taxes, how well the investment portion of the fund performs, and more.

• Dividends may be paid out on a policy’s anniversary, but aren’t guaranteed.

• The dividend scale is the formula your insurance provider uses to calculate your yearly dividend payments unique to your policy.

• The dividend scale interest rate is the interest rate used by your insurance provider to calculate the investment component of the dividend. It is not the growth rate applied to your policy.

How do dividends work with participating whole life insurance?

Any growth from a participating whole life insurance policy comes in the form of dividends, which are calculated using a formula known as the dividend scale. Before we get into how dividends work, here’s what you need to know about how the policy functions.

Participating whole life insurance pools money from policyholders (that’s potentially you) into a participating account. Those funds are professionally managed by an investment team at the insurance company with the goal of growing the investment, so the dividends can be paid out. You can use the dividends you earn in several different ways, including:

• Toward the payment of your premiums

• To purchase more life insurance

• Having them paid out directly to you each year (you may be taxed on any cash you take out from your policy)

• Having them held on deposit earning interest (you may be taxed on any cash you take out from your policy)

Dividends are paid out annually on your policy’s anniversary date, and they’re shared fairly and equitably with all policyholders using a formula called the “dividend scale.”

What makes up the participating account?

There are several factors that contribute to whether a participating account will experience a surplus of funds. They can include the following.

• Investment returns: How well the invested funds perform

• Expenses: What it costs to manage the account

• Mortality (or death rate): The amount of claims that were made that year

• Other factors: Including, but not limited to, the number of policyholders who cancelled their policy, surrendered coverage, or took out loans against their policy, and taxes

If the participating account performs differently than expected, and excess earnings or profits are generated, they’re kept within the account and eventually distributed fairly to policyholders through a change in the dividend scale. The opposite could also be true, and the account may experience unexpected losses that get passed back to policyholders. To help balance the gains against the losses, insurance companies use something called the “smoothing technique” to help reduce volatility over time, but more on that later.

What is a dividend scale?

A dividend scale is the formula or method your insurance company uses to calculate annual dividend payouts. It’s reviewed each year by the insurance company and takes into consideration factors such as the death rate among the policyholders, the expenses required to manage the account, and the fund’s investment performance.

Not all dividend payouts are the same. The calculation used to determine payouts is unique to each policyholder, based on things such as age, policy size and type, premiums paid to date, and premium payment options. Dividends are paid out fairly and equitably, based on those factors.

It’s also important to note that dividends are not guaranteed by your policy, and the amount of dividends that are paid out will change annually. But once paid out, those dividends belong to the policyholder and cannot be taken back by the insurance company.

What is a dividend scale interest rate?

The dividend scale interest rate (or DSIR) is a large part of the formula that contributes to the amount of dividends paid out to policyholders. The DSIR is applied when calculating the investment component of the dividend scale, but it’s not the growth rate applied to your policy. It can be potentially higher, or lower, than the investment returns on the participating account.

Factors beyond investment returns, including the participating account’s earnings and future expected returns, are also considered.

How often does the DSIR change?

Each year, insurance companies will approve maintaining or updating the dividend scale and the dividend scale interest rate. The dividend scale interest rate can go up or down, according to market factors such as inflation and fluctuating interest rates. Other parts of the dividend scale may also fluctuate, based on changes in the insurance company’s experiences, or other factors such as inflation.

Policyholders are directed by the insurance company, usually in their anniversary statement, on where to learn about policyholder disclosures.

What is the smoothing technique applied to the dividend scale?

Despite potential changes in the dividend scale, participating whole life insurance policies may offer consistent returns year over year (though, it’s important to note that dividends are not guaranteed). That’s because a smoothing technique is applied to help minimize the short-term impact of market fluctuations. It’s when changes in the investment gains or losses that are passed back to policyholders are spread over several years. This helps to manage investment risk and minimizes the effect of market volatility for policyholders.

Should I choose a life insurance company based on its DSIR?

Because the DSIR is only one component, choosing a policy based primarily on this factor won’t provide you with a complete picture of the ways in which your life insurance policy will serve your needs. The DSIR is important, but it’s only a single component among many used to determine your dividends.

Talk with your insurance advisor before deciding on a policy, so you know you’re making the right choice for you and your family. Be sure to ask your advisor about an insurance company’s:

• Investment strategy and plan for stable, long-term growth

• Experience and diverse areas of expertise in managing the participating account

• Long-term commitment to the participating account as the DSIR changes over time

Interested in learning more about participating whole life insurance and if it’s right for you? Contact an RBC Insurance Advisor to understand how life insurance can offer you future growth and protection.