Named beneficiary vs. estate: when a specific living individual (or a trust for their benefit) is named as beneficiary:
- The death benefit is paid directly by the insurer to the beneficiary, outside the estate.
- The proceeds do not pass through the deceased's will and are not subject to probate (estate administration tax in Ontario).
- The proceeds are not available to the general creditors of the deceased (subject to preferred-beneficiary rules below).
- Distribution is fast: the insurer pays on proof of death and claim, without waiting for the estate to be wound up.
If the estate is named as beneficiary (or there is no valid beneficiary designation):
- The death benefit becomes part of the estate and is distributed according to the will or, absent a will, Ontario's intestacy rules.
- Probate fees apply on the value of the estate (in Ontario, called estate administration tax under the Estate Administration Tax Act, 1998, S.O. 1998, c. 34, Sched.).
- General creditors of the estate can claim against the proceeds.
- Distribution is slower and subject to the estate administration process.
Preferred beneficiary creditor protection: under s. 196 of the Ontario Insurance Act, where the designated beneficiary is a spouse, child, grandchild, or parent of the insured, both the death benefit and the cash value of the policy are exempt from seizure by the insured's creditors while that designation remains in effect. This protection does not extend when the estate is named or when the beneficiary is not in one of the listed relationships.
Recall: Name two consequences of naming the estate as beneficiary instead of a living individual. What relationship must a beneficiary have to the insured to qualify for creditor protection under the Ontario Insurance Act?