Advisors often recommend life insurance based on the fact that it’s easy for heirs to collect policy benefits. But executors, known as estate trustees in Ontario, still need to know how the process works, and potential pitfalls that can happen along the way.
Easy (until it’s not)
Most insurance policies have named beneficiaries: a person (or group of people), rather than the estate itself. Those people just need to fill out the appropriate paperwork—typically a straightforward process, even if one of the beneficiaries is also the executor.
“In the vast majority of cases, if there’s a named beneficiary and it’s been done properly, it’s got nothing to do with the estate,” says David Mills, partner at Mills & Mills in Toronto. While the executor has no legal obligation to help, in practice, she might provide copies of the death certificate and assist the beneficiaries with paperwork.
When the policy’s beneficiary is the estate itself, things get more complicated. Before the insurance company can pay out, the executor must provide the death certificate, any company-specific forms, and the will or certificate of appointment proving the estate trustee’s authority.
Then, once the cheque arrives, the real work begins. “Once that money comes into the executor’s hands, it’s no different from any other asset,” Mills says. “The executor receives that money in trust for the beneficiaries. But it’s subject first to payment of debts and taxes, and all legal obligations the deceased had.” The executor may need to explain that to impatient heirs. If it’s unclear whether the estate is the beneficiary (e.g., the designation’s vague or in dispute), Mills says that instead of the executor interpreting the designation herself, she should seek a legal opinion.
Lawyers will usually suggest the executor ask a judge to resolve the interpretation problem (also known as an “order for advice and direction”).
“The executor has to be neutral and maintain that neutrality throughout, so she can’t side with any one beneficiary,” Mills says. “All interested parties should have a right to say their piece and then the judge will make the decision.”
Designations made to “my children” are unclear if the deceased is part of a blended family, and may require a legal ruling before payout.
The reality of the job
Wayne Stone, vice president of planning and finance at Westward Advisors in Vancouver, says collecting insurance proceeds is usually easy.
“The most difficult part is getting it started,” he says. “What insurance policies are there? Who are the brokers? And what is this money supposed to be used for?”
Stone adds executors can contact the broker who originally sold the policy for help. “The executor has many things on the go,” Stone explains. “If she can leverage the broker as a go-between with the carrier, it simplifies the executor’s life. The broker knows what’s required.”
Assisting named beneficiaries with insurance claims is outside an executor’s legal responsibility, but in reality, it often becomes part of the job. “An executor often has other roles in the circumstances, because it’s usually a close family member,” Stone says.
Problematic policy situations
Most insurance companies will take longer and require additional documentation before paying out more than $1 million.
If the policyholder’s death occurs within two years of purchase, the insurance company will likely check if there was full disclosure of previous medical conditions. If there wasn’t full disclosure, the insurer could limit payout to return of premium plus interest.
Undue influence or infirmity
If the policyholder was known (or alleged) to be mentally infirm or unduly influenced when beneficiaries were named, the executor should ask a judge to assess the policyholder’s mental competency.
Designations to strange or unexpected beneficiaries—a pet; an unknown friend; an obscure charity—may require extra due diligence from the executor.
James Dolan is a Vancouver-based financial writer.
Originally published in Advisor's Edge
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