Doubt and designations

June 21, 2010 | Last updated on June 21, 2010
9 min read

The recent spotlight on financial products hasn’t been limited to complex mortgage-backed products. Insurance-based products have had their share of recent attention, especially when it comes to beneficiary designations.

Several court cases involving beneficiary designation disputes underscore the importance of reviewing these designations and ensuring that they are up-to-date and in accordance with a client’s current estate plan. It’s easy for disputes and allegations to arise on this front, and it’s incumbent upon the advisor to periodically review them.

Products like individual life insurance, group life insurance, RRSPs administered through insurance companies, registered annuities, non-registered annuities and variable annuity contracts will all include beneficiary designations. Depending on the province and plan terms, they may also apply to critical illness and long-term care contracts with return of premium on death provisions.

An insurance-based product involves three parties: the owner, the individual whose life is insured and the beneficiary. In various provinces, The Insurance Act provides for definitions of beneficiary. In general, it is the individual who would receive the benefit insurance money payable through the contract or payable by a separate declaration. In all provinces except Québec, the legislation defines the insured as the policy owner, who has the right under the terms of the contract to appoint the beneficiary.

Who owns the policy?

There are two kinds of beneficiary designations – revocable and irrevocable. An irrevocable beneficiary designation will limit how flexible policy owners can be – they cannot alter or revoke the beneficiary, change the policy coverage, transfer ownership, assign the policy or withdraw funds without the consent of the irrevocable beneficiary. In Québec, a spouse designated as beneficiary is automatically irrevocable. However, an insurance contract could lapse as a result of non-payment or may be rescinded without the knowledge of an irrevocable beneficiary.

Irrevocable beneficiaries should only be designated if required by agreement and if the policy owner fully understands the ramifications of the appointment. In contrast, a revocable beneficiary designation allows the policy owner to deal fully with the policy. Who is the policy owner? Certain provinces view this differently. The insured and the owner could be the same person, but in Québec the distinctions are somewhat different. There, the insured is the life insured and the policy-holder is the person who owns the contract, not the insured. In Québec, the policyholder designates the beneficiary. The policy owner can name a beneficiary in the policy through a declaration or can name the estate or personal representatives of the life insured as beneficiary. In each of these situations, the rights provided to the ultimate beneficiary could differ under the policy or by declarations that may not be provided to a personal representative of the beneficiary of the estate.

Multiple beneficiaries

Commonly, there is one policy owner or life insured and one beneficiary. However, in some situations there could be more than one owner and multiple beneficiaries. A corporation or trust could also be owner and beneficiary. In addition, there may be one life, two lives or several lives insured under the terms of the policy.

In the case of mortgage insurance, it is not uncommon to see both spouses insured on a first-to-die life insurance contract. For charitable purposes, or to cover a tax liability which may be excisable on the second death, it is likely to see joint life policies with death benefits payable on the death of the last survivor. There are also insurance contracts that offer multiple lives that may be used primarily for business purposes.

Keeping up, quelling trouble

The owner of a contract will usually designate a beneficiary in an application. It is critical to ensure that the application form is completed together with the client and reviewed with the client when the policy is issued.

In Anderson v. Industrial Alliance Insurance, 2009 CanLII 166903 (ON.S.C.), the Ontario Superior Court had to consider whether a change to a beneficiary designation was effective during a period of time when the ownership of the policy was under consideration. In this particular case, the advisor left the ownership and beneficiary section of the application blank, advising the client that he would complete the application after he returned to his office. To the wife of the life insured it was clear from the conversation that she was to be the owner and beneficiary under the policy. She paid all of the policy premiums. However, the issued policy showed the husband as owner and insured.

Many years later, the husband changed the beneficiary designation, reducing the spouse’s share to 50% and introducing his friend and his daughter as beneficiaries for a portion of the proceeds. When the life insured died, the wife realized that she had been cut out of a portion of the proceeds.

The courts determined that the changed beneficiary designation did not stand because of two advisor errors: his original clerical error in 1984 and because he had not followed client instructions. Not completing the application in front of the applicant and owner is a dangerous practice.

Revocation ramifications

A policy owner can name a beneficiary on the insurance application or by a subsequent declaration. A declaration is generally an instrument signed by the policy owner, which will alter or revoke a designation and will set out its intention to make a new designation. Typically, this could either be a will or trust document. At times, a testator may unintentionally revoke a designation within their will.

Unfortunately, in most cases, the policy owner does not inform the insurer of the revocation and of the new beneficiary designation. This practice is risky, as the proceeds upon death of the life insured could end up in the hands of the wrong person. Conversely, if a will is revoked that contains an insurance declaration, that insurance declaration is also revoked. If a new designation is not made after the revocation, the proceeds would be paid to the owner or to the owner’s estate, if the owner is the life insured.

The case of Ashton Estate v. South Muskoka Memorial Hospital Foundation, 2008 CanLII 21421 demonstrates the implications of drafting revocation clauses in the will. In this case, the annuitant of a Registered Retirement Income Fund contract made a designation in favour of his children on the application.

A few years later, he executed his will, which altered the distribution provided for in the original application. The will had the standard clause, saying “I hereby revoke all wills and testamentary dispositions of every nature or kind whatsoever made by me.” Trustees of the deceased’s estate asked the courts to determine the appropriate rights of the children in relation to the funds in the RRIF, since there was no reference to the actual designation in the will. The judge, however, concluded that the general revocation clause used in most wills relates to all testamentary dispositions, which includes beneficiary designations. Once again, this emphasizes how wary clients, their legal advisors and financial advisors should be of using standard revocation clauses in a will.


When a beneficiary differs between the will and the policy designation, timing, wording and the intent of the owner of the contract is critical. In the case of Dierk Estate v. Smithgall (2005 BCSC 1357), the British Columbia Supreme Court examined a situation where the life insurance proceeds were designated to one person and the will designated the proceeds to another person. As one would expect, each beneficiary brought forward the claim to the proceeds, prompting litigation.

In these situations, typically the last document signed becomes relevant in determining which designation takes priority. In this particular case, the testator stated in the will, “I hereby confirm that my daughter shall remain as my beneficiary.” However, the original beneficiary on the application was not the daughter, but his common-law wife.

The courts concluded, however, that the deceased believed that his daughter already was the designated beneficiary, which was not the case in the original application. Even though in his will, the testator did not revoke a prior designation, the courts still concluded that he had a clear intention that his daughter was to be his beneficiary. His intent was clear, even though the will did not revoke the previous designation. The time and the costs of the court could have been saved had the drafter of the will consulted the advisor, confirming the current designation in the existing insurance contract. If the legal advisor knew that the designation was not the daughter of the testator, it is likely that they would have added an appropriate revocation clause within the last will and testament.

Purpose and proceeds

In discussing insurance with a client, it is important to outline its purpose and where the proceeds are needed. In most cases, the estate needs the proceeds to pay off liabilities, for estate taxes or to generate continuing income for dependants. The proceeds can also be used to fund bequests or satisfy final expenses. Knowing how the funds will be used will assist in determining who should be the beneficiary.

All of the instruments of an estate plan must complement each other, so clients should consider any other outstanding obligations that could affect the proceeds. These documents must be in synch.

Recently, the Supreme Court of Newfoundland and Labrador Court of Appeal examined a situation where the provisions of a marriage agreement, the beneficiary designations on the application of insurance and the last will and testament contradicted each other. The deceased’s will indicated his property was to be transferred to his wife, as outlined in his marriage contract. This included the proceeds of his life insurance policies, which already named her as beneficiary and any other insurance monies required to provide her a specific total amount of proceeds.

The document put forward by the executor of the will stated that the will revoked the designations outlined in the life insurance policies and that any balance above the designated amount outlined in the will should be payable to the estate. The deceased had other insurance policies. In the initial judgment, the court upheld the spouse’s position and did not alter the beneficiary designation of the life insurance policies. As a result, she was the beneficiary both through the policies and under the terms of the will. The estate appealed and the Court of Appeal concluded that there was a declaration in the will that revoked the wife as beneficiary under all of the policies. It went on to conclude that the maximum proceeds outlined in the last will and testament were, in fact, binding and that the total proceeds should not exceed this cap.

In this particular case, thousands of dollars spent on litigation could have been saved had the documentation, such as the marriage contract, last will and testament and beneficiary designations, been integrated.

A 2005 case further indicates that the courts require clear evidence of an intention to change the designation of an insurance vehicle. Documents such as separation agreements, which contain clauses that typically release parties from making any claims against each other’s estates, may not affect designations in insurance plans.

An Ontario Superior Court decision in the case of the Estate of Francesco Gaudio (Claudio Gaudio Estate Trustee v. Debra Ann Gaudio, Great-West Life Assurance Company, The Bank of Nova Scotia, and The National Life Assurance Company of Canada, Court File No. CV-5-003040-00, May 4, 2005) found that even though there was a separation agreement between the deceased and his ex-wife, the designation in favour of his ex-wife still was effective.

Just because the insured might have been under the impression that it was unnecessary for him to actually take the steps to change the designations of the beneficiary, does not mean that the beneficiary was actually changed and that the proceeds should be paid to someone else. Once again, this result would have been different had the individual who drafted the separation agreement advised the deceased to contact the insurance company or his advisor to revoke or change the beneficiary designation.

Other problems can arise when designations are changed several times and when changes lack clear intent or consistency. Challenges can also emerge in situations of joint ownership of insurance contracts. Advisors must encourage their clients to periodically review their beneficiary designations. Both sides need to ensure that when the time comes, proceeds are paid to the appropriate recipient, with the least amount of complications or angst.

  • David Wm. Brown, CFP, CLU, Ch.F.C., RHU, TEP, and a member of the MDRT. He is a partner at Al G. Brown and Associates in Toronto.