Who Gets The Payout? Contesting Life Insurance Beneficiaries In Canada

Life insurance is a financial safety net for your loved ones after you pass away. It provides them with a one-time, tax-free payment called a death benefit. The beneficiaries of a life insurance policy are the individuals or entities named by the policyholder to receive this death benefit. However, disputes can arise over who should receive the benefit, leading to a contested beneficiary situation. This often occurs when the policyholder fails to update their beneficiaries after significant life changes, such as marriage, divorce, or the birth or adoption of children. To avoid conflicts, it is crucial to promptly update beneficiary forms and clearly document your wishes. While insurance companies cannot settle beneficiary disputes, they encourage disputing parties to seek mediation or take the matter to court. Understanding the complexities of life insurance and its beneficiary designations is essential to ensure your wishes are honoured and your loved ones are protected.

Last-minute changes to beneficiaries

While you have the power to change the beneficiary on your life insurance policy whenever you want, making a last-minute change is not recommended. A last-minute change will almost certainly be contested by the insurance company and could even result in a denied payout.

If you are on your deathbed, ill, or in a hospital/nursing home, and you make such a change, there is a good chance the insurance company will deny the change. Even if you are of sound mind, the insurer will likely contest the beneficiary change. If the change occurs on the day of your death or even a few days prior, it is nearly guaranteed to be contested.

Life insurance providers typically have a series of nuanced requirements that must be met for beneficiary changes. For example, most providers mandate a minimum of two witnesses be present to sign the change-of-beneficiary form. Some insurers require the completed form to be provided to their office before the insured party's death. If the beneficiary alteration does not adhere to the unique provisions of the policy, the change is not valid.

If you are considering changing your life insurance beneficiary, reach out to the insurance provider right away to ask about their unique requirements. It is also a good idea to notify the original beneficiary of the change so they are not angered when they learn of their removal from the policy after you pass away.

If you are the beneficiary and you believe a last-minute change was made under suspicious circumstances, you can contest the change by presenting proof of physical or mental incapacity, action under duress, outright fraud, or undue influence. This conflict may reach litigation if you insist that you are the rightful policy beneficiary. In this case, the services of a life insurance interpleader will be necessary to resolve the complexities of the matter.

Failure to update beneficiaries after major life events

Life insurance is a crucial aspect of financial planning, and choosing beneficiaries is an integral part of this process. However, it's easy to overlook the need to review and update beneficiary designations as time passes and life changes occur. This oversight can lead to unintended consequences, with your money ending up in the wrong hands or not reaching everyone you want it to.

Major life events, such as marriage, divorce, the birth of a child, or the death of a loved one, can significantly impact your estate plan. For instance, if you get married or divorced, you may need to update your beneficiaries or revise your plan to include a new spouse or reflect changes in your family dynamics. Similarly, the birth of a child may prompt you to add them as a beneficiary or make provisions for their care in case of your incapacity or death.

Failing to update your beneficiaries after such significant life events can have serious implications. For example, if you get divorced and don't remove your ex-spouse as a beneficiary, they could still receive a portion of your assets upon your death. On the other hand, if you have a child and don't update your plan to provide for them, the court may need to appoint a guardian to manage their inheritance.

To avoid these issues, it's essential to work with an experienced estate planning attorney who can guide you through the legal and financial implications of any changes. They can help you review your existing plan, determine the necessary adjustments, draft new documents, and update beneficiary designations on financial accounts or life insurance policies. Remember, your beneficiaries may be individuals, trusts, charities, or entities such as your business.

Additionally, it's worth noting that beneficiary designations take precedence over directives in a will. For instance, if your will states that your life insurance policy should be divided among your children, but you've designated your spouse as the beneficiary on the policy, the death benefit will be paid to your spouse. However, you can establish a trust and name it as a beneficiary, allowing the trust language to direct how the funds will be distributed.

Only courts can remove beneficiaries

After the policyholder's death, the beneficiary cannot be changed, and the proceeds will go to the primary beneficiary or the contingent beneficiary if the primary beneficiary has passed away. This is to honour the policyholder's exact wishes while they were alive. However, a beneficiary can be contested and removed by a court of law under limited circumstances.

A court may remove a beneficiary if there was a problem with the beneficiary, such as coercion or if the policyholder was of unsound mind when making the change. The court will consider the terms of the life insurance policy and any applicable state or federal laws. For example, in some states, divorce may be grounds for removing a beneficiary. Additionally, a beneficiary who caused the death of the insured or was named as a beneficiary due to a court order may also be removed by a court.

To contest a beneficiary, a person must file a lawsuit or other legal documents with the probate court handling the deceased person's estate. The insurance company will not disburse funds while the case is pending and may hold the payment or put it into a special escrow account managed by the probate court. Both the named beneficiary and the person contesting the designation may need to present evidence and legal arguments in court, and lawyers and other experts may be involved in the case.

Grounds for contesting: mental capacity, coercion, etc

Mental capacity and coercion are two of the main grounds for contesting a life insurance beneficiary designation.

Mental Capacity

In most cases, a person making a will must be of "sound mind, memory and understanding" when doing so. This means that they must:

• Understand the nature of their actions and the consequences.
• Understand the extent of their property.
• Be able to comprehend and appreciate the claims to which they ought to give effect.
• Not be affected by any "disorder of the mind" that could influence their decisions.

In the context of life insurance, this means that the policyholder must have the mental capacity to understand the nature of the beneficiary designation and the consequences of changing it. This is particularly relevant in cases of last-minute beneficiary changes, which often occur when the insured person is gravely ill, in hospital, or in a nursing home. In such cases, the previous beneficiary may challenge the change by presenting evidence of the policyholder's mental and physical incapacity.

Coercion

Coercion, or undue influence, is another common ground for contesting a beneficiary designation. This occurs when an individual uses their power or authority to manipulate the policyholder's decisions, such as a last-minute beneficiary change. For example, if a policyholder changes their beneficiary a few days before their death from their son to their brother, the son may contest that decision on the grounds of coercion, especially if the policyholder was suffering from an illness that could have affected their decision-making.

How to avoid disputes: update, follow procedure, discuss changes

Disputes over life insurance beneficiaries can be emotionally draining and legally complex. However, there are steps you can take to avoid such disputes. Here are some tips to prevent conflicts and ensure your wishes are honoured:

Update your policy regularly

Life changes such as marriage, divorce, births, deaths, or adoptions are common reasons for disputes. Therefore, it is crucial to review your life insurance policy regularly and make necessary updates. This helps to ensure that your policy reflects your current circumstances and intentions.

Follow proper procedures for beneficiary changes

When making changes to your beneficiary designations, it is important to follow the correct procedures. Contact your insurance provider to understand their specific requirements and ensure that any changes are properly processed and recorded. This can help prevent issues arising from unsuccessful beneficiary changes or lack of records.

Discuss changes with relevant parties

Communicating your intentions and keeping your professional advisers and loved ones informed of any changes can help to avoid future disputes. While beneficiaries can still contest changes, it may be harder for them to do so if you have made your intentions clear and ensured that the relevant parties are aware of your reasons for making those decisions.

Be mindful of controversial changes

If you anticipate that a change might be seen as controversial, consider having witnesses present when making the change. This can provide additional support for your decision and help prevent disputes by demonstrating that you were of sound mind and understood the implications of your actions.

By following these steps, you can help to prevent disputes over your life insurance beneficiary and ensure that your wishes are respected and carried out.

Frequently asked questions