How life insurance, probate, and wills work

Wills and final testaments are a big deal, and an important part of making sure your family is taken care of once you’re no longer around. But they can be overwhelming to understand. Canadians often wonder if life insurance is part of their estate, whether it goes through probate, and if their will determines who their life insurance beneficiary has to be.

Letting these questions go unanswered while you try to figure it out can cause expensive delays if you were to pass away. In this article, we help you sort out the whys and hows of wills, life insurance, and probates. This will let you figure out where the proceeds of your life insurance policy should go.

Let’s start by quickly refreshing what “life insurance“, “estate“, and “probate” mean. Or, you can skip to how a life insurance policy factors into a will.

What is life insurance?

Life insurance is a contract between you and a life insurance company. If you, the insured person, die, the insurance company will pay a lump sum of tax-free money to your named beneficiary. In exchange, you agree to pay them regular insurance premiums, which are a small amount of money over time.

Read more about how life insurance works.

What is an estate?

Generally speaking, an estate includes all the things that someone owns at the time of death.

For example, high-value items like your car, jewellery, and bank accounts. It also includes any property you own, like your home, cottage, or land.

But any liabilities you have are also part of your estate. This includes loans, lines of credit, and other debts. We’ll talk about why this is important a little further down.

The total value of your estate is your assets minus your liabilities. And, if you have assets that you wish to pass onto another person when you die, then your estate (in most cases) must be probated.

What is a will?

A will is a written document that states how you wish your estate to be distributed after you pass away. It’s also known as a last will & testament. A written will helps your loved ones access your assets, although after the probate process has been completed.

Read our complete Guide To How Wills Work In Canada.

What is probate?

Probate is a legal process of determining whether the will of a deceased person is legitimate, and confirming who has been appointed as the will’s executor. The executor will be responsible for making sure the will is carried out. But we’ll get to that in the next section.

The probate process takes place in a court in the deceased person’s home province. Probate is considered finalized once the court issues an official document.

But in the event that someone dies without a will, their assets will be distributed by the court according to provincial laws. When this happens, it’s called intestacy or an instate death.

Who is an executor?

An executor of a will is the person who is responsible for carrying out the will. This individual is either named in the will or appointed by a court. They have to distribute the assets of the estate according to the deceased person’s will.

How are wills and life insurance related?

Both life insurance policies and wills are powerful tools for planning what happens after your death. But they function in different ways and follow different rules. They can also act independently of each other, giving you more control over what happens to your assets.

Is life insurance considered an estate asset?

No, life insurance is not usually a part of your estate as long as you have a beneficiary. If you have a beneficiary, the insurance money will be paid directly to that person instead of becoming an estate asset.

In other words, you cannot “pass” your life insurance policy or death benefit payout onto your next of kin as you would be able to with an estate asset — and, believe us, that’s a good thing! It means your beneficiary will receive your insurance payout much faster and easier than if it went through your estate. Plus it guarantees they will receive the full amount. We’ll give you more reasons why you wouldn’t want your life insurance to be part of your estate below.

There are some circumstances where a life insurance payout could become a part of a deceased person’s estate. But complex matters like these are the exception rather than the norm.

For example, an insured person can choose to name their estate as their life insurance beneficiary. Or, a life insurance policy owner and their only beneficiary can unfortunately die at the same time. In cases like these, the insurance payout would become a part of the individual’s estate.

Is life insurance included in someone’s will? 

No, a life insurance policy and its corresponding payout are not generally included in someone’s will. Because you already named a life insurance beneficiary who will receive the payout when you pass away, there’s no need for you to include it in a will. The insurance company will bypass your will, estate, and any other end-of-life instructions and give the payout money directly to the person you named as your beneficiary.

Life and wills are generally separate. Although, they can work in tandem as a solid estate planning strategy.

Does life insurance go through probate?

No, life insurance money given to your beneficiary does not usually go through probate. As we mentioned earlier, it skips over your estate and your will and goes straight to the beneficiary — which means they get it much faster.

For instance, if you have named your daughter as the person to receive your life insurance death benefit after you die, then the named beneficiary is your daughter. She is the rightful recipient of your life insurance proceeds. The proceeds will belong to your daughter as her property, and she will be able to use the money any way she sees fit.

But, let’s say you did not name a beneficiary to your life insurance application or policy, or the beneficiary is no longer alive; what would then happen to the life insurance proceeds upon your death?

In these circumstances, your life insurance proceeds would go to your estate and then have to go through probate. The probate process is typically time-consuming and — worse yet — is not free.

Why designate a beneficiary to your life insurance policy?

We all want to make sure that when we die, our families are financially secure and that our loved ones receive the money from our life insurance policy without any delay or cost. This was most likely your intention when you initially purchased your life insurance policy.

As discussed above, this is possible if you have named a beneficiary or beneficiaries to your life insurance policy. This person could be your spouse, children, parents or anyone else you wish to leave the money for upon your death – even groups such as a charity or association.

If you do not name a beneficiary, then by default, your estate is the beneficiary. In such cases, your life insurance proceeds (as mentioned earlier) are required to go through probate.

Why avoid having a life insurance payout go through probate?

There are several reasons why it’s generally a good idea to keep your life insurance proceeds out of the probate process. We’ve outlined 3 major ones for you below:

1. Cost

Here’s the expensive part we mentioned earlier. As part of the probate process, certain fees are paid to settle the estate, like probate fees and attorney fees. Probate fees vary by province and can range from a flat amount to a percentage of your assets.

If your life insurance proceeds go through probate, it can substantially increase the value of your assets and therefore your probate fees. Furthermore, if there are any creditor claims, debts, or taxes payable, these are also paid from the deceased’s estate. Such fees and payments can gradually reduce the life insurance death benefit if it is considered part of the estate, leaving your loved ones with that much less money.

2. Privacy

Another thing to consider is privacy. Once a will passes probate, it becomes a public document that anyone can see. Information about your life insurance benefits would also become public record if it goes through probate.

3. Processing time

As we mentioned earlier, some people may make their estate their beneficiary. This is often the case if the person only got life insurance primarily to use it to pay estate taxes upon their death.

But if you want your death benefit to be used by your family to replace your income, then it’s probably best that you name your beneficiary a family member or members. In this case, your life insurance provider pays the death benefit directly to your named beneficiaries. This way, there is no probate requirement and you avoid any added delay in your beneficiaries receiving the money. Plus, your beneficiaries will receive the amount you intended them to have in the first place.

Tip: Make a Plan B

As an extra note, it is a good idea to name a contingent or secondary beneficiary. This is just in case your primary beneficiary dies before you do. For instance, couples with children might want to ensure their dependents are the contingent beneficiaries in case both primary caregivers pass away simultaneously.

Can you use a will to change a life insurance policy beneficiary?

Nope, a will cannot be used to change who will receive someone’s life insurance money. An insurance contract is separate from a will. The beneficiary named on the life insurance policy will receive the payout in the event of the death of the insured. A will cannot be used to replace such a beneficiary.

This is why you should be sure to review and update the beneficiary designations of your life insurance policy after major life events like marriage, births, divorce, and death.

If you need any advice on how to update or augment your current life insurance coverage, give our licensed brokers a call. We’re happy to help you with any insurance questions you may have!