Are you confused between who is who and
what is what when it comes to heirs and beneficiaries? Maybe you’re unsure
whether to add your life insurance to the assets under your will or not.
Well, the legal jargon can certainly spin
anyone’s head, especially if they’re planning their estate for the first time.
However, this guide will make everything as clear as day; read it till the end
to understand the difference between life insurance and will and more.
Main Differences Between Life
Insurance & A Will:
Life insurance and will are both integral
parts of a lifelong financial plan to protect your loved ones after you’re not
around. If you have a husband/wife and/or children, it is imperative that you
have both a policy and will in place. While both of them ultimately benefit
your loved ones, there are key differences between both; let’s discuss them
below:
Life Insurance:
· If you pass away, your assigned beneficiary will be provided with a
lump sum of money, whether your spouse or children or someone else. They are
free to use that money for anything they want as it will not be administered
via your estate unless it’s under the assets included in your will.
· The money assigned to your beneficiaries through the life insurance
policy will be provided to them quicker. However, if the money is processed
through your estate (if the policy is in the will’s assets), it will take a lot
longer to land in the assigned beneficiary’s bank account.
· You cannot choose the guardians in an insurance policy. The money will
only be given to the beneficiary, so if you’ve purchased the policy for your
children, then your wife can be the beneficiary. However, since you cannot name
minor children as the beneficiaries of the policy, things will get complicated
if both you and your spouse pass away due to any reason.
· You can pay for a charity with a life insurance policy in three ways;
taking out a policy on the charity’s name, transferring the existing policy’s
ownership to it, or name the charity as your existing policy’s beneficiary.
Will:
· If you pass away, besides the money you have, other assets like
property, jewelry, investments, and vehicles, etc., will also be given to the
people you’ve assigned them to in your will. This is not the case with
insurance policy; it’s limited to only a lump sum of money.
· There are some moving parts associated with the execution. While
insurance policy is given to the beneficiaries after the owner’s death, Will
needs to be filed in the court by whoever has it – typically the heir or
executor. Because of this, it can take some time, even months, before the
assets are given to their beneficiaries listed in the will.
· Unlike an insurance policy, where the money is directly given to the
beneficiaries, you can assign guardians in your will in case your assets need
to go to a minor. You can put the people you trust as the guardians of the
children until they’re old enough to claim the assets you left for them.
· You can also donate your assets to a charity using your will, which is
called Planned Giving. Here, you can name any charitable organization you like
as your beneficiary and list the amount of money or assets (or both) you want
to donate. Visit here to learn more about planned giving in Canada.
What Happens If You Pass Away Without
a Will?
In the case of a life insurance policy,
you already have some beneficiaries listed (a mandatory thing to do). So you
know who’ll get what in case you suddenly meet your demise. However, what
happens if you don’t do estate planning and leave your assets as orphans? Well,
then, according to Canadian law, particularly in Ontario, your property will go
to:
Spouse (if there are no children)
If you don’t have any children, your
estate will go to your legally married spouse. This doesn’t apply to common-law
spouses, so they may not get anything.
Spouse & Children:
In case you have children as well, then
your spouse will get a preferential
share (the share before asset distribution) of up to $350,000, which is
increased in 2021 from the previous amount of $200,000.
Whatever’s left after that is called the residue.
This is the amount that will be divided among the spouse and children (yes,
the spouse gets a share from the residue as well).
So if there’s one child, him/her and the
spouse get half each. If you have more than one child, the spouse gets
one-third, and the rest is equally divided among the children.
Children Only: (No Spouse)
If you’ve only got children and no
spouse, your children will get an equal share in the estate. If any children
died before you, their children (your grandchildren) would get their share.
No Spouse & No Children:
Parents get the entire estate
No Spouse, Children, and Parents:
The estate will be divided between
brothers and sisters or their children if any of your siblings died before you.
No Brothers & Sisters:
The children of your brother and sister
(your nieces and nephews) will get your estate’s equal portions.
No Nieces & Nephews:
Any other next of kin will get an equal
portion of the estate.
No Next of Kin:
The Government will get the estate if you
have no next of kin.
Parting Words:
If you want to benefit your loved ones
after your demise, estate planning a must. Make sure to make a will and keep
updating it with the addition of people in your life.
As for the insurance policy, it will go
straight to the people you’ve listed as beneficiaries. Unlike a will, they
don’t have to be your family, relatives, or next of kin – whoever is listed as
beneficiary will get the money.
Disclaimer: Different Canadian provinces have
different laws, and we’ve provided a general idea of what to expect. Please
reach out to a professional in your area to find out the respective laws.