A beneficiary is the person, people or organization you name to receive money or assets when you die, such as a life insurance payout, RRSP, RRIF or TFSA balance. By naming a beneficiary, you choose who gets the money and help it pass directly to them, often faster and with fewer fees than if it went through your estate.
In plain language, a beneficiary can be:
- A family member (spouse, child, parent, sibling)
- A friend or other individual you trust
- A charity or other organization
- Your estate or a trust, if you choose to structure it that way
Let me explain what a beneficiary is, the difference between primary and contingent beneficiaries, how revocable and irrevocable designations work and how your choices affect taxes and probate in Canada.
What Is a Beneficiary? (simple definition)
At its simplest, a beneficiary is the person, people, or legal entity you formally designate to receive the assets from a specific contract, account or legal instrument upon your death.
The primary function of a beneficiary designation is asset transfer. Assets with a properly named beneficiary usually transfer directly to that person, often avoiding the court process called probate, which can add time, cost and complexity.
Which Accounts Use Beneficiaries?
Beneficiaries are most crucial for assets governed by specific contracts or registrations:
- Life insurance: The beneficiary receives the death benefit (the lump sum payout) directly from the insurer.
- Registered accounts: RRSPs, RRIFs and TFSAs allow you to name a beneficiary or successor holder (for a spouse/partner on a TFSA).
- Pensions and annuities: Many employer pensions and annuities require you to name a survivor or beneficiary for ongoing payments or lump sum benefits.
Checking who is named on each of these is one of the most important parts of basic estate planning.
Why Naming a Beneficiary Matters
Naming a beneficiary directly on an asset instead of relying only on your will, can help in three big ways:
- Speed: Probate can take many months or longer, while beneficiary payouts (like life insurance) are often made much faster.
- Lower fees: Many provinces charge probate or estate administration fees based on assets that flow through your estate; assets paid directly to a beneficiary can bypass those fees.
- Protection from estate creditors: Assets that pass through the estate are generally available to pay estate debts first. Assets paid directly to a named beneficiary are often better protected from those claims.
Example:
If a life insurance beneficiary is named, the insurance company pays the proceeds directly to that person for a faster, more cost effective and protected transfer.
Primary vs Contingent vs Estate
Beneficiary designations are organized into a simple hierarchy that dictates the order of payment.
Primary Beneficiary
The primary beneficiary is first in line to receive the asset when you die. You can name one or more primary beneficiaries, and their percentage shares should add up to 100%.
- Example: Naming a spouse to receive 100% of a life insurance death benefit.
Contingent (Secondary) Beneficiary
The contingent beneficiary (or secondary beneficiary) is the backup. They receive the asset only if the primary beneficiary has already died or is otherwise unable or unwilling to accept the proceeds.
- Example: You name your spouse as primary (100%) and your two children as contingent (50% each). If your spouse survives you, they receive the full benefit; if not, your children split the benefit.
Having a contingent beneficiary helps prevent the asset from defaulting to your estate and going through probate.
Estate as Default Beneficiary
If you fail to name a beneficiary at all or if both your primary and contingent beneficiaries have died and there is no update, the asset usually defaults to your estate.
When that happens:
- The asset may be subject to probate fees.
- Creditors of the estate may be able to claim against it.
- The payout often takes longer to reach your heirs.
Naming the estate as beneficiary can make sense in specific legal or tax strategies but for most people it is better to name individuals or a trust directly with professional advice.
Revocable vs Irrevocable Beneficiaries
Beyond “who gets paid first,” beneficiary designations also differ in how much control you keep over future changes.
Revocable Beneficiary
A revocable beneficiary is the most common type.
- You can change the beneficiary at any time without their consent.
- You usually keep full control as you can change coverage, surrender a policy or take loans (where allowed) without needing the beneficiary’s signature.
- This suits most people whose family or financial situation may change (marriage, divorce, children, new debts or assets).
Irrevocable beneficiary
An irrevocable beneficiary has stronger rights in the contract.
- You generally cannot change the beneficiary, reduce coverage or cancel or borrow against the policy without the irrevocable beneficiary’s written consent.
- You are effectively giving up part of your control over the policy while you are alive.
Common uses include:
- Divorce or separation agreements where one person must keep life insurance in place to secure support for a former spouse or children.
- Certain loan or collateral arrangements where a lender wants added security.
Because this designation can be very hard to unwind, legal and financial advice is strongly recommended before naming an irrevocable beneficiary.
How Beneficiaries Affect Tax in Canada
The type of asset and who you name as beneficiary both affect how tax is handled at death.
Life Insurance (Non‑Registered)
- The death benefit from a personal life insurance policy is generally tax‑free for a named beneficiary in Canada.
- It is usually not reported as income by the beneficiary.
- If no beneficiary is named and the proceeds are paid to the estate, the amount can still be non‑taxable as income, but it may face probate fees and exposure to estate creditors.
Registered accounts (RRSP / RRIF)
RRSP and RRIF accounts can create significant tax bills if not structured carefully.
- Spouse or common‑law partner: A named spouse/partner can usually transfer the RRSP/RRIF value to their own RRSP, RRIF or qualifying annuity on a tax‑deferred basis, avoiding immediate tax for the estate.
- Non‑spouse (adult child, friend, estate): If a non‑spouse beneficiary is named, the fair market value of the RRSP/RRIF at death is generally taxed on the deceased’s final return and the estate must pay that tax before distributing what is left.
Because the tax can be large, coordinating RRSP/RRIF beneficiaries with your overall estate plan is important.
Tax‑Free Savings Account (TFSA)
TFSAs have special options that can preserve tax‑free status.
- Successor holder (spouse/common‑law partner): A spouse/partner named as successor holder simply becomes the new TFSA owner. The account stays tax‑free and does not affect their own TFSA contribution room.
- Designated beneficiary (non‑spouse): Other beneficiaries usually receive the TFSA balance tax‑free up to the date of death. Any growth after the date of death can be taxable investment income to the beneficiary.
Special Beneficiary Situations
Naming a Minor Child
A minor (under 18 or 19, depending on the province) cannot usually receive and manage large sums directly.
If you name a minor as beneficiary:
- Funds may be paid to a public guardian, public trustee or through the courts until the child reaches the age of majority.
- There may be extra administration, fees and less control over how money is used for the child’s benefit.
A common solution is to:
- Name a trust (set up in your will or separately) as beneficiary and
- Appoint a trusted adult as trustee to manage the funds for the child under your instructions (for example, for education or to delay full access until a later age).
Naming a Charity
Naming a registered charity as beneficiary can be a very tax efficient way to give.
- Life insurance: A charity named as beneficiary can receive the full death benefit and your estate may be able to claim a charitable donation tax credit, helping offset other taxes owed.
- RRSP / RRIF: If a charity is named, the RRSP/RRIF value is generally taxable on your final return but the matching donation credit can often offset that tax.
Professional tax advice is recommended to structure charitable designations properly.
Per Stirpes vs Per Capita
When naming multiple beneficiaries, especially children and grandchildren, you may need to decide how a deceased beneficiary’s share is handled.
- Per stirpes (“by branch”): A deceased beneficiary’s share passes down to their children.
- Per capita (“by head”): A deceased beneficiary’s share is redistributed among the remaining living beneficiaries at that level.
This is more advanced drafting and is best reviewed with an estate planning professional or lawyer.
Beneficiary Review: Your Simple Action Plan
Naming a beneficiary is not a “set it and forget it” decision. Life changes and so should your designations.
Use this quick checklist:
- Review your accounts: List all policies and accounts (life insurance, RRSP, RRIF, TFSA, pensions, non‑registered investments) and confirm who is currently named as beneficiary.
- Check accuracy: Make sure full legal names and relationships are clear, not vague labels like “my wife” or “my kids.”
- Add contingents: Do not leave the contingent (secondary) field blank where it exists; name a backup to avoid assets defaulting to your estate.
- Align with your will: Check your beneficiary designations work with, not against, your will, especially if you have trusts or special instructions for minors.
- Review after life events: Update designations after marriage, divorce, birth or adoption of a child, death of a beneficiary or major changes in your wealth or health.
Your beneficiary designation is one of the simplest and most powerful tools you have to protect your family and control where your money goes. Taking a few minutes to review and update it can make a significant difference in how smoothly and efficiently your legacy is passed on.
