Life Insurance Entitlement: What You Need To Know

When a marriage or common-law relationship comes to an end, many people assume that a separation agreement or equalization payment resolves all outstanding issues. However, this is not always true, and certain complications can resurface after one party passes away. If the deceased party has life insurance, this can amplify already existing contention.

Life insurance policies are easily misunderstood, especially when they coincide with estate planning. Family members may believe that wills, separation agreements, or other legal documents drafted prior to the individual's death will dictate who inherits the proceeds from the life insurance policy. Importantly, though, this is not necessarily true, and in fact, this is only true in a minority of situations.

What is Life Insurance?

Life insurance policies are valuable financial tools. When someone dies, their insurer pays a tax-free sum of money directly to the named beneficiaries within the policy. These funds can be used to:

• Replace income to maintain a family's standard of living;
• Provide for children or other dependents;
• Cover funeral expenses and debts;
• Make charitable donations; and
• Be left to an estate or trust.

Since these proceeds go directly to the named beneficiary, they often bypass the estate altogether. This places beneficiaries in a powerful position. However, this designation can in turn be problematic when the named beneficiary no longer reflects the policy owner's true wishes or when other legal agreements exist. Therefore, trouble can arise when the beneficiary named on a life insurance policy is not the same person the deceased intended to benefit through their will or through other legal agreements.

The Insurance Act: Beneficiary Designations Take Priority

In Ontario, the Insurance Act¹ governs life insurance. Two sections are particularly important:

• Section 190: An insured person may designate a beneficiary in a contract or by a declaration and may alter or revoke the designation by a declaration.
• Section 196(1): Where a beneficiary is designated, whether irrevocably or not, the insurance money, from the time it becomes payable, is not subject to the control of the insured or their creditors, nor does it form part of the insured's estate, unless the beneficiary is the insured or their personal representative.

These two provisions illustrate that the beneficiary named in the insurance policy usually takes priority over the proceeds under the statutory framework. However, Canadian courts have recognized that the Insurance Act does not necessarily oust common law or equitable rights that persons other than the designated beneficiary may have in the policy proceeds, even if the contrary is mentioned in the will. The Canadian courts have interpreted these relevant sections of the Insurance Act and truly illustrate the complexity of the matter.

Case Law

In Richardson (Estate Trustee of) v. Mew,² a separation agreement required a husband to maintain his ex-wife as beneficiary of his insurance policy. Later, he remarried, granting his new wife power of attorney over his personal care and property, and left her his estate, yet he never changed the designation of his ex-wife as a beneficiary under his insurance policy. The Court held that the ex-wife was still entitled to the proceeds. Here, the court illustrates that absent to clear language, the beneficiary named on the policy will likely obtain the insurance proceeds.

In Moore v. Sweet,³ the Supreme Court of Canada took a different approach when a prior contractual entitlement was at issue. The ex-wife had an agreement with her ex-husband that she would remain the sole beneficiary of his insurance policy if she continued to pay the premiums of the policy. He later named his common-law spouse as the beneficiary under the insurance policy. When he died, his new partner attempted to claim the insurance proceeds. The Court ruled in favour of the ex-wife, Michelle, thereby enforcing the separation agreement. The court noted that she had a clear contractual tie to the policy, which protected her entitlement to the proceeds. The court imposed constructive trust on the insurance proceeds in Michelle's favour.

Evidently, Courts will enforce clear agreements dealing specifically with insurance, but absent such language, the insurance policy designation usually wins.

What Does All of This Mean?

While the Insurance Act dictates the formal process for designating and changing beneficiaries, and the named beneficiary generally takes priority if the designation is not properly altered (as seen in Richardson Estate v. Mew), this statutory priority does not override all other claims. Where there is a clear prior contractual entitlement to the insurance proceeds, courts may impose equitable remedies, such as a constructive trust, against the designated beneficiary to prevent unjust enrichment, as demonstrated in Moore v. Sweet.

Therefore, while the named beneficiary on the policy will often take priority, this is not absolute. The law recognizes that prior agreements, especially those supported by consideration, can create equitable rights to the proceeds that courts will enforce. Regular updates on insurance policies are crucial to ensure that the deceased's intentions prior to death are truly accounted for and to avoid potential litigation.

It would be beneficial to review the specific language of any separation agreements or other contractual arrangements to determine if they create a clear contractual entitlement to life insurance proceeds, which could give rise to an equitable claim despite a contrary beneficiary designation under the Insurance Act.

This blog was co-authored by articling student Adriana Piccolo.

Footnotes

1. Insurance Act, R.S.O. 1990, c. I.8.

2. Richardson (Estate Trustee of) v. Mew (2009 ONCA 403).

3. Moore v. Sweet (2018 SCC 52).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.