The Importance of the “Preferred and Primary” Beneficiary Class

A long-time client passed away within the last 2 years and I helped his widow settle his financial affairs. However, she was horrified to find out he had appointed “The Estate” as beneficiary on his RRIF which he purchased online through a DIY platform.

The other RRIF and TFSA he had with me listed his spouse as “Successor Owner/Holder” and she took over the contracts with one signature. The RRIF my late client held through my competitor, took more than 4 months to transfer to his widow, as the estate needed to go through probate.

While investments such as RRSP/RRIFs, TFSA and Non-Registered Accounts offered by a Canada Life Insurance company may look like the products that banks or Credit Unions offer, there is a significant difference in how the beneficiary designation can be structured.

What is the difference between a Primary Beneficiary and a Contingent Beneficiary?

A Primary Beneficiary means the chosen individual(s) receive the proceeds directly without going through the “Estate,” which saves time and eliminates Probate Fees.

A Contingent Beneficiary designation is the back-up in case the Primary Beneficiary dies before the owner can change the contract.

Every Canadian financial institute offers a Primary Beneficiary designation (on Registered plans) but only Canadian life insurance companies offer a Contingent Beneficiary.

Why is this important? After settling the estate of loved one like a spouse, many people do not automatically update their beneficiary designations on their other investments. Having a Contingent Beneficiary designation in place from the beginning, ensures the proceeds will go directly to those second in line.

What products can have a Contingent Beneficiary designation? All financial products sold through a Canadian life insurer which includes – life insurance, RRSPs/RRIFs, TFSAs, FHSAs, Segregated Funds, GICs and even group benefits like a Group RRSP or Group life insurance.

Why is having a Primary Beneficiary important for Non-Registered investments?

Regular savings and investment accounts with a bank, credit union or stock brokerage firm do not allow for a Primary Beneficiary to be named, it has to the “Estate.”

If funds are payable to the “Estate,” probate fees are applicable, and the time taken to settle an estate can easily be 4-6 months.

As stated above, under the importance of having a Contingent Beneficiary, all investments with a Canadian life insurance company can have both a primary and contingent beneficiary appointed.

What is a “Preferred Beneficiary” designation and why is it important?

A “Preferred Beneficiary” is a spouse, parent, child, or grandchild of the contract owner, which now grants them an additional level of security.

The courts have ruled in most situations that a Preferred Beneficiary has protected rights to the investment over and above what a regular beneficiary has at the time of insolvency, bankruptcy, and litigation such as a civil lawsuit.

Non-Registered assets such as GICs, Term Deposits, High Interest Savings Accounts and Mutual Funds with a bank, Credit Union or brokerage firm do not have these same rights. In the 4 decades I have been in the industry I have had 3-4 clients who had their assets held with me, protected when they filed for bankruptcy. One client had a lawsuit against her when she was sued privately by a 3rd party and again, the assets were protected.

If in doubt with your own investments, ask your advisor about a review dealing with who has been appointed as beneficiary on each contract.