Life Insurance Beneficiaries in the Context of Separation
The designation and limitations of irrevocable beneficiaries in Ontario
Published by Bronwen Bruch on February 19th, 2019
Life insurance arrangements, despite the difficult conversations they may invite, are often an important step in the separation process. Customarily, life insurance serves as an additional provision for support commitments; this is particularly valuable in cases involving children, to ensure funds are set aside for their care in the event a parent passes away. Accordingly, many Separation Agreements include life insurance clauses, and section 34(1)(i) of the Family Law Act allows for courts to order designation of a former spouse as an irrevocable life insurance beneficiary.
Revocable versus Irrevocable Beneficiaries
Under sections 190 and 191 of Ontario’s Insurance Act, an insured person can revoke a beneficiary designation at his or her leisure—with one critical limitation. This limitation is the fundamental difference between a revocable and an irrevocable beneficiary designation: an irrevocable beneficiary must provide written consent before he or she can be removed from an insurance policy, while the consent of a revocable beneficiary is unnecessary. In fact, as the Financial Services Commission of Ontario notes, a revocable beneficiary does not even need to be informed of his or her removal from an insurance policy.
Clearly, an irrevocable beneficiary designation can mitigate some of the uncertainty associated with the default revocable beneficiary designation. However, recent judgements have established that even an irrevocable beneficiary designation cannot always guarantee entitlement to insurance payments. As the cases of Moore v. Sweet (2018 SCC 52) and Dagg v. Cameron Estate (2017 ONCA 366) demonstrate, third parties may still be entitled to a share or the entirety of insurance payments in special circumstances.
Moore v. Sweet: Conflicting Contracts and Unjust Enrichment
In the case of Moore v. Sweet, the newly separated Ms. and Mr. Moore agreed that Ms. Moore would remain the beneficiary of Mr. Moore’s life insurance policy, and would pay the premiums of said policy. Ms. Moore was designated as a revocable beneficiary. Without Ms. Moore’s knowledge, Mr. Moore later removed her from the policy and designated his new partner, Ms. Sweet, as an irrevocable beneficiary. Upon Mr. Moore’s death, Ms. Moore learned she was no longer beneficiary and sued Ms. Sweet for the amount of the insurance policy.
The case traveled up the appeal courts. Finally, the Supreme Court ruled in favour of Ms. Moore, on the basis of her initial verbal contract with Mr. Moore and the “unjust enrichment” of Ms. Sweet. In other words, Ms. Sweet had benefited financially from Ms. Moore’s loss, both through the $7,000 Ms. Moore had paid in premiums and the unexpected revocation of her life insurance entitlement. Ms. Sweet, despite her irrevocable beneficiary designation, was ultimately denied the insurance payments.
It is important to note that, before the case reached the Supreme Court, a lower court of appeal initially ruled in Ms. Sweet’s favour. Even two justices of the Supreme Court dissented to the final decision, proving how nearly Ms. Moore could have faced a loss.
Ms. Moore’s vulnerability as a revocable beneficiary demonstrates the value of irrevocable beneficiary designation. However, Ms. Sweet’s loss demonstrates that designation as an irrevocable beneficiary does not necessarily supersede circumstances such as unjust enrichment, as well as the value of investigating policy details such as payment arrangements to prevent future complications.
Dagg v. Cameron Estate: A Case of Dependant Support Claims
In the case of Dagg v. Cameron Estate, Mr. Cameron was ordered to designate his separated spouse, Ms. Cameron, as the irrevocable beneficiary of his life insurance policy in order to secure support for herself and their two children. Prior to his death, Mr. Cameron breached the order by amending the policy to include his new partner, Ms. Dagg, who had become pregnant with his child and gave birth soon after Mr. Cameron’s death. Because Mr. Cameron had breached the original separation order, the designation of beneficiary was restored to Ms. Cameron.
Ms. Dagg then applied for support under subsection 72(1)(f) of the Succession Law Reform Act (SLRA), which allows for insurance funds to be “clawed back” into the estate for the purpose of dependant support. Ms. Cameron countered Ms. Dagg’s claim under subsection 72(7) of the SLRA, which states that section 72(1)(f) does not affect the rights of a creditor.
Both the original trial court and the appealed Divisional Court ruled in favour of Ms. Dagg’s claim, deeming that Ms. Cameron was not a creditor in the context of the SRLA. However, the Ontario Court of Appeal then overturned this ruling, stating that Ms. Cameron was indeed a creditor due to Mr. Cameron’s legal support obligations. The support payments owed to Ms. Cameron and her children were thus protected from the reach of the SLRA, and only excess funds could be clawed back into the estate.
The Ontario Court of Appeal noted the responsibility of separating parties to arrange their life insurance policies and beneficiary designation in such a way that they are protected from the reach of the SLRA. As Justice Brown outlined, this protection can be achieved through a properly worded Separation Agreement containing a life insurance proviso, or a transfer of policy ownership to:
- the dependant spouse,
- joint names (with a right of survivorship), or
- a trustee.
The case of Dagg v. Cameron Estate demonstrates the limitations of irrevocable beneficiary designation under the application of the SLRA, and the value of seeking appropriate legal advice in order to properly insulate an insurance policy from the SLRA’s reach.
In cases of separation, life insurance is an important protection for dependant support, and an irrevocable beneficiary designation necessitates consent before the designation can be legally revoked. The irrevocable designation can mitigate future uncertainties, but is still limited in specific circumstances such as unjust enrichment or conflicting dependant support claims.
Life insurance arrangements during the separation process can be a complex issue to navigate, and can vary in approach based on individual circumstances. A consultation with an experienced collaborative professional can help you to make informed decisions, and guide you towards long-term security.
If you have any questions or would like to discuss the matter further, please do not hesitate to get in touch with us here at Family First Solutions; we are more than happy to help.
Bronwen Bruch is a Chartered Professional Accountant (CPA, CMA), Financial Divorce Specialist, Accredited Family Mediator, and Collaborative Financial Professional. Bronwen has been working in the separation and divorce field for over five years, and enjoys using her experience to assist others.