The Supreme Court of Canada was recently asked to weigh the competing claims of a second spouse and a first spouse to the proceeds of a life insurance policy. In a contest between two innocent parties (i.e., a first spouse and a second spouse), both of whom claim an entitlement to the proceeds of a life insurance policy, who should prevail? The answer depends on a number of factors, including who was designated as the beneficiary of the policy. But as the majority decision of the Supreme Court of Canada in Moore v. Sweet, 2018 SCC 52 demonstrated, not all beneficiary designations are created equal. This post will discuss the difference between a revocable and an irrevocable beneficiary designation in a life insurance policy.
Competing claims of a second spouse in Moore v. Sweet
Michelle and Lawrence Moore married in 1979. In October 1985, Lawrence purchased a term life insurance policy, with a coverage amount of $250,000, and designated Michelle as the beneficiary — but not as an irrevocable beneficiary. The annual premium of $507.50 was paid out of the couple’s joint bank account until 2000. In December 1999, Michelle and Lawrence separated. Shortly thereafter, they entered into an oral agreement (the “Oral Agreement”) whereby Michelle would pay the premiums and be entitled to the proceeds of the policy on Lawrence’s death. The effect of this agreement was therefore to require that Michelle remain designated as the sole beneficiary of Lawrence’s life insurance policy.
New common law relationship and change of designated beneficiary
In the summer of 2000, Lawrence began a common-law relationship with Risa Sweet. On September 21, 2000, Lawrence executed a change of beneficiary form designating Risa as the irrevocable beneficiary of the policy. Lawrence did not advise Michelle that she was no longer named as the beneficiary. Pursuant to her obligation under the Oral Agreement, and without knowing that Lawrence had named Risa as the irrevocable beneficiary, Michelle continued to pay all of the premiums on the policy until Lawrence’s death on June 20, 2013. By then, a total of $30,535.64 had been paid on account of premiums; about $7,000 had been paid since 2000. When Lawrence passed away, the proceeds were payable to Risa and not to Michelle. Michelle commenced an application to determine her entitlement to the proceeds of the policy. The insurance company was ordered to pay the proceeds of the policy into court pending the resolution of the dispute.
BC Insurance Act governs designation of beneficiaries
While the matter in Moore v. Sweet arose in Ontario, the Insurance Act provisions in BC defines a beneficiary using the same language: “beneficiary” means a person, other than the insured or the insured’s personal representative, to whom or for whose benefit insurance money is made payable in a contract or by a declaration. Put another way, a beneficiary designation identifies the intended recipient of the proceeds under the life insurance policy upon the death of the insured person, in accordance with the terms of the policy.
Not all beneficiary designations are created equal
There are two types of beneficiary designations: those that are revocable and those that are irrevocable. A revocable beneficiary designation is one that can be altered or revoked by the insured without the beneficiary’s knowledge or consent. An irrevocable beneficiary designation, by contrast, can be altered or revoked only if the designated beneficiary consents. When a valid irrevocable beneficiary designation is made, the BC Insurance Act makes clear that the insurance money ceases to be subject to the control of the insured, is not subject to the claims of the insured’s creditors and does not form part of the insured’s estate.
Does the irrevocable designation ensure the competing claims of a second spouse?
The legislation makes it clear that the interest of an irrevocable beneficiary is afforded much more protection than that of a revocable beneficiary. As the Supreme Court of Canada noted in Moore v. Sweet, an irrevocable beneficiary has a statutory right to remain as the named beneficiary entitled to receive the insurance monies unless he or she consents to being removed. On its face, it would appear that Risa, the second spouse who was named as irrevocable beneficiary in the life insurance policy, should be entitled to the insurance proceeds. It was undisputed that Risa was the validly designated irrevocable beneficiary of the policy. However, as we will discuss in detail in next week’s post, the competing claim of the second spouse did not prevail. The Supreme Court of Canada ordered that the first spouse, Michelle, receive all of the proceeds of the insurance policy.
Bottom line on competing claims of a second spouse to insurance proceeds
When faced with competing claims of a second spouse to insurance proceeds, the starting place is to examine who is designated as beneficiary in the policy and whether the beneficiary is designated as a revocable or irrevocable. The Insurance Act purports to make an irrevocable beneficiary designation irrefutable. But as next week’s post will discuss, an irrevocable beneficiary designation does not always end the matter.