March 2015
Contingent ownership of a life insurance policy
Where life insurance is concerned, the consequences following the insured's death are often a prime consideration
while those following the policy owner's death are frequently overlooked. The ability to appoint a contingent owner is
unique to life insurance and has many advantages. Appointing a contingent owner is therefore a way to sidestep
certain problem situations. Following is a brief overview of the rules around contingent ownership.
Benefits of appointing contingent ownership
Appointing a contingent owner controls who owns a policy, or an interest in it, after the owner’s death. Keep in mind
that the contingent owner has no rights under the policy while the original owner is alive.
It's important to note that the original owner of a life insurance policy can change the contingent owner designation at
any time.
Appointment of a contingent owner for a life insurance policy allows ownership of the policy to bypass the estate of the
original owner at death. This feature provides a strong degree of protection against potential creditors of the original
owner's estate. In addition, probate fees may be avoided by appointing a contingent owner. See our technical guide
“Probate minimizing strategies” for a more thorough overview of rules regarding probate fees rules.
Joint tenancy versus contingent ownership
Many clients put ownership of non-insurance assets into "joint tenancy with right of survivorship" (JTWROS) in trying
to address their need for ownership transfer. Note that JTWROS does not exist in Quebec. There are potential
problems with these arrangements that are easily avoided in the case of life insurance policies by simply appointing a
contingent owner.
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Problems with Joint Tenancy
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Partial loss of ownership
Loss of sole control
Adding a joint owner after the policy is issued is
a disposition that may trigger tax
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Joint tenant has permanent rights
Transferred interest cannot be recalled
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Joint tenant’s interest now subject to other
owner’s creditor claims
Contingent Ownership Better Solution
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No loss of ownership
Owner continues to have full control
Adding a contingent owner at any time is not a
disposition; no tax payable
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Contingent owner has no rights during life of
owner
Owner can change appointment at any time
without contingent owner’s consent
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Contingent owner not considered party to the
policy until owner dies
When owner dies
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In the case of "joint tenancy with right of survivorship", when one of the joint tenants dies, the surviving joint
tenant(s) now owns the entire property.
At death of the first tenant in common, the deceased’s ownership interest forms part of their estate.
In a case where the original owner has appointed a contingent owner, transfer to the contingent owner on
death bypasses the original owner’s estate.
Contingent ownership may allow tax-free rollover of life insurance policy
Transferring ownership of a life insurance policy can come with tax consequences. In most cases, the transfer will
trigger a taxable policy gain. There are certain exceptions to this rule though that allow for a tax-free rollover of the
policy to the new owner (see our Financial Advisor Bulletin titled “Tax implications of a life insurance policy transfer”
for a more thorough overview of these rules). In some cases, the contingent ownership mechanism may be the best or
even the only way to achieve this.
For example, where a life insurance policy is owned by a parent on the life of their child, the only way to avoid a
disposition at the parent's death is to appoint a child or grandchild as contingent owner of the policy. The policy may
then be rolled over on a tax-free basis. However, if the policy is bequeathed in the owner’s will or passes by intestacy,
the property becomes part of the owner’s estate first, meaning the transfer will trigger a disposition and possibly a
tax bill.
In short, the policy cannot be bequeathed by will and rolled over on a tax-free basis. Only the appointment of a
contingent owner who is the insured child or child of the insured could prevent a tax bill for the deceased at death.
If the child is a minor, a trustee may be needed.
Note that spouses can transfer policies between themselves using either a contingent ownership designation, or by
will, without tax consequences. In both cases, a tax-free rollover can be done.
Lastly, if the policy is transferred to a spousal trust (or any other trust) a taxable policy disposition is triggered, even if
the trustee is appointed a contingent owner. In these situations, transferring a policy with a low or zero cash value may
be a preferred solution to minimize the policy gain at transfer. The CRA has also said that a spousal trust loses
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its special tax status if it owns a life insurance policy on the trust beneficiary (i.e. the surviving spouse). Such a
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transfer would taint the trust according to the CRA.
Quebec distinctions
It’s important to note that “joint tenancy with right of survivorship" existing under the "common law" legal system does
not exist under the Civil Code of Québec. The rules applying in Quebec stipulate that the proportion of the interest in a
life insurance policy held by one of the owners will automatically form part of that person's estate.
In fact, sums insured payable to a beneficiary do not form part of the succession of the insured. Similarly, a contract
transferred to a subrogated policyholder does not form part of the succession of the preceding policyholder
Note that the Civil Code of Québec stipulates that all contingent owner designations are always revocable.
Lastly, for married couples or spouses in civil unions, in the event of divorce, marriage annulment or termination of the
civil union, the designation of spouse as beneficiary or contingent owner automatically becomes null and void. In the
case of separation from bed and board, the spouse is not removed as contingent owner unless stipulated by the court.
What advisors can do
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Identify clients who have a joint life last-to-die insurance policy,
Identify any policy where the owner’s child or grandchild is the insured.
Discuss the benefits of making sure they have appointed a contingent owner where appropriate.
Every effort has been made to ensure the accuracy and currency of the information provided. However, any
examples presented in this article are for illustration purposes only. No one should act upon these examples
or information without a thorough examination of the tax and legal situation with their own professional
advisors after the facts of the specific case are considered.
This article is intended to provide general information only. Sun Life Assurance Company of Canada does not
provide legal, accounting or taxation advice to advisors or clients. Before a client acts on any of the
information contained in this article, or before you recommend any course of action, make sure that the client
seeks advice from a qualified professional, including a thorough examination of their specific legal,
accounting and tax situation. Any examples or illustrations used in this article have been included only to
help clarify the information presented in this article, and should not be relied on by you or a client in any
transaction.
Reviewer: Jean Turcotte, Lawyer, B.B.A., LL.B., D.Fisc, Fin.Pl., TEP
First published: January 2004
Last revision: December 2014
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2006-0174041C6, dated November 2, 2006.
© Sun Life Assurance Company of Canada, 2015.
Sun Life Assurance Company of Canada is a member of the Sun Life Financial
group of companies.
810-4325-Digital-03-15
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