Before I start, I will make a disclaimer: I’m a lawyer operating a law firm, and I’m not affiliated with any life insurance companies, nor would I benefit in any way regardless of whether or not our clients buy life insurance. This article is speaking directly from my experience in helping our clients settle their estates. Now, let’s dive in and see the top 3 benefits life insurance has on estate distribution.
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Funeral Costs
Unfortunately, estate distribution is a process that is full of costs. It’s also a “pay first, get later” model. Immediately the executor would need to deal with funeral costs. In Ontario, many of our clients paid $30 k for even a small ceremony. Most families do not have that much liquid funds, meaning that they would need to pull it from their investments or line of credit.
Even if the estate have funds, this problem still exists – because this is a “chicken and egg” dilemma. If the estate funds are held in financial institutions (e.g. banks) or by other third parties, they will usually require seeing a Certificate of Appointment of Estate Trustee (“Certificate”) before agreeing to release the funds, due to liability reasons. However, to get this Certificate, one would need to apply to the Estate Court, and depending on their backlog, it may take months or even years. While some banks may make an exception and accept a Will before releasing the funds, it’s even more tricky if the person who passed (“testator”) did not leave a Will.
If the estate funds cannot be accessed, then someone else (usually the executor or beneficiaries) would need to use their own funds to pay for funeral expenses, and then be reimbursed by the Estate after the Certificate has been issued. However, life insurance is different – it only requires a proof of death from the funeral home before releasing the insurance proceeds to the named beneficiaries. Those funds can then be used for funeral expenses without having to wait for the Certificate.
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Estate Administration Taxes (“Probate Fee”)
When applying for a Certificate, the Estate Court prefer to see the Estate Administration Tax, or commonly referred to as “Probate Fee”, being paid upfront. The Probate Fee only applies to Estate valued higher than $50k. The rate is: $0 – $50k = free; $50 k and above, for every $1000 of estate, the probate fee is $15. So if an estate is worth $1 million, the probate fee would be $14,250.
Now, there are legal affidavits that the executor could submit, promising to pay the outstanding probate fees after the issuance of the Certificate, which then would be decided by the Court on a case-by-case basis. Regardless, Courts are more likely to issue the Certificate – and issue it faster – if the probate fee can be paid upfront.
Once again, if the beneficiaries have access to the insurance proceeds, they can first use that money to pay the probate fee and get the Certificate, and then be reimbursed by the Estate.
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Mortgage Payouts
Many people have real estate as part of their estate – often with outstanding mortgages. In most cases, mortgages cannot be transferred from the testator to the beneficiary, because the beneficiary have different income levels than the testator — they wouldn’t qualify for the same mortgage. Then, the banks would ask the beneficiary for a plan on how to pay out the mortgage, and in the worst case scenarios, if there’s no realistic plan to repay back the debt, the banks may exercise its right to power of sale and sell the property.
In contrast, if the beneficiaries already have the insurance proceeds, then they can first pay out the mortgage and wait for the Certificate in a less stressful situation. Alternatively, if the testator had mortgage insurance, then upon their passing the insurance will pay out the outstanding mortgage. However, unlike life insurance, which offers a specific amount of insurance proceeds, mortgage insurance only serve to payout the mortgage, and the beneficiaries won’t get more money from the insurance to pay out other expenses like funeral costs or probate fees.
Conclusion
In summary, life insurance is beneficial for solving many immediate problems during estate distribution, including paying out funeral costs, probate fee, and outstanding mortgage. Varity Law and myself are not insurance agents or brokers – rather, this article is speaking from experience – as many of our clients have benefited from life insurance. We invite you to seek professional advice from insurance companies and to book a free initial consultation with Varity Law (call 905-597-9357) to talk about your Will & Estate planning.
