Creditor protection considerations
When an insurance contract may be protected from creditors
Creditor protection is one of the features most often mentioned about insurance contracts and most often overstated. It can be real and valuable, and it depends on the circumstances rather than on the product.
Worth knowing: It isn't automatic and it isn't absolute.
Where it may apply
Protection generally depends on who is named as beneficiary. Designating a beneficiary in the family class — commonly a spouse, child, grandchild or parent — or naming an irrevocable beneficiary is what may put the contract beyond the reach of creditors.
It applies to life insurance policies and to segregated fund contracts, which is one of the few things a segregated fund can do that an ordinary mutual fund cannot.
Where it fails
A transfer made to put assets beyond the reach of an existing or foreseeable creditor can be challenged and set aside. Protection arranged when trouble is already visible is the arrangement most likely to fail.
It is also not absolute in bankruptcy, and it does not protect against every kind of claim. It is a possibility created by law and circumstance, not a guarantee written into a product.
Who it actually matters to
For most employees it is theoretical. For someone who has personally guaranteed a business lease or line of credit, or who works in a profession carrying personal liability, it is one of the few features worth paying for in its own right.
Because it depends on provincial law, family relationships and the facts at the time, it is a question for a lawyer as well as an advisor. Anyone presenting it as a simple product feature is overselling it.
Questions people ask
Does naming any beneficiary protect the money?
No. It generally depends on the beneficiary falling within the family class, or on an irrevocable designation. Naming the estate usually removes the protection entirely.
Does it protect me from the Canada Revenue Agency?
Tax debts are treated differently from ordinary creditors, and protection should not be assumed. That is specifically a question for a lawyer.
Can I set this up now that I'm having difficulties?
That is the situation most likely to be challenged and undone. Arrangements made while solvent and for genuine reasons stand on far firmer ground.