Life insurance proceeds and dependent support obligations

Law360 Canada (June 12, 2024, 12:40 PM EDT) --

Jason Moore

In my May 31, 2024 article, “Enforcing support obligations in separation agreements and court orders against an estate,” I discussed some of the legislative mechanisms dependants can use to obtain and enforce support orders. Once an order for support has been made, what assets belonging to the payor can be charged to satisfy the order? Specifically, can the proceeds of a life insurance policy held by the payor be used to fund the support ordered by the court?

The FLA and the Divorce Act

The Family Law Act, R.S.O. 1990, c F.3, (FLA) and the Divorce Act, R.S.C., 1985, c.3 both permit a broad variety of assets to be used as security to enforce a dependent support order.

Sections 33 and 34 of the FLA state as follows:

33. (1) A court may, on application, order a person to provide support for his or her dependants and determine the amount of support.

34. (1) In an application under section 33, the court may make an interim or final order,

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(i) requiring that a spouse who has a policy of life insurance as defined under the Insurance Act designate the other spouse or a child as the beneficiary irrevocably;

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(k) requiring the securing of payment under the order, by a charge on property or otherwise.

Notably, the FLA’s language specifically permits the court to order a payor of support to irrevocably designate a dependent as a beneficiary of the payor’s life insurance policy. In Dagg v. Cameron Estate, 2017 ONCA 366, at paragraph 76, the Court of Appeal noted that this practice had become more common than registering a charge against the payor’s real property in favour of the beneficiary.

Section 15.2 of the Divorce Act is arguably even broader in scope:

15.2 (1) A court of competent jurisdiction may, on application by either or both spouses, make an order requiring a spouse to secure or pay, or to secure and pay, such lump sum or periodic sums, or such lump sum and periodic sums, as the court thinks reasonable for the support of the other spouse.

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(3) The court may make an order under subsection (1) or an interim order under subsection (2) for a definite or indefinite period or until a specified event occurs, and may impose terms, conditions or restrictions in connection with the order as it thinks fit and just.

The court has ultimate discretion over what terms of support to order (Burke v. Poitras, 2020 ONSC 3162). Common terms include requiring the payor to designate a dependant as a beneficiary of a life insurance policy or, if the payor is ineligible for life insurance, placing a charge on the payor’s estate in favour of the beneficiary (Oschisor v. Oshisor, 2018 ONSC 3306).

The court may also order a payor to obtain a life insurance policy if they do not already have one. Jurisprudence indicates that the court must proceed cautiously when making such an order. In Katz v. Katz, 2014 ONCA 606, at paragraph 74, the Court of Appeal provided a list of factors for courts to consider when making an order compelling a payor to obtain life insurance:

[74]  That said, where there is no existing policy in place, a court should proceed carefully in requiring a payor spouse to obtain insurance. … Careful consideration should be given to the amount of insurance that is appropriate. It should not exceed the total amount of support likely to be payable over the duration of the support award. Moreover, the required insurance should generally be somewhat less than the total support anticipated where the court determines that the recipient will be able to invest the proceeds of an insurance payout. Further, the amount of insurance to be maintained should decline over time as the total amount of support payable over the duration of the award diminishes. The obligation to maintain insurance should end when the support obligation ceases – and provision should be made to allow the payor spouse to deal with the policy at that time. Finally, when proceeding under the Divorce Act, the court should first order that the support obligation is binding on the payor’s estate.

In light of Katz, it is crucial that a solicitor drafting an order for support carefully consider what happens to an irrevocable beneficiary designation on a life insurance policy as circumstances change. Special attention should be given to what portion of the policy should be made irrevocable in the event that the payor remarries and may be subject to a second claim for support at a later date.

The SLRA

Section 63 of the Succession Law Reform Act, R.S.O. 1990, c. S.26 (SLRA) provides for the payment of a dependent’s support from an estate. Section 72 of the SLRA adds additional teeth to this provision by permitting the proceeds of any life insurance policies owned by the deceased to be included in the value of the estate for the purposes of determining dependent support.

Crucially from the perspective of dependents, the SLRA contains language that “shields” the proceeds of a life insurance policy from being used to repay third party creditors. Section 72(1) specifically provides as follows:

72. (1) Subject to section 71, for the purpose of this Part, the capital value of the following transactions effected by a deceased before his or her death, whether benefitting his or her dependent or any other person, shall be included as testamentary dispositions as of the date of the death of the deceased and shall be deemed to be part of his or her net estate for purposes of ascertaining the value of his or her estate, and being available to be charged for payment by an order under clause 63 (2) (f),

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(f) any amount payable under a policy of insurance effected on the life of the deceased and owned by him or her;

(f.1) any amount payable on the death of the deceased under a policy of group insurance.

At first blush, this provision appears to conflict with s. 72(7) of the SLRA, which states: “[t]his section does not affect the rights of creditors of the deceased in any transaction with respect to which a creditor has rights.” However, as the Court of Appeal explained in Dagg v. Cameron Estate, the payee of a support order made inter vivos is a creditor of the payor’s estate, thus gaining priority over the insurance proceeds over dependants whose claims arise post mortem. Section 72(7) of the SLRA, therefore, serves to protect the rights of payees as well as those of third-party creditors and functions to balance the rights of different classes of dependents.

Seeking an order for life insurance to be pledged as security for a support obligation requires a deep understanding of the interplay between the Divorce Act, the FLA, and the SLRA. For those dealing with these issues, a lunch and learn seminar on this topic will feature David Freedman and James Dunphy on June 18, 2024, starting at 12:00 p.m. This seminar is an opportunity for new and experienced estate and family lawyers to learn about this rapidly evolving area of family law and estate litigation. For more information and to register, please click here.

Jason Moore is a lawyer at Wagner Sidlofsky LLP, practicing in the estate and commercial litigation groups.

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