What is an irrevocable beneficiary?
An irrevocable beneficiary is a person or entity designated to receive the assets of a life insurance policy or segregated fund contract. What is irrevocable is the status of beneficiary. You cannot choose to change the beneficiary or the terms of the contract yourself, and you cannot cancel the contract without the beneficiary’s consent. The beneficiary must accept any modification of the rights to compensation of these entities.
Key points to remember
- An irrevocable beneficiary is a person or entity designated to receive the assets of a life insurance policy or segregated fund contract.
- An irrevocable beneficiary is a more foolproof version of a beneficiary. Their rights are guaranteed and they often have to approve any policy changes.
- Irrevocable beneficiaries cannot be revoked once designated, unless they consent, even if they are divorced spouses.
- Children are often named irrevocable beneficiaries to ensure their inheritance or to secure child support payments.
- Designating an irrevocable beneficiary can also have estate planning benefits, especially if the insurance policy is placed in an irrevocable trust.
Understanding an irrevocable beneficiary
An irrevocable beneficiary has certain guaranteed rights to the assets held in the policy or fund. It is a more foolproof status than that of a revocable beneficiary, whose right to assets can be refused or modified in certain circumstances.
With a life insurance policy, the policyholder can designate an irrevocable or revocable beneficiary to receive compensation in the event of death. If someone is listed as an irrevocable beneficiary, denial of policy income after the death of the insured is not possible, and no changes are made to the terms of payment of the policy, unless the beneficiary do not accept them.
For example, a spouse who is an irrevocable beneficiary is entitled to a policy payment even after a divorce. The ex-spouse must accept the changes to the policy before or after the death of the insured. Even the insured cannot change the irrevocable beneficiary status once it is named. The irrevocable beneficiaries must also be informed in the event of termination of the contract or attempted termination.
In some states, an irrevocable beneficiary has the right to veto any modification of an insurance policy, including cancellation. In other states, they can only dispute items that directly affect them, such as a payment.
Benefits of an irrevocable beneficiary
The main advantage of naming an irrevocable beneficiary is that it ensures that the money will go where you want it to go. Hard to change over the course of your life, and virtually impossible to change after you die, it’s for bequests that you are 100% sure about and don’t want to have to worry about keeping up to date.
Children are often called irrevocable beneficiaries. If a parent wanted to guarantee a child money, the parent could designate that child as the irrevocable beneficiary, thereby ensuring that the child will receive the death benefits from the life insurance policy or segregated fund contract. . A parent can also make their spouse an irrevocable beneficiary to ensure that they have the means to provide for their offspring properly and not depend on someone else.
As a way to protect an inheritance, making a beneficiary irrevocable can be especially important in this age of multiple marriages and blended families. A step-parent cannot cut a child from a previous marriage or change or challenge a policy after your death. In the event of a complicated divorce, it may be better to name a child irrevocable beneficiary of the policy rather than a spouse.
A beneficiary designation means that the funds in question do not have to be probated, so the beneficiary gets them faster.
Beneficiaries can protect their assets in other ways. A beneficiary designation takes precedence over any type of bequest made in a will, and it does not have to go through probate. The beneficiary will thus obtain funds more quickly.
Irrevocable beneficiaries can also play a role in estate planning. If you name a beneficiary on a life insurance policy and then place that policy in an Irrevocable Life Insurance Trust (ILIT), then the proceeds are considered withdrawn from your estate, thus avoiding possible income taxes. estates and donations after your death. An appointed trustee can oversee the trust and distribute the assets, which can be useful in the case of irresponsible beneficiaries or when the beneficiary is a minor.
While irrevocable beneficiaries are fairly well protected to begin with, irrevocable trusts provide an additional layer of protection against legal challenges. A beneficiary cannot be sued by a creditor for these funds because the money belongs to the trust and not to the individual, while the beneficiary does not own the money until paid.
Irrevocable beneficiaries also come into play if you want to use an insurance policy as collateral for a loan. The lender, like a bank, would become the irrevocable beneficiary of the policy, which means they would be entitled to the cash value and / or the death benefit if you fail to pay off the debt or die before it occurs. be reimbursed. This process is called collateral assignment. If the loan is repaid in full during your lifetime, the assignment is canceled and the lender is no longer the beneficiary of the death benefit.
Disadvantages of an irrevocable beneficiary
The main disadvantage of having an irrevocable beneficiary is inflexibility. You cannot make any changes without the consent of the recipient. Life has a way of surprising us, so you must be very sure that the circumstances will not make you regret your choice.
When it comes to irrevocable trusts, an additional downside is that you lose control of the trust’s assets, ceding that control to a trustee. If you suddenly need to access funds due to an emergency, you don’t have them.
Irrevocable beneficiaries and divorces
A policyholder may be ordered by a court to designate their ex-spouse as the designated beneficiary. Most often, this happens in cases where there are dependent children, child support or alimony involved.
In such a case, the ex-spouse may work with a divorce lawyer to persuade a court to require the policyholder to name the ex-spouse as the irrevocable beneficiary to secure child support. However, the court can also change the policy if it is found that the payment is in excess of what is necessary to support the child or at a time when the children are no longer considered to be caregivers. charged.
It is important to note, however, that state law ultimately decides the rights of beneficiaries to an insurance policy, whether they are revocable or irrevocable beneficiaries. Policyholders should be clear with any beneficiary as to the terms and conditions of a life insurance policy.
How often should I see my beneficiaries?
Some financial planners, including insurance companies themselves, recommend that you review your beneficiaries annually. This may be unnecessary, especially if you have designated irrevocable beneficiaries. However, whenever a major life change occurs – such as marriage, divorce, childbirth, or death – you should definitely take a look at your beneficiaries.
Is an irrevocable beneficiary a primary beneficiary?
The irrevocable beneficiaries will always be the first beneficiaries. They have priority over revocable beneficiaries, forcing the others to secondary or tertiary status. It would be extremely rare for an irrevocable beneficiary to take second place.
How to remove an irrevocable beneficiary?
Not without difficulty. The point of irrevocable beneficiary status is its permanence. In general, an irrevocable beneficiary can only be revoked if he agrees to be moved by voluntarily renouncing his status.