A life insurance policy helps protect the financial well-being of the people you love. Most people buy life insurance to cover expenses for close family members. These family members are beneficiaries and receive the proceeds of the policy. Beneficiaries can be revocable or irrevocable. An irrevocable beneficiary is near impossible to change once put into place.
So, how do you determine if you should choose which type of beneficiaries to assign? Let’s take a closer look at life insurance beneficiaries and why you may or may not want an irrevocable one.
What is a beneficiary?
A beneficiary is a person you wish to receive the money paid out by your life insurance policy. If you pass away, this person gets the death benefit of your policy.
For example, you have a million-dollar life insurance policy. You name your spouse as the beneficiary. When you pass away, your insurance company awards a million dollars to them.
Can I name more than one beneficiary?
Yes! Beneficiaries aren’t limited to one person. Someone with multiple children will likely want to list each child. You can also name an entity, such as a charity.
Some people set up trusts for their estate and name the trustee as a beneficiary. Life insurance policies without a named beneficiary go to your estate.
You also decide if the beneficiary is revocable or irrevocable. This choice determines how easy it is to change them in the future.
Revocable beneficiary meaning
The policy owner can change a revocable beneficiary. That's why most life insurance beneficiaries are revocable. Using a revocable beneficiary means you’ll be able to change your policy as your life changes.
For example, you have two children when you take out your policy. Years later, you have another child. Your first two children are revocable beneficiaries. You’ll be able to add your third child to the policy as another beneficiary. This is usually done in a simple form.
Irrevocable beneficiary meaning
An irrevocable beneficiary is the opposite of a revocable one. When you list an irrevocable beneficiary, you’re giving up your right to make changes. They aren’t designed to change — even if your situation does.
Let’s look at the example we used for revocable beneficiaries. If your children were irrevocable beneficiaries, it would be almost impossible to add your third child to the policy.
When should you choose an irrevocable beneficiary?
If it’s so hard to change irrevocable beneficiaries, why does anyone use them? There are times when a person is sure about their choice. By naming an irrevocable beneficiary, your plans can't change.
Business owners might list their business partners on a business-owned policy. Or, a parent with a special needs child may want to ensure their financial future.
The biggest thing to remember is that you won’t be able to change your beneficiary. That means you can’t add a new one or adjust how much each receives. You need to be sure it's right for your situation and that it won’t change in the future.
Should my spouse be my irrevocable beneficiary?
Spouses generally shouldn't be irrevocable. Sometimes “till death do us part” doesn’t work out. Say you named your spouse as irrevocable and then got divorced.
Now, your ex-spouse would receive the death benefit, regardless of your current relationship. So, you may not want to list them this way in your estate plan.
Examples of irrevocable beneficiaries
There are a few times where irrevocable beneficiaries make sense. Let's take a closer look at these situations.
Life insurance is an important tool for protecting your children’s future. Many people decide to name their children as irrevocable beneficiaries. Of course, there’s always the chance the relationship could sour. However, many parents consider it their duty to protect their children no matter what.
Naming children as irrevocable can also protect them if you marry someone new. Your new spouse won’t be able to claim the benefits or change your policy if you pass away. You can be sure the money will go directly to your children.
Key man insurance
Business owners have a lot of financial considerations. A big one is what happens if a key employee passes away. For example, your business partner is in charge of product design. If they pass away, you’ll be without their knowledge or expertise. Your business may not be able to continue without them.
To combat this, many businesses use “key man” policies to protect against the loss of knowledge or skills if a partner dies. This is a policy taken out by the business on the life of the key person. The business is the irrevocable beneficiary.
If the key person passes away, the business receives the death benefit. This financial compensation can help the business stay afloat.
Irrevocable life insurance trusts
An irrevocable trust gives you more control of where your finances go after death. You can create rules about when and where your money goes from the trust. Parents might use a trust to give funds to children at certain ages. This prevents a young child from receiving a large death benefit all at once.
You can name your trust as your irrevocable life insurance beneficiary. This means your life insurance proceeds are sure to go to the trust. The instructions within the trust then direct the trustee where to send the money.
Some loans let you use life insurance as collateral. To do this, your lender is the irrevocable beneficiary of a life insurance policy. The insurance proceeds cover your outstanding debt if you die before paying it off. If you pay off the loan during your life, the policy dissolves.
Advantages and disadvantages of irrevocable beneficiaries
There are pros and cons to using irrevocable life insurance beneficiaries. So understanding the advantages and disadvantages will help you decide which type to use.
Advantages of irrevocable beneficiaries
An irrevocable life insurance beneficiary gives the policy owner peace of mind. You’ll know exactly where your death benefit is going after you die. Having this peace of mind can be invaluable if you’re a parent or caregiver.
They also help protect loved ones from changing family dynamics. Remarriage, for example, could complicate your children’s claims to your finances. An irrevocable designation guarantees life insurance money goes to your children.
Disadvantages of irrevocable beneficiaries
The biggest disadvantage is the difficulty to change them. Not being able to update your beneficiaries can cause problems as your life changes.
Naming a spouse, for example, could be difficult if your marriage doesn’t work out. Even if you remarry, your ex-spouse has the claim to your life insurance benefits.
Can I change an irrevocable beneficiary?
There is a way to change an irrevocable beneficiary. However, it’s difficult. After all, an irrevocable designation isn’t meant to be changed. Your beneficiary has to agree to the changes. This includes adding new beneficiaries to the policy.
Some states have extra restrictions for these policies. You may have to get your beneficiary’s approval before changing the policy. Be sure to check your state’s regulations before naming beneficiaries.
You can only change irrevocable beneficiaries with their consent. Your beneficiary will have to voluntarily give up their status.
How often should I review my beneficiaries?
It’s important to regularly review your life insurance policies — including beneficiary designations. A good rule of thumb is to look over your policies at any major life event, such as:
- Getting married
- Buying a house
- Taking on debt, such as student loans or car loans
- Having a child
- Moving to a new location
- Paying off your mortgage
What’s the difference between a primary beneficiary and an irrevocable beneficiary?
A primary beneficiary is the main beneficiary of a life insurance policy. A contingent beneficiary is a secondary one. The contingent beneficiary only receives funds if the primary beneficiary can’t.
For example, a primary beneficiary passes away before the policy owner. The policy owner forgets to update the beneficiaries. The contingent beneficiary gets the death benefit when the owner dies.
Primary and contingent beneficiaries tell life insurance companies who should get the proceeds. Irrevocable and revocable designations determine if you can change a beneficiary. An irrevocable beneficiary will always be a primary beneficiary.
How do I designate an irrevocable beneficiary?
You designate beneficiaries when you first take out a life insurance policy. Most applications have a section for listing them. You will likely need their names, addresses, and Social Security numbers.
This is where you will usually choose irrevocable or revocable. Most people choose a revocable beneficiary when taking out a policy. This lets you make changes to your beneficiaries as needed.
Be cautious if you choose an irrevocable beneficiary!
Now you know what the irrevocable beneficiary meaning is, and the seriousness of it. Your life insurance beneficiary is the person or entity who gets your death benefit. Irrevocable beneficiaries are designed to be permanent. They’re nearly impossible to change. Most policies require permission from the beneficiary to make changes.
Are you thinking of using an irrevocable beneficiary? Be sure to talk with an estate planning attorney or other trusted advisor first. They’ll help you decide if it makes sense for your policy.