When you purchase a life insurance policy, you will be asked to appoint a beneficiary who will collect the death benefit when you pass away. However, there are typically two types of beneficiaries that you can choose from—irrevocable and revocable. The main difference between these two is how much access they have to the policy and their rights to the death benefit.
What Is An Irrevocable Beneficiary?
An irrevocable beneficiary is a person, organization, or other entity that will receive the funds from your life insurance policy after your death. When a beneficiary is irrevocable, it means they are fully entitled to the death benefit as outlined in the contract.
Removing an irrevocable beneficiary from your policy can be challenging. The person or organization must agree to forfeit their rights to the death benefit. As the policyholder, you can’t simply remove their name and add someone else.
Another thing to know about irrevocable beneficiaries is that they must agree to any policy changes you make. For example, if you have a policy that allows you to increase or decrease the death benefit, you would have to get approval from the irrevocable beneficiary to change the coverage limit.
Irrevocable Beneficiary Pros and Cons
Adding an irrevocable beneficiary to your life insurance policy has advantages and disadvantages.
The biggest upside to an irrevocable beneficiary is that it ensures your inheritance goes to the person or organization that you want it to. You don’t need to worry about changing the beneficiary over the lifetime of the policy. Similarly, there is no risk that legal issues after your death could cause the money to end up in the wrong hands.
Having an irrevocable beneficiary can also come in handy for estate planning. If your life insurance policy is part of an irrevocable life insurance trust, the death benefit gets taken out of your estate and is not subject to estate or gift taxes.
On the other hand, having an irrevocable beneficiary on your life insurance policy makes it very difficult to remove that person if need be. For example, if you add your spouse as an irrevocable beneficiary and you get divorced, they are still legally entitled to the death benefit, unless they agree to be taken off.
Reasons To Have An Irrevocable Beneficiary
The best reason to have an irrevocable beneficiary is to leave an inheritance to your loved ones. Oftentimes, children are named as irrevocable beneficiaries on their parent’s policy, using the death benefit as an inheritance.
You might also want an irrevocable beneficiary if you wish to leave money to an organization or charity after your death. That way, your family members can’t step in and attempt to collect the money for themselves.
An irrevocable beneficiary can also have tax benefits if your policy is part of an irrevocable life insurance trust.
When Can An Irrevocable Beneficiary Be Changed?
Technically, you can change an irrevocable beneficiary at any time. You don’t need to go through a major life event, like divorce, in order to add or remove an irrevocable beneficiary. However, the key is that the beneficiary must agree to be dropped from your policy. If they don’t agree, it’s nearly impossible to remove them.
Revocable Beneficiary Vs Irrevocable Beneficiary
The other main type of beneficiary is a revocable beneficiary, which is more common for life insurance policies. A revocable beneficiary is not legally entitled to your death benefit, and you can choose to remove them at any time, without their consent.
If there is any chance that you will want to change your beneficiary over time, choosing a revocable beneficiary is probably a better idea. It gives you more freedom over your policy and legally, it’s much easier to make changes.
How Often Should I Review My Beneficiaries?
As a general rule of thumb, it’s a good idea to review your life insurance beneficiaries once per year. Insurance companies recommend reviewing your policy details more frequently if you go through a significant life change, such as marriage, to ensure that your beneficiaries are up to date. If you have a revocable beneficiary, the process of adding or removing the person should be pretty easy.
Are Spouses Automatically Irrevocable Beneficiaries?
No, spouses are not automatically considered irrevocable beneficiaries. When you open a life insurance policy, you can choose any person or entity as an irrevocable beneficiary. You can also choose someone who is not related to you.
What Happens If My Irrevocable Beneficiary Is My Spouse And I Get Divorced?
If you get divorced and your spouse is an irrevocable beneficiary, it will be difficult to remove them, unless they voluntarily agree to be dropped from the policy. In this case, you might be able to work with a divorce lawyer to persuade your ex-spouse to remove themselves, but legally, they are still entitled to the death benefit when you pass away.
What Happens If An Irrevocable Beneficiary Dies?
If an irrevocable beneficiary dies before the policyholder, it can complicate the payout process. To avoid this, you can appoint a contingent beneficiary to your policy, who would have rights to the money if the irrevocable beneficiary passed away. For example, you might name your spouse as an irrevocable beneficiary and your child as a contingent beneficiary.