An irrevocable beneficiary in a life insurance contract is a person or entity designated as beneficiary that a policy owner cannot remove. The policy owner cannot alter the position of the beneficiary without the approval/agreement of the beneficiary. Ordinarily, the receiver is not a party to the life insurance contract. This implies that he/she has no authority over decisions the policy owner makes concerning him/her.
An irrevocable beneficiary has a more active role in the contract and has certain rights not extended to regular beneficiaries. . It’s a more iron-clad status than that of a revocable beneficiary, whose right to assets can be denied or amended under certain circumstances. Their entitlements are guaranteed, and they must approve any changes in the policy. Even the insured cannot change the status of an irrevocable beneficiary once they are named.
Revocable Versus Irrevocable Beneficiaries
Beneficiaries named to a life insurance policy are mostly revocable. The policy owner has the right to alter their proportional share of the death benefit at any time. The insurance company has no obligation to notify the beneficiary that a change took place. Also, if the policy owner chooses to cancel the life insurance contract, the insurance company has no obligation to notify the recipient of the policy cancelation.
The irrevocable beneficiary has many rights that differ from revocable beneficiaries. The policy owner cannot withdraw an irrevocable beneficiary from a life insurance policy without his/her consent. Similarly, the policy owner cannot change the irrevocable beneficiary’s share of the death benefit without his/her approval.
Also, if the policy owner defaults in paying the policy’s premium or decides to cancel his/her life insurance policy, the insurance company must notify the irrevocable heir.
In some states, an irrevocable beneficiary has the right to veto any changes to an insurance policy, including cancellation. In other states, they may only challenge items that affect them, such as payout.
Irrevocable beneficiaries also come into play if you desire to use an insurance policy as collateral for a loan. The lender-bank-would become the irrevocable beneficiary of the policy. The bank will be entitled to the death benefit, if the beneficiary defaults in paying the debt. When the beneficiary dies before repaying the debt, the lender will also be entitled . This is called collateral assignment. If the beneficiary pays the loan in full while still alive then the assignment will be removed. Thus the lender is no longer the beneficiary of the death benefit.
How Does a Person Become An Irrevocable Beneficiary?
Irrevocable beneficiaries mostly occur when a legally binding agreement between a life insurance policy owner and another person/entity exists. Such agreement could necessitate the irrevocable designation. The most common example of this is a life insurance collateral assignment.
Under a collateral assignment, the policy owner pledges the policy’s value as collateral in order to accomplish a goal. This is usually in order to borrow money from a lending institution such as a bank. In such circumstance, the policy owner pledges the policy death benefit as collateral for the loan. Under this arrangement, the bank becomes an irrevocable beneficiary of the life insurance policy.
The fact that the bank technically becomes a party to the life insurance policy considering it now has the right to certain information, it neither owns nor control the policy. The policy owner is still free to do what he/she wants to do with portions of the policy in excess of his/her obligation to the bank. However some insurance company can be easier to work with in this regard.
As soon the policy owner establishes the collateral assignment, the bank becomes an irrevocable beneficiary of the policy. Thus the policy owner cannot remove the bank as beneficiary. He also cannot change the bank’s death benefit interest in the policy without the bank’s prior consent. The only way to remove the bank as a beneficiary is to repay the loan. Another way is to offer the bank a different asset as collateral. That will release the collateral–offer the bank a different asset as collateral. The bank would have to approve the new collateral.
Irrevocable Beneficiaries and Divorces
The court can order a policyholder to assign his or her ex-spouse as a designated beneficiary. Where there are dependent children, child support, or alimony involved, this is mostly the situation.
In such a case, the ex-spouse may be able to persuade a court to make the policyholder designate the ex-spouse as an irrevocable beneficiary to secure child support. The court can however amend the policy if he thinks the payout is excessive. If the children are no longer dependents, the court can also amend the policy.
However, state law ultimately decides the rights of both revocable and irrevocable beneficiaries to an insurance policy. Policyholders should be clear with any beneficiary as to the terms and conditions of a life insurance policy.
Advantages of Having an Irrevocable Beneficiary
The major benefit to naming an irrevocable beneficiary is that it ensures money goes where you want it to. You are 100% sure of the bequests and you don’t have to worry about keeping up to date.
The irrevocable heirs are most often the children. If a parent wants to guarantee money to a child, the parent could designate that child as an irrevocable beneficiary. This ensures that the child will receive death benefits from the life insurance policy or the segregated fund contract. A parent may make their spouse an irrevocable beneficiary. This ensures that the surviving partner has the means to independently support their offspring properly.
In this era of multiple marriages and blended families, making a beneficiary irrevocable is especially important. A step-parent cannot “cut off” a child from a previous marriage. Neither can he/she alter or challenge a policy after your death. In case of a messy divorce, naming a child the policy’s irrevocable beneficiary could be preferable.
Beneficiaries can also protect their assets in many other ways. A beneficiary assignment overrules any sort of bequest made in a will. Plus, it doesn’t have to go through probate. The heir will receive the funds faster this way.
Irrevocable beneficiaries also play an important role in estate planning. For instance, you name a beneficiary on a life insurance policy. If you put that policy in an irrevocable life insurance trust (ILIT), the proceeds are considered removed from your estate. This will avoid potential estate and gift taxes after your death. in In the case of minors or irresponsible beneficiaries, an appointed trustee can supervise the trust and distribute the assets.
Although irrevocable beneficiaries are well protected, irrevocable trusts offers an additional layer of protection against legal challenges as well. A creditor can’t sue a beneficiary for these funds. This is because (except for the actual payout), the money is owned by the trust, not the individual.
How Often Should I Review My Beneficiaries?
Financial planners, including insurance companies themselves, advice that you review your beneficiaries annually. This might not be necessary, especially if you have named irrevocable beneficiaries. However, when a major life change occurs, for example- marriage, divorce, or death—you definitely should look over your beneficiaries.
Is an Irrevocable Beneficiary a Primary Beneficiary?
Irrevocable beneficiaries will always be primary beneficiaries. They take priority over revocable beneficiaries. Therefore, they force those others into secondary or tertiary status. It should be extremely rare for an irrevocable beneficiary to take second place.
How Can I Remove an Irrevocable Beneficiary?
You cannot remove an irrevocable beneficiary without their express consent. This is because part of the perks of irrevocable beneficiary status is it’s permanency. If the beneficiary agrees to be removed, only then can he/she be displaced. That is, if they voluntarily surrender their status.