What is an Irrevocable Beneficiary?

Life insurance beneficiaries come in two flavours: revocable or irrevocable.

A beneficiary is any person or organization that receives a life insurance payout (the death benefit) upon your death.

A revocable beneficiary has no rights to their death benefit portion, whereas an irrevocable beneficiary does. Irrevocable beneficiaries are less commonly used, since the policyholder loses full control of their insurance with an irrevocable beneficiary. However, there are times when designating a beneficiary as irrevocable makes sense (children, bank loans, divorce cases, etc.).

Keep reading to find out the key differences between irrevocable and revocable beneficiaries and when it makes sense to designate a beneficiary as irrevocable. 

What is a Life Insurance Beneficiary?

A life insurance beneficiary is the person, people, or entity that gets the proceeds (death benefit) of your policy when you pass away.

You are free to name anyone as your beneficiary. People often think that the beneficiary must be a spouse or child, but this is not the case. Anyone can be a beneficiary, whether they are a parent, friend, pet or a trust.

When you buy life insurance, you will be asked to name one or more beneficiaries. If you name several beneficiaries, you must specify what percentage of the death benefit each receives when you pass away.

Life insurance beneficiaries can be primary or secondary, and they can be revocable or irrevocable. 

A primary beneficiary is someone who receives the death benefit after you pass away. The secondary beneficiary, on the other hand, gets a payout only when the primary beneficiary predeceases the insured or is untraceable. 

An irrevocable beneficiary is someone who cannot be removed from the policy, nor can their share of the death benefit be altered without their permission. A revocable beneficiary, on the other hand, is a person or entity that you can change anytime. Most people choose revocable beneficiaries for this reason.

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What is an Irrevocable Beneficiary? 

An irrevocable beneficiary is designed to be permanent. They have full rights over their stake in your policy. You can neither remove them nor change their share of the life insurance payout. The only situation in which you can remove an irrevocable beneficiary is if they agree to forfeit their rights to the proceeds of your policy. Also, if you want to cancel the coverage, you will need to inform them first. 

Children are sometimes named as irrevocable beneficiaries by their parents to ensure they receive financial assistance when the parents die. For instance, if you have children and your spouse is the sole or primary earner of the household, you may want her to name the children as irrevocable beneficiaries on the policy.  This way, you can rest easy knowing that even if you get divorced in the future, your children will still be financially protected if you die. 

What is a Revocable Beneficiary? 

A revocable beneficiary is someone who does not enjoy any guaranteed rights to your life insurance payout. You can remove them from your policy or alter their share of the death benefit later if you want. You do not need their approval to make changes to your policy. Unless specified otherwise, your insurer creates a revocable beneficiary designation when you buy the policy. 

Revocable vs. irrevocable beneficiary

Here are the main differences between the revocable and irrevocable beneficiary: 

When do you need an irrevocable beneficiary? 

Most people choose a revocable beneficiary because it gives them the freedom to change the beneficiary designation later if they want to. An irrevocable beneficiary makes sense in some cases, like if you have children, or do not want to worry about keeping the beneficiary designation up to date. 

Other situations where assigning an irrevocable designation makes sense include: 

• A separation agreement or divorce settlement 

As part of the separation agreement or divorce settlement, the court may ask the parent who is paying child and/or spousal support to name their ex-partner as the irrevocable beneficiary. This is done to prevent that parent from making changes to their policy without the knowledge of their former spouse.

• Collateral Assignments

If you want to use your life insurance policy as collateral for a loan, the lender may ask you to name them as an irrevocable beneficiary on your policy. That means if you die without paying off the loan, the lender would be entitled to the death benefit. However, if you pay back the loan in full, this collateral assignment is removed, and the lender will no longer be the beneficiary. 

What happens if I don't name a beneficiary? 

If you do not name a beneficiary, or if the beneficiary dies and you do not amend the beneficiary, the life insurance payout will be paid to your estate. This is not ideal because your life insurance policy will be subject to probate. That is, the death benefit will be used to satisfy probate expenses and any unpaid debts before being awarded to your heirs.

The bottom line: your heirs will not receive the entire death benefit. Also, since probate can be time-consuming, your heirs will likely have to wait longer than the usual 30-day period to receive any money. For these reasons, avoid naming the estate as your beneficiary and review the beneficiary designation from time to time and update it if necessary. 

Is an irrevocable beneficiary the primary beneficiary? 

Not necessarily.

The primary beneficiary is the first in line to receive the insurance proceeds. The sole purpose of naming an irrevocable beneficiary is to ensure they get the death benefit. However, in most cases, the irrevocable designation is also the primary beneficiary.

How often do I need to review my beneficiaries? 

You should revisit the beneficiary designations at least once a year or whenever a major life event occurs. Failure to do so may result in your policy’s death benefit going to someone not intended.

Important life events that call for a review of the beneficiary designations include getting married or divorced, having a child, or the death of the primary beneficiary.  

How can you remove an irrevocable beneficiary?

You can revoke or change an irrevocable beneficiary designation only with the consent of the named beneficiary. If the irrevocable beneficiary is not willing to forfeit their stake in your life insurance policy, there is nothing you can do about it. 

What happens if an irrevocable beneficiary dies? 

The policyholder can choose another beneficiary if the irrevocable beneficiary dies first. If they do not update the beneficiary designation, the insurer will pay the life insurance payout to the policyholder’s estate. If the irrevocable beneficiary dies at the same time as the policyholder or dies after the policyholder but before the claim is processed, the death benefit will be issued to the estate of the beneficiary. 

Conclusion

An irrevocable beneficiary is someone whom you cannot remove from your policy, unless they agree. Nor can you change their share of the death benefit without their consent. An irrevocable beneficiary designation can complicate matters, but there are times (for example, a divorce settlement) when it is a necessity.  

Are you considering life insurance, but still not sure who to name as your beneficiary? Reach out to a Dundas Life licensed advisor today. We're happy to help.