Irrevocable Beneficiary

What Is an Irrevocable Beneficiary?

An irrevocable beneficiary is a person or entity designated to receive the assets in a life insurance policy or a segregated fund contract. What is irrevocable is the beneficiary status. You can’t choose on your own to change the beneficiary or the terms of the policy, and you can’t cancel the policy without the beneficiary’s consent. The beneficiary must agree to any and all changes in the rights to compensation from these entities.

Understanding an Irrevocable Beneficiary

An irrevocable beneficiary has certain guaranteed rights to assets held in the policy or fund. It’s a more ironclad status than that of a revocable beneficiary, whose right to assets can be denied or amended under certain circumstances. 

With a life insurance policy, the policyholder may designate either an irrevocable or revocable beneficiary to receive a payout in the event of the insured’s death. If someone is listed as an irrevocable beneficiary, then denial of income from the policy after the death of the insured is not possible, nor are any changes made to policy payout terms — unless the beneficiary agrees to them.

For example, a spouse who is an irrevocable beneficiary has the right to a policy payout even after a divorce. The ex-spouse must agree to changes in the policy before or after the death of the insured. Even the insured cannot change the status of an irrevocable beneficiary once they are named. Irrevocable beneficiaries also have to be notified if either the policy lapses or an attempt is made to cancel it.

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 directly affect them, such as a payout.

Advantages of an Irrevocable Beneficiary

The main advantage to naming an irrevocable beneficiary is that it ensures that money goes where you want it to go. Difficult to change during your life and virtually impossible to alter after your death, it’s for the bequests that you’re 100% sure of and don’t want to have to worry about keeping up to date.

Children are often named irrevocable beneficiaries. If a parent wanted to guarantee money to a child, then the parent could designate that child as an irrevocable beneficiary, thus ensuring the child will receive death benefits from the life insurance policy or segregated fund contract. A parent might also make their spouse an irrevocable beneficiary to ensure that they have the means to support their offspring properly and not be dependent on someone else.

As a way to safeguard an inheritance, making a beneficiary irrevocable can be especially important in this era of multiple marriages and blended families. A stepparent can’t cut off a child from a previous marriage or alter or challenge a policy after the death of the insured. In case of a messy divorce, naming a child rather than a spouse as the policy’s irrevocable beneficiary could be preferable.

A beneficiary designation means that the funds in question don’t have to go through probate, so the recipient gets them faster.

Irrevocable Trusts

Beneficiaries can protect assets in other ways. A beneficiary designation overrides any sort of bequest made in a will, and it doesn’t have to go through probate. The recipient will get funds faster this way.

Irrevocable beneficiaries can also play a role in estate planning. If you name a beneficiary on a life insurance policy and then put that policy in an irrevocable life insurance trust (ILIT), the proceeds are then considered removed from your estate — thus avoiding potential estate and gift taxes after your death. An appointed trustee can supervise the trust and distribute the assets, which can be helpful in the case of irresponsible beneficiaries or when the beneficiary is a minor.

Although irrevocable beneficiaries are pretty well-shielded to begin with, irrevocable trusts offer an additional layer of protection against legal challenges. A beneficiary can’t be sued by a creditor for these funds because the money is owned by the trust, not the individual, while the beneficiary doesn’t own the money until the payout.

Collateral Assignments

Irrevocable beneficiaries also come into play if you want to use an insurance policy as collateral for a loan. The lender — such as a bank — would become the irrevocable beneficiary of the policy, meaning it would be entitled to the cash value and/or death benefit if you defaulted on the debt or died before it was repaid. This process is called collateral assignment. If the loan is repaid in full while you’re alive, the assignment is removed, and the lender is no longer the beneficiary of the death benefit.

Disadvantages of an Irrevocable Beneficiary

The primary disadvantage of having an irrevocable beneficiary is inflexibility. You can’t make any changes without the beneficiary’s consent. Life has a way of surprising us, so you need to be very sure that circumstances won’t make you regret your choice.

As to irrevocable trusts, an additional disadvantage is that you lose control of the assets in the trust, ceding that control to a trustee. If you suddenly need to access the funds due to an emergency, you don’t have it.

Irrevocable Beneficiaries and Divorces

A policyholder can be ordered by a court to designate their ex-spouse as a designated beneficiary. Most often, this is seen in cases where there are dependent children, child support, or alimony involved.

In such a case, the ex-spouse can work with a divorce lawyer to persuade a court to make the policyholder designate the ex-spouse as an irrevocable beneficiary to secure child support. However, the court can also have the policy amended if it’s deemed that the payout is excessive in regard to what is needed to support the child or at a time when the children are no longer seen as dependents. 

It’s 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 what the terms and conditions of a life insurance policy will be.

How Often Should I Review My Beneficiaries?

Some financial planners, including insurance companies themselves, recommend that you review your beneficiaries annually. That might be unnecessary, especially if you have named irrevocable beneficiaries. However, whenever a major life change occurs — marriage, divorce, the birth of a child, 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, forcing those others into secondary or tertiary status. It would be extremely rare for an irrevocable beneficiary to take second place.

How Can I Remove an Irrevocable Beneficiary?

You can’t without difficulty. The point of irrevocable beneficiary status is its permanency. Generally speaking, an irrevocable beneficiary can only be removed if the beneficiary agrees to be displaced, voluntarily surrendering their status.