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A life insurance policy is in many cases the centerpiece of an estate plan, ensuring that your loved ones receive financial benefits when you are no longer around to help out. If you have family members you want to provide for after you’re gone, a life insurance policy benefit can help to do that. Even those without a spouse or children can opt to have their life insurance benefit an organization or another party special to them.
When you purchase life insurance, you choose a beneficiary or beneficiaries to receive the death benefit related to the policy after you pass away. It’s important to understand, though, that there are two types of beneficiaries: an irrevocable beneficiary and a revocable beneficiary, and that there are rules regarding who can receive the policy’s death benefit and the type of access they have to the payout.
What is a life insurance beneficiary?
A life insurance beneficiary is a person or organization who will collect the money from your life insurance policy when you pass away. The money can be used for any purpose and it is usually tax-free. You can name any individual person as your beneficiary, and some people choose to name an organization, such as a church or non-profit, as their main beneficiary.
When you buy a life insurance policy, you also have the option to name two or more people as a beneficiary on your policy. This could be a spouse and a child, for example. You can also add a contingent beneficiary to your policy, who would receive your death benefit if the primary beneficiary were to pass away before they can claim the money.
Understanding an irrevocable beneficiary
There are two main types of beneficiaries — irrevocable and revocable. An irrevocable beneficiary is someone who has full rights to the funds from your life insurance policy. Even if you want to change the beneficiary on your policy, an irrevocable beneficiary will still be able to receive the death benefit because of the terms of the contract.
The only way to remove an irrevocable beneficiary from your policy is for them to agree to forfeit their rights to the money. This can often be a difficult situation, especially because removing an irrevocable beneficiary from your policy often involves lawyers. It is not as simple as contacting your insurance company to have a new beneficiary added to your policy statement.
Children are often named as irrevocable beneficiaries on their parent’s life insurance policy because it ensures they have access to the money. But it gets tricky when marriage is involved. For example, if you name your spouse as an irrevocable beneficiary but you get divorced years later, they legally still have rights to the money unless they agree to be removed.
When comparing a revocable beneficiary vs. irrevocable beneficiary, you can think of them as opposites. A revocable beneficiary is someone whose rights to your life insurance benefits can be revoked or changed while you’re still alive, should you choose to do so. You can remove them from your policy at any time, for any reason, and they do not need to approve this change. They also have no access to your policy and cannot make any changes.
With a revocable beneficiary, the policyholder can make changes to the portion of the death benefit that they will receive, either increasing or decreasing the amount of death benefit they will receive. There is no requirement to notify them if you cancel the policy.
Revocable beneficiaries are more common than irrevocable beneficiaries simply because your choices of beneficiary may change depending on time and shifts in circumstances. In turn, it makes sense to have the flexibility to make changes if the need arises. It’s typically simple to make a change to a policy that has a revocable beneficiary. If the beneficiaries are irrevocable, however, it becomes significantly complicated, or in some cases impossible.
Why would I want an irrevocable beneficiary?
People who name an irrevocable beneficiary on their life insurance policy often do so for peace of mind. For example, if you have a demanding job and your spouse primarily stays home with your kids, you might name him or her as an irrevocable beneficiary to ensure they have access to your life insurance funds in order to care for your family if you were to die unexpectedly.
As mentioned, many people choose to add their children as irrevocable beneficiaries to their life insurance policy. This ensures that the children will have access to the money, regardless of what happens over the course of your lifetime. For instance, if you get divorced and remarry later in life, naming your children as irrevocable beneficiaries means that your new spouse cannot attempt to claim the money or make changes to your policy after you die.
Frequently asked questions
It’s a good idea to review your life insurance policy annually to make sure it’s meeting your needs and that the beneficiaries and other information are correct. It may also be wise to take a look at your life insurance policy when you experience any major life changes, such as getting married or divorced. In those cases, you may wish to change a beneficiary on your life insurance policy. For example, you might want to add your newborn child as a beneficiary of your policy. Doing so should not affect your life insurance premiums.
If you get divorced and your ex-spouse is an irrevocable beneficiary, you might be in a tough spot. You can get them removed from your policy, but only if they agree to forfeit their right to the money. If they do not agree to be removed, they will still legally have access to your death benefit.
The best life insurance company is different for everyone. It depends on the type of policy you need, how much coverage you need, your age, your overall health condition and your budget. However, some of the providers that stand out for offering great customer service, financial stability and robust coverage options are Prudential Financial, Nationwide and MassMutual.