When one wants to buy a life insurance policy, one of the requirements is to name a beneficiary. A beneficiary is a person that receives the death benefit of the policyholder after his/her demise. There are mainly two kinds of beneficiaries namely; revocable and irrevocable beneficiaries. In this blog post, the focus would be on the irrevocable beneficiary.
What is an irrevocable beneficiary?
An irrevocable beneficiary is a type of beneficiary to life insurance that cannot be replaced. They have full right to the death benefits of the insured. The only way an irrevocable beneficiary can be removed as the primary beneficiary is if he/she gives up his right to the claim. They have more stronghold on a policy than a beneficiary whose right to a policy’s benefit can change at any time.
Most people name their children or spouse as their irrevocable beneficiary so they can have access to funds even after they(the policyholder) have passed on. Naming your spouse as an irrevocable beneficiary can be risky because should a divorce happen, they still have rights to your money, except they willingly give up their right to the benefits.
Changes cannot be made to the policy without the approval of the irrevocable beneficiary. For instance, if a spouse is named as an irrevocable beneficiary of the insured’s policy and they later got divorced, if the insured wishes to change the amount of coverage of the policy, the ex-spouse must approve of it before any changes can be made.
Read also: Adjustable Life Insurance
Advantages of having an irrevocable beneficiary
The primary advantage of having an irrevocable beneficiary is that you are able to plan the disbursement of your death benefit to your preferred beneficiary without having any alteration should you pass on, since changes cannot be made to the beneficiary.
People who name their child as an irrevocable beneficiary secure their future so they do not lack finances when they die. If it’s the spouse then the funds would ensure that their child/children would be properly taken care of.
If a policyholder dies naming a child from a previous marriage as an irrevocable beneficiary, the current spouse can not cut the child off his inheritance.
Disadvantages of having an irrevocable beneficiary
One of the disadvantages is that you would not have the freedom to change the terms of your policy at will no matter the reason as you need the approval of your irrevocable beneficiary before it can be done.
In the case of unplanned events where one may need to change their minds as to whom they prefer their beneficiary to be, it is almost impossible.
If you put your life insurance in an irrevocable life insurance trust, the benefits would be excluded from your estate and also would be excluded from paying potential gift or estate taxes, also since the policy is put in a trust, a trustee is assigned to disburse the proceeds. This is beneficial, especially in cases where the beneficiary is irresponsible or a minor.
One of the disadvantages of using an irrevocable trust is that since all decision-making power has Been bequeathed to a trustee, the policyholder would not be able to access funds in the event of an emergency.
Collateral assignment vs. irrevocable beneficiary
Collateral assignment simply means naming a lender as the primary beneficiary for your life insurance as collateral for the loan. policyholders can take out a loan using their insurance policy as collateral.
The lender would be named an irrevocable beneficiary of the policy, that is, the lender would have complete control over the policy benefits should the borrower be unable to pay the loan or dies before the loan is paid.
Most lenders would accept a permanent instead of a term life insurance because unlike permanent life insurance that accumulates cash value, term life insurance does not. Plus term life insurance might be too short to pay and may not be able to harbor the loan.
How Can I Remove an Irrevocable Beneficiary?
Without effort, you can’t. The permanence of irrevocable beneficiary status is its main benefit. In general, an irrevocable beneficiary may only be displaced if the beneficiary consents to the change and freely relinquishes their status.
Irrevocable beneficiary vs Revocable
Revocable: The policy owner maintains ownership in this kind of life insurance policy designation.
Irrevocable: An irrevocable beneficiary is a type of beneficiary to life insurance that cannot be replaced