Many people choose to purchase life insurance to ensure that after they pass away their loved ones are provided for. This is possible because when you purchase a life insurance policy you are able to choose your beneficiary (or beneficiaries). But often, there are rules surrounding who can receive your 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.
Irrevocable beneficiaries can sometimes have the power to make changes to your life insurance policy, but it depends on the state. For instance, if you wanted to cancel your life insurance policy to ensure that your ex-spouse did not have access to your death benefit, they might need to approve the cancellation before it could be processed.
When comparing a revocable beneficiary vs irrevocable beneficiary, you can think of them as opposites. A revocable beneficiary is someone who does not have full access to the funds from your life insurance policy. 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.
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.
By: Elizabeth Rivelli
Posted: Mar. 1st, 2021
Frequently asked questions:
How often should I review my beneficiaries?
It is common for people to change the beneficiary on their life insurance policy as their life goes on. As a result, insurance companies recommend that you review your beneficiaries once per year. If a major life change occurs, like a divorce or marriage, it is a good idea to make changes to your policy sooner, in case anything were to happen unexpectedly. Adding beneficiaries to your policy will not affect your life insurance premium.
What happens if my irrevocable beneficiary is my spouse and I get divorced?
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 and depending on where you live, they may be able to make changes to your policy due to irrevocable beneficiary rights.
What is the best life insurance company?
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, MetLife, Haven and MassMutual.