An irrevocable beneficiary is a person or entity that is designated to receive certain assets or benefits upon the death of the person who has named them as the beneficiary in a life insurance policy or trust. The irrevocable part means that the beneficiary cannot be changed by the person who named them, and they can’t cancel the policy without the beneficiary’s consent.
Irrevocable beneficiary pros and cons
There are both pros and cons to naming an irrevocable beneficiary. Some of the pros include:
- Certainty: An irrevocable beneficiary cannot be changed, so there is no risk of the assets or benefits being distributed to someone else. This can provide peace of mind and certainty for both the person naming the beneficiary and the beneficiary themselves.
- Protection: An irrevocable beneficiary can also provide protection for the assets or benefits in question. For example, if the beneficiary is a child or grandchild, naming them as an irrevocable beneficiary can ensure that the assets or benefits will be used for their benefit and not squandered by a spouse or other relative.
- Tax advantages: In some cases, naming an irrevocable beneficiary can also provide tax advantages. For example, if the beneficiary is a charity, the assets or benefits they receive may be tax-exempt.
However, there are also some cons to consider:
- Lack of flexibility: Once an irrevocable beneficiary is named, it cannot be changed unless certain specific circumstances are met. This lack of flexibility can be a drawback if the person’s circumstances or desires change over time.
- Lack of control: An irrevocable beneficiary also has complete control over the assets or benefits they receive, and the person who named them as the beneficiary has no say in how they are used. This can be a concern if the beneficiary is not responsible with money or if the person naming the beneficiary wants to have some control over how the assets or benefits are used.
Reasons to have an irrevocable beneficiary
There are several reasons why someone might choose to name an irrevocable beneficiary:
- To ensure that certain assets or benefits are used for a specific purpose: For example, someone might want to ensure that their life insurance proceeds are used to pay for their children’s education, and so they might name their children as irrevocable beneficiaries.
- To protect assets or benefits from creditors or lawsuits: Naming an irrevocable beneficiary can also protect assets or benefits from creditors or lawsuits. For example, if someone has a large amount of debt, they might want to ensure that their assets are not seized by creditors after their death, and so they might name an irrevocable beneficiary to receive those assets.
- To avoid probate: In some cases, naming an irrevocable beneficiary can also help to avoid probate, which is the legal process of distributing a person’s assets after their death. Probate can be time-consuming and costly, and so naming an irrevocable beneficiary can be a way to avoid it.
When can an irrevocable beneficiary be changed
In general, an irrevocable beneficiary cannot be changed unless the person who named them as the beneficiary has a valid reason for doing so and obtains the consent of the beneficiary.
Revocable beneficiary vs. irrevocable beneficiary
A revocable beneficiary, also known as a changeable beneficiary, is a person or entity that can be changed or revoked by the person who named them as the beneficiary at any time. This is in contrast to an irrevocable beneficiary, who cannot be changed or revoked unless certain specific circumstances are met.
There are pros and cons to both revocable and irrevocable beneficiaries. Some of the pros of a revocable beneficiary include:
- Flexibility: A revocable beneficiary can be changed at any time, which allows for greater flexibility in case the person’s circumstances or desires change over time.
- Control: A revocable beneficiary also gives the person who named them as the beneficiary more control over the assets or benefits in question. For example, if the person wants to change the beneficiary to someone else, they can do so without needing the consent of the original beneficiary.
However, there are also some cons to consider:
- Lack of certainty: A revocable beneficiary can be changed at any time, which means that there is a risk that the assets or benefits will be distributed to someone else. This lack of certainty can be a drawback for both the person naming the beneficiary and the beneficiary themselves.
- Potential for disputes: If a revocable beneficiary is changed or revoked, it can lead to disputes among family members or other beneficiaries.
How often should you review your beneficiaries?
It is generally a good idea to review your beneficiaries on a regular basis, especially if you have experienced any major life changes such as getting married, divorced, or having a child. This will ensure that your assets or benefits are distributed according to your wishes.
It is also a good idea to review your beneficiaries if you have named a revocable beneficiary, as this will allow you to make any necessary changes to ensure that your assets or benefits are distributed according to your current wishes.
Are spouses automatically irrevocable beneficiaries?
No, spouses are not automatically irrevocable beneficiaries. In general, a person can choose to name anyone they wish as a beneficiary of their assets, including a spouse, family member, friend, or charitable organization. However, the specific terms of a beneficiary designation will depend on the type of asset or benefit being designated, as well as any applicable laws or regulations.
What happens if my irrevocable beneficiary is my spouse and I get divorced?
If an irrevocable beneficiary is named in a will or trust, and the person who named them as the beneficiary gets divorced, the divorce will not affect the beneficiary designation, and unless they agree to be removed they legally still have rights to the money.
What happens if an irrevocable beneficiary dies?
If an irrevocable beneficiary dies before the policy owner, the funds from the insurance policy will go to the contingent beneficiary. The contingent beneficiary is a secondary beneficiary who is named in the policy to receive the funds if the primary or irrevocable beneficiary dies before the policy owner. It is a good idea to name a contingent beneficiary at the time the insurance policy is purchased in order to have a plan in place in the event that the primary beneficiary dies before the policy owner. The contingent beneficiary can be revocable or irrevocable, depending on the terms of the policy.
Can a spouse override a beneficiary?
In a community property state, a spouse may have the right to claim some or all of the life insurance money if someone else is named as beneficiary, depending on the specific circumstances.
Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Additionally, in Alaska and Tennessee, spouses can choose to opt-in to community property laws.
In these states, spouses equally own any income earned during the marriage and any property purchased with that income, including life insurance policies. If a spouse uses “community property” to pay the life insurance premiums, the other spouse may be entitled to a portion of the life insurance proceeds. The extent to which the life insurance is considered community property depends on the type of policy and may vary by state. It is important to carefully consider these issues when naming a beneficiary for a life insurance policy.