What Is an Irrevocable Beneficiary?
An irrevocable beneficiary is a person – also known as a beneficiary – who is named by another to receive benefits from a life insurance policy in an agreement that cannot be changed without the permission of the beneficiary. This is the opposite of a revocable beneficiary, whose benefits may be altered by the person who takes out the policy. In many cases, this type of beneficiary is named as a way of meeting a financial obligation, like when a person owes money to an ex-spouse. With this type of agreement, a contingent beneficiary is often named to receive the benefits should the irrevocable beneficiary die before the person who bought the policy.
Life insurance is a way for people to leave behind a sum of money after they die to ensure that friends and family are able to meet financial obligations in the aftermath. As such, a life insurance policy names certain people, known as beneficiaries, who will be the recipients of the money specified by the policy. Any time that the policy-holder wants to lock in a certain person who will definitely receive life insurance benefits, he or she names that person an irrevocable beneficiary.
The main benefit of being named an irrevocable beneficiary is that no part of the life insurance agreement concerning that person can be changed without his or her permission. What this means is that the benefits will definitely be transferred at the time of the policy-holder's death. In cases where this beneficiary dies first, the policy-holder can name a contingent beneficiary to receive the benefits that were originally conferred on the deceased beneficiary.
Not all beneficiaries need to be named an irrevocable beneficiary. Revocable beneficiaries may initially be named to receive benefits from a policy-holder, but this situation could change, for instance, if the policy-holder has a child, or if the beneficiary dies. In these cases, the policy-holder can revoke those benefits from those people and choose other beneficiaries. This could not happen when a beneficiary is named irrevocable, which is why the policy-holder must weigh the decision heavily before making such a declaration.
Using this type of beneficiary is one way for someone to meet financial obligations owed to another. This is often the case in divorce proceedings, when one spouse is deemed responsible for the financial situation of his or her ex-spouse. When this is the case, and the ex-spouse is named as an irrevocable beneficiary, it is usually accompanied by a court order certifying this agreement. This prevents the person holding the policy from cancelling it and negating the benefits meant for his or her former spouse.
You've also got revocable and irrevocable trusts which are important in estate planning. A revocable trust can be altered during the life of the grantor, whereas an irrevocable one cannot be.
It is fairly common for people with significant assets to protect to take out revocable trusts, which become irrevocable upon the death of the grantor. The grantor gets to live on the assets of the trust during his or her lifetime and the rest go to the beneficiaries after death. An advantage here is that a good trust spells out specifically who gets what upon death and there are some "death tax" ramifications that can be somewhat avoided with a solid trust.
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