When you purchase a life insurance policy, you choose one or more beneficiaries who will get the policy pay-out when you die. If you designate someone as the “irrevocable beneficiary” of your policy, that person has the right to a pay-out no matter what. You can’t remove that person’s name from the policy, even if you have a falling out or get divorced, without his or her consent. And who would consent to be taken off a life insurance policy?
Designating a Revocable Beneficiary
Designating a revocable beneficiary (i.e. a beneficiary you can remove from the policy at will and without obtaining consent) is the more common approach. It’s normal for there to be some amount of shuffling of beneficiaries as families change. You may choose to name the trust fund as a beneficiary when a new grandchild is born, for example.
With revocable beneficiaries, there’s paperwork involved in changing the policy beneficiary designations, but it’s certainly doable. The important thing is to communicate with all your beneficiaries, so that if something happens to you they know about the policy and can claim the funds. It’s a good idea to keep up with the various forms and follow through with your insurance company to make sure any desired changes to your policy have gone through.
Designating an Irrevocable Beneficiary
If you designate someone to be the irrevocable beneficiary of your policy, he or she, by definition, can’t be removed as beneficiary involuntarily. That’s why, if you’re considering designating someone as the irrevocable beneficiary of your life insurance policy, it’s best to be darn sure that your relationship with that person will endure, or that you have lasting financial obligations to that person. Many people choose their children as irrevocable beneficiaries. Naming a spouse as an irrevocable beneficiary is a little riskier, since there’s a chance (no offense!) of separation and remarriage to a different partner. You can still name contingent beneficiaries who will stand to gain if your irrevocable beneficiary predeceases you.
We should note that there’s some uncertainty when it comes to the rights of irrevocable beneficiaries. Some courts have ruled that an irrevocable beneficiary has veto power over any changes to a life insurance policy. Others have determined that the rights of an irrevocable beneficiary are limited only to changes that affect the beneficiary’s stake in the policy. Translation: irrevocable beneficiaries have the right to keep their name on the policy, but don’t have rights over things like changes to the size of the policy or loans taken out against the policy.
Irrevocable Beneficiaries and Divorce
In some cases, a policyholder will designate his or her ex-spouse as the irrevocable beneficiary of a life insurance policy. Why on earth would anyone do that, you ask? Well, sometimes it’s voluntary and sometimes it’s court-ordered. Here’s the logic:
If one member of a divorcing couple is required to pay alimony and child support, a life insurance policy acts as financial protection for the custodial parent (the one doing the childcare). But what if the alimony-paying spouse stops paying the life insurance premiums, cancels the policy or takes the ex’s name off the policy? The custodial spouse would be in a real financial pickle if the supporting spouse died. For this reason, divorce lawyers can request (and judges can rule) that the support-paying parent designate the custodial parent as an irrevocable beneficiary. That way, the custodial parent can keep tabs on the policy and take steps if payments lapse.
Revocable Beneficiary vs. Irrevocable Beneficiary
Are you prone to changing your mind? Can you imagine frequent calls to the insurance company requesting the forms to remove a beneficiary? If so, designating revocable beneficiaries is the right move.
On the other hand, if you have financial obligations to meet to a spouse or ex-spouse, obligations that you plan to honor no matter what (usually the case if kids are involved), an irrevocable beneficiary designation could give everyone peace of mind. Pre- and post-nuptial agreements often cover life insurance policies for this reason.
Another reason to consider naming someone as an irrevocable beneficiary is if you’re worried that someone might want to come between the beneficiary and your policy’s pay-out. For example, say you re-marry late in life but you intend for your assets to pass to your children from your first marriage, not the stunner you met at the Senior Center. In that case, consider naming your children as irrevocable beneficiaries on your life insurance policy. That way, in the (unlikely) event your new spouse turns out to be an evil step-parent, he or she won’t be able to influence you to change the policy in his or her favor.
One Last Thing…
Don’t assume that changes to your will can trump the terms of your life insurance policy. If you no longer want any assets passed on to a person you may remove them from your will, but also make sure that person isn’t still listed as a beneficiary of your life insurance. Unless, that is, the person is an irrevocable beneficiary, in which case you may be out of luck.
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