What Is an Irrevocable Beneficiary?

An irrevocable beneficiary is a designated beneficiary on a life insurance policy that can only be removed as a beneficiary of the policy if you agree to do so. On the other hand, the policy holder can change a revocable beneficiary at any time.

Learn about the difference between the two types of beneficiaries, why you can choose one over the other, how an irrevocable beneficiary works to manage estate taxes, and the differences between contingent beneficiaries and irrevocable beneficiaries.

Definition and examples of irrevocable beneficiary

Life insurance policies are purchased to pay a death benefit when the policyholder dies. The person who will receive the money is known as the beneficiary. Beneficiaries are divided into two categories:

• Revocable: The policy holder can change a revocable beneficiary at any time.
• Irrevocable: An irrevocable beneficiary must agree to any changes to the policy, including removal as a beneficiary.

An irrevocable beneficiary is a designated recipient of income from a life insurance policy who controls whether changes can be made to the beneficiary of the policy. If the beneficiary is revocable, the policyholder controls the changes.

For example, a wife can include her spouse on her life insurance policy as an irrevocable beneficiary. If the couple divorces and the wife wants to remove the spouse from her policy, she will not be able to do so unless the spouse agrees to do so.

How irrevocable beneficiaries work

Beneficiaries are named when a life insurance policy is purchased. For example, a father may want to purchase life insurance so that his adult children receive sufficient funds to pay for a large funeral when he dies. He would name the children as beneficiaries and specify whether they were irrevocable or revocable.

If the parent decides they want a modest funeral, they may want to transfer the recipient to a favorite charity. If the children have been included as revocable beneficiaries, you simply need to contact the insurer and fill out a form to make the change. But if they have been listed as irrevocable, then he needs to receive signed approval from each child before the insurer makes the change.

In addition to beneficiary changes, other policy changes, including cash value withdrawals, policy loans, policy repayments, and ownership changes must also be approved by any irrevocable beneficiary.

But by making a beneficiary irrevocable, a life insurance policy can ensure that the beneficiary is protected against unexpected changes.

Why choose an irrevocable beneficiary?

The designation of an irrevocable beneficiary can be something you choose if you want to provide that person, no matter what, and are comfortable essentially giving them ownership of the policy. It may also be something you have to choose from. For example, in a divorce, the court may order you to name your spouse as the irrevocable beneficiary.

However, having an irrevocable beneficiary with a life insurance policy can serve another purpose, and that has to do with estate taxes.

Irrevocable Beneficiaries and Inheritance Taxes

Life insurance benefits are generally exempt from income tax and may also be exempt from property tax. But there are many exceptions to this rule. People who are likely to leave a property larger than the IRS property tax exemption (currently $ 11.7 million) should be especially careful not to run into problems.

For a life insurance policy to be exempt from property tax, it must be considered the property of the beneficiary. If the policy owner has no control, the IRS says the policy buyer has no equity. The policy buyer can pay for the policy (and is considered the owner by the insurer), but if the buyer has named an irrevocable beneficiary, they will have no control over the policy after the initial transaction. In other words, if an irrevocable beneficiary is named, the proceeds of the death benefit may be exempt from estate taxes.

To use life insurance to pay property taxes, the policy buyer must ensure that the benefits will not be paid to the property or will increase the property's value for tax purposes. Instead, the beneficiary (and owner) of the policy can be an irrevocable life insurance fund (ILIT). Profits are not taxed, as is trust. The details can be complicated, so anyone considering this should consult a probate attorney for advice.

Why choose a revocable beneficiary?

The choice of a revocable beneficiary is common and does not mean that the policy buyer is fickle - the choice guarantees flexibility.

For example, someone may want to provide benefits to their spouse, but they also want to be able to change the beneficiary in the event of divorce or death. Or they may simply want to borrow or cancel their life insurance policy without getting their spouse's permission. This requires a revocable beneficiary.

Or parents may want to name their adult children as revocable beneficiaries until they are financially secure. If this happens, parents can choose a charity or other beneficiary at their discretion.

 

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Source: InsurEye Inc.

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