Revocable vs Irrevocable Beneficiary

When shopping for life insurance, there are a few decisions you have to make. 

Any life insurance application will ask you common questions about your health and lifestyle, but it may also ask you some more complicated questions about beneficiaries.

In particular, you must choose your beneficiaries and whether you want the ability to change them in the future (revocable vs. irrevocable). There are many factors to consider when making this decision. Let’s discuss them in more detail.

What is a life insurance beneficiary?

The main purpose of life insurance is to give your loved ones a financial safety net in case you pass away. Life insurance beneficiaries are the people or entities that you've designated to receive a life insurance payout in the event of your death. 

Different types of beneficiaries

The first person mentioned in your life insurance policy is the primary beneficiary. They will be the first to get a payout upon your death. A contingent beneficiary, also known as a secondary beneficiary, is a second person named on a life insurance policy. If your primary beneficiary dies before you, the policy's benefits will be paid to your secondary beneficiary. 

You also have the option of naming multiple primary and secondary recipients. It’s common to name both a spouse and your children as beneficiaries. They will eventually receive life insurance proceeds in the form of a tax-free lump sum payout to cover bills, living expenses, estate taxes, and burial expenses. 

As a final good deed, a policy owner may name a charitable organization as their beneficiary. You can also name your own business as a beneficiary, which is a common corporate planning strategy for things such as key person insurance or buy-sell agreements.

What is a revocable beneficiary?

A revocable beneficiary is a person or entity that can be changed in an insurance policy at any time. This kind of beneficiary is often used in estate planning to give more options for how assets will be given out. Your beneficiaries have no say in any changes you make, and changing your beneficiary is usually as simple as filling out a form. This method allows you to change beneficiaries at any time if your financial priorities change.

Should a beneficiary be revocable?

Making beneficiaries revocable is a common practice in estate planning. This eliminates the need to obtain several signatures to make a change to a life insurance policy. By doing this, you may keep your life insurance policy within your control. When one or more irrevocable beneficiaries must approve of policy changes, it becomes significantly trickier to accommodate changes.

What is an irrevocable beneficiary?

An irrevocable beneficiary is a person or entity who must agree to any changes to your life insurance policy.

You can't change the insurance policy's beneficiary or terms on your own, and you can't cancel it without the beneficiary's permission. As a result, irrevocable beneficiaries have a stronger claim to your death benefit. An irrevocable beneficiary is someone who has unrestricted access to the proceeds of your life insurance policy.

Should a beneficiary be irrevocable?

When using a life insurance policy as loan collateral, irrevocable beneficiary names are often required. In this scenario, a bank can be added as an irrevocable beneficiary on your life insurance policy. 

Loaning a portion of a life insurance policy's death benefit allows you, as the borrower, access to funds during your lifetime. Using this method, you can access your life insurance payout before you pass away. On the other hand, if you pay back the debt during your lifetime, the lender will agree to no longer be a beneficiary.

Irrevocable beneficiary status assures that money flows to the intended recipient. When a couple gets a divorce or legally separates, it's common for both partners to identify each other as irrevocable beneficiaries.

Assume that one partner passes away after the divorce has been finalized. Since they have died, their former partner will no longer get payments for alimony or child support. The life insurance payout makes up for this loss and gives them financial security for the future.

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‍Can I choose my underage children as beneficiaries?

In Ontario and much of Canada, children under the age of 18 are not entitled to any money left to them in an insurance policy.

If you want the money to go to the children, you'll need to select a trustee or administrator and create a trust for them. When you pass, the trustee or administrator will hold the death benefit in trust for the children until they reach the age of 18, at which point it will be paid to your child. It is critical to select a trustee in whom you can place your trust.

What if my beneficiary passes away before or at the same time I do?

It is possible to designate a secondary or contingent beneficiary. If your designated beneficiary passes away first or at the same time as you, the secondary beneficiary will be paid the death benefit. If you haven't named a second or alternative beneficiary, your death benefit will go to your estate.

Conclusion

As the policyholder, it’s important to review your beneficiaries on a regular basis. Your beneficiaries can change over time, and you want to make sure that the people you have chosen to receive your benefits are still the people you want to receive them. 

At Dundas Life, our expert life insurance agents can help you set up a new policy or make changes to an existing one to meet your changing needs. Book an appointment with an advisor today!