Setting up a life insurance policy isn’t the most straightforward thing. It involves answering numerous questions and really thinking about future goals. While creating a policy, your agent will ask you questions about your health and lifestyle. However, there will also be some out-of-the-ordinary questions such as who to designate as your beneficiaries and whether they will be revocable or irrevocable.
In this article, we will explain the difference between revocable and irrevocable beneficiaries and how to designate them.
What Is A Life Insurance Beneficiary?
In simple terms, a beneficiary is someone who receives something like money or property. A life insurance beneficiary can be a person, multiple people, or an organization that receives your insurance policy death benefit.
While formulating your life insurance plan you will be asked by the insurance company to name a beneficiary. Most individuals designate their spouse or a child as a beneficiary.
A beneficiary will ultimately receive the life insurance proceeds as a tax-free, lump-sum cash payment to use for expenditures such as debt payments, estate taxes and funeral arrangements.
Minor children can be life insurance beneficiaries, however, most provincial laws restrict their control over any money left to them in an insurance policy. A minor beneficiary can receive payouts through an irrevocable trust until he/she reaches the age of majority.
Therefore, individuals should name a trustee or administrator and set up a trust for the children. The trustee can manage the funds on behalf of the minor child through the trust until they are legally able to hold that money themselves.
A policy owner can also designate a charitable organization as their beneficiary or they can select their business as a beneficiary.
If a policy owner does not designate a beneficiary, their estate will automatically become the beneficiary. As a result, creditors can access the life insurance payout and the money is subject to any applicable taxes, such as an estate administration tax. The remainder of the life insurance benefits is then divided based on the will or provincial laws.
Therefore, it is best to name a specific beneficiary so they get to enjoy the full life insurance benefits.
What Is The Difference Between A Revocable And An Irrevocable Beneficiary?
Most individuals designate revocable beneficiaries when creating their life insurance policies. The revocable beneficiary designation allows the owner of the policy to remain in control.
As a policy owner, you can change your revocable beneficiary/beneficiaries or change the percentage of payout going to them. A revocable beneficiary does not have any say in the changes you make. You can also change them by simply filling out a form.
Naming someone a revocable beneficiary gives you the flexibility to change beneficiaries at any time during the policy as your situation and priorities change.
On the other hand, an irrevocable beneficiary has a specific right to your policy.
An irrevocable beneficiary cannot be removed from the policy without their consent. Their share of the death benefit cannot be changed without their consent and they have to be notified if the policy owner cancels the policy.
An irrevocable beneficiary designation impacts the policy owner in several ways. If you decide to change the beneficiary on your policy, you’ll need the current irrevocable beneficiary to sign off on these changes. That can be a much more involved process than updating a revocable beneficiary.
People choose an irrevocable beneficiary if they want to guarantee that a certain person or entity will receive their payout. But with the passage of time, the dynamics of their lives change and they may decide to change who receives these funds. Making things more complicated.
Designating An Irrevocable Beneficiary?
Life insurance companies designate every beneficiary as a revocable beneficiary when you purchase a policy. They will only designate an irrevocable beneficiary when they are told to do so.
If you want to assign an irrevocable beneficiary, consult your insurance company. You may be able to update an existing life insurance policy to include an irrevocable beneficiary.
How Can I Remove an Irrevocable Beneficiary?
As mentioned above, removing an irrevocable beneficiary will require their consent. Keeping this in mind, as a policy owner you should choose an irrevocable beneficiary carefully.
We recommend that you designate someone as a revocable beneficiary initially, and once you are sure you can change their designation to an irrevocable beneficiary.
Is an irrevocable beneficiary the same as a primary beneficiary?
Meanwhile, contingent beneficiaries are second in line. A secondary beneficiary will receive the benefits from the policy if the primary beneficiary dies.
A policy owner can name multiple primary and secondary beneficiaries.
Life Insurance Planning & Advisory Services In Halifax
If you are seeking the right people to be alongside you during the setting up of a life insurance policy look no further than Eastport Financial. Located in the picturesque coastal city of Halifax, NS, our mission is to add meaning to financial flow to help you live with purpose!
Those seeking wealth management, investment, insurance, retirement, and estate planning advisory services should get in touch with our wonderful team of financial advisors.
Conclusion
Setting up the right life insurance policy is essential in order to secure the financial future of your beneficiaries. Choosing the right type of life insurance, and then deciding the designation of your beneficiaries calls for a lot of thought. With countless plans out there it can get confusing for most people.
At Eastport Financial, we understand that these are big decisions for you. We can cater to your life’s evolving needs by setting up the right insurance policy for you.
To learn more about how you can get started on setting up a life insurance policy, get in touch with one of our financial advisors today!
