What Is an Irrevocable Beneficiary?

An irrevocable beneficiary is a person or entity designated to receive the assets in a life insurance policy or segregated fund contract. The beneficiary must agree to any changes in the rights to compensation from these entities.

Key Takeaways

  • An irrevocable beneficiary is a person or entity designated to receive the assets in a life insurance policy or segregated fund contract.
  • An irrevocable beneficiary is a more iron-clad version of a beneficiary. Their entitlements are guaranteed, and they often must approve any changes in the policy.
  • Irrevocable beneficiaries cannot be removed once designated unless they agree to it—even if they are divorced spouses.
  • Children are often named irrevocable beneficiaries, to ensure their inheritance or secure child support payments.
  • Naming an irrevocable beneficiary can also have estate-planning benefits, especially if the insurance policy is put in an irrevocable trust.

Understanding an Irrevocable Beneficiary

An irrevocable beneficiary has certain guaranteed rights to assets held in the policy or fund. It's a more iron-clad status than that of a revocable beneficiary, whose right to assets can be denied or amended under certain circumstances. 

With a life insurance policy, the policyholder may designate either an irrevocable or revocable beneficiary to receive a pay-out in the event of their death. If someone is listed as an irrevocable beneficiary, denial of income from the policy after the death of the insured is not possible. Nor are any changes made to policy payout terms—unless the beneficiary agrees to them.

For example, a spouse who is an irrevocable beneficiary has the right to a policy pay-out even after a divorce. The ex-spouse must agree to changes in the policy before or after the death of the insured. Even the insured cannot change the status of an irrevocable beneficiary once they are named.

Irrevocable beneficiaries also have to be notified if the policy lapses, or if an attempt is made to cancel it.

In some states, an irrevocable beneficiary has the right to veto any changes to an insurance policy, including cancellation. In other states, they may only challenge items that directly affect them, such as payout.

Irrevocable beneficiaries also come into play if you want to use an insurance policy as collateral for a loan. The lender—like a bank—would become the irrevocable beneficiary of the policy, meaning it would be entitled to the cash value and/or the death benefit if you defaulted on the debt, or died before it was repaid. This process is called collateral assignment. If the loan is repaid in full (while you're alive) the assignment is removed, and the lender is no longer the beneficiary of the death benefit.

Benefits of Having an Irrevocable Beneficiary

The main advantage to naming an irrevocable beneficiary is that it ensures money goes where you want it to. Difficult to change during your life and virtually impossible to alter after your death, it's for the bequests you're 100% sure of—and don't want to have to worry about keeping up to date.

Children are often named irrevocable beneficiaries. If a parent wanted to guarantee money to a child, the parent could designate that child as an irrevocable beneficiary, thus ensuring the child will receive death benefits from the life insurance policy or the segregated fund contract. Or, a parent might make their spouse an irrevocable beneficiary, to ensure this person has the means to support their offspring properly and not be dependent on someone else.

As a way to safeguard an inheritance, making a beneficiary irrevocable can be especially important in this era of multiple marriages and blended families. A step-parent can't "cut off" a child from a previous marriage or alter or challenge a policy after your death. In case of a messy divorce, naming a child the policy's irrevocable beneficiary, rather than a spouse, could be preferable.

Estate-Planning Advantages

Beneficiaries can protect assets in other ways. A beneficiary designation trumps any sort of bequest made in a will—and doesn't have to go through probate. The recipient will get funds faster this way.

Irrevocable beneficiaries can also play a role in estate planning. If you name a beneficiary on a life insurance policy, and then put that policy in an irrevocable life insurance trust (ILIT), the proceeds are then considered removed from your estate—thus avoiding potential estate and gift taxes after your death. An appointed trustee can supervise the trust and distribute the assets, which can be helpful in the case of minor or irresponsible beneficiaries.

Although irrevocable beneficiaries are pretty well-shielded to begin with, irrevocable trusts offer an additional layer of protection against legal challenges, as well. A beneficiary can't be sued by a creditor for these funds, because (except for the actual payout), the money's owned by the trust, not the individual.

Irrevocable Beneficiaries and Divorces

A policyholder can be ordered by a court to designate his or her ex-spouse as a designated beneficiary. Most often, this is seen in cases where there are dependent children, child support, or alimony involved.

In such a case, the ex-spouse can work with a divorce lawyer to persuade a court to make the policyholder designate the ex-spouse as an irrevocable beneficiary to secure child support. However, the court can also have the policy amended if it's deemed that the payout is excessive in regards to what is needed to support the child or at a time that the children are no longer seen as dependents. 

It's important to note, however, that state law ultimately decides the rights of beneficiaries to an insurance policy whether they be revocable beneficiaries or irrevocable beneficiaries. Policyholders should be clear with any beneficiary as to what the terms and conditions of a life insurance policy will be.

Irrevocable Beneficiary FAQs

How Often Should I Review My Beneficiaries?

Some financial planners, including insurance companies themselves, recommend that you review your beneficiaries annually. That might be unnecessary, especially if you have named irrevocable beneficiaries. However, whenever a major life change occurs—marriage, divorce, the birth of a child, or death—you definitely should look over your beneficiaries.

Is an Irrevocable Beneficiary a Primary Beneficiary?

Yes, irrevocable beneficiaries will always be primary beneficiaries. They take priority over revocable beneficiaries, forcing those others into secondary or tertiary status. It would be extremely rare for an irrevocable beneficiary to take second place.

How Can I Remove an Irrevocable Beneficiary?

Not without difficulty. Part of the perks of irrevocable beneficiary status is its permanency. Generally speaking, an irrevocable beneficiary can only be removed if the beneficiary agrees to be displaced, voluntarily surrendering their status.