What is a Revocable Beneficiary

A revocable beneficiary does not have guaranteed rights to receive compensation from an entity such as an insurance policy or a trust fund. The policy owner reserves the right to make changes to who receives payment, change the terms of the policy, or terminate the policy without the need of revocable beneficiary consent. Most life insurance policies have this feature.

BREAKING DOWN Revocable Beneficiary

It is standard to designate children and spouses as beneficiaries, but the policyholder may choose whomever they would like. The policyholder may also name their estate, a trust account, or a charity as the revocable beneficiary. 

A policyholder must have completed a last will before they can name an estate as the trustee of their policy. Tax accountants and estate planners are instrumental in structuring a sound estate or trust account. 

A policyholder may name multiple revocable beneficiaries. These recipients can be broken down into primary beneficiaries and contingent beneficiaries. A primary beneficiary has first rights to payouts upon the policyholder's death. However, a contingent beneficiary has rights to the payouts should the primary beneficiary die. The policyholder may earmark the percentage of total payout each primary beneficiary receives, the timing of payout, and contingencies to meet before policy payout. A policyholder is free to change both primary and contingent revocable recipients as often as they please.

grantor trust offers a similar situation with estate planning. The trust or grantor designates a beneficiary, which they may change at any time. As with the insurance policy, the beneficiary of a revocable trust expects to obtain trust assets as designated in the trust agreement. However, he or she is not guaranteed anything.   

Irrevocable Beneficiary

A revocable beneficiary is the opposite of an irrevocable beneficiary. The latter has guaranteed rights to an insurance policy's pay-outs unless they agree to their removal from the policy as a beneficiary. Designating a revocable beneficiary is usually the best course of action as it allows you to change the beneficiary on the policy due to unforeseen circumstances. Designation of revocable beneficiaries is vital in cases of divorce and with business partnerships.

If a wife designates her husband as an irrevocable beneficiary of an insurance policy, for example, the wife remains the beneficiary even if a divorce follows. The same scenario may happen if a business lists a partner as an irrevocable beneficiary and later dissolve the relationship. To avoid legal troubles, the wishes of the policyholder must remain paramount, which becomes problematic with an irrevocable beneficiary.