IRREVOCABLE LIFE INSURANCE BENEFICIARIES
Enrolling in a life insurance policy can be a confusing process because you must navigate the complex language of the contract and face some very challenging choices about what you want to happen after you pass away. Life insurance is a contract between the insurance company and the insured. The insured, or policyholder, pays premiums in exchange for a guaranteed payout to their loved ones at the time of their death. When you enroll in a life insurance plan, you must select the policy's beneficiaries, or those who will receive the payout when you die.
Selecting a beneficiary is a critical step in the life insurance process, and depending on how you designate your beneficiaries, there can be serious consequences. An experienced life insurance attorney may be able to help you through the life insurance process or in the event that there is a dispute about your policy.
Revocable vs. Irrevocable Beneficiaries
What’s the Difference?
Beneficiaries may be either revocable or irrevocable. A revocable beneficiary is a somewhat self-explanatory concept – the policyholder has the right to revoke that beneficiary’s interest in the policy at any time while the policyholder is still alive. For many people, this may be the most logical and flexible choice. For example, imagine a young, unmarried person with no children begins a new job and enrolls in their company's life insurance plan. Perhaps they'll choose their parents or siblings as beneficiaries in the unlikely case of their death. It would make sense for these to be revocable beneficiaries, so if the young employee gets married or has a child, they can designate their spouse or children as their new beneficiaries instead. On the other hand, once named, irrevocable beneficiaries cannot be removed from the policy without their consent, even after a major rift in the family or a divorce. Irrevocable beneficiaries may also apply in the case of a business partnership, where one partner was listed as an irrevocable beneficiary of the other’s life insurance, even after the business partnership was dissolved.
Who Can Change the Beneficiary on a Life Insurance Policy?
The policyholder has the ultimate right to change the beneficiary on a life insurance policy. With a revocable beneficiary, the insured may change them at any time. However, if there are irrevocable beneficiaries on the policy, they may have a say as well. In some states, irrevocable beneficiaries “co-own” the policy, meaning any change to the policy requires their consent. In other states, their rights are limited to only changes that impact their specific interest in the benefit. Why, then, would any policyholder choose to designate an irrevocable beneficiary?
Why Designate an Irrevocable Beneficiary?
One reason would be to ensure their children are supported after they die. In some cases, policyholders must pay alimony or child support due to a divorce, so it makes sense to make the recipients of those payments irrevocable beneficiaries in case you die. In some cases, a court order may even require a policyholder to designate an ex-spouse or child as an irrevocable beneficiary. In other cases, some policyholders simply want to make sure they maximize the payout their loved ones receive, and they aren't worried about changing their minds.
Primary vs. Contingent Beneficiaries
Life insurance beneficiaries can also be designated as primary or contingent. A primary beneficiary is the first person or class of people who will benefit from the policyholder's death. In our example above, our new employee may designate their parents as their primary beneficiaries, meaning the parents will be paid the full amount of the insurance policy. The young new employee may be concerned about what would happen if their parents were to die before them, though, so they should designate a contingent beneficiary. If the employee chooses to make their siblings contingent beneficiaries, so if their parents predecease them, the death benefit's payout will be divided among the living siblings.
Understanding the difference between primary and contingent beneficiaries is important to know what happens if an irrevocable beneficiary dies before the policyholder.
What Happens If the Irrevocable Beneficiary Dies Before the Insured?
If you have designated an irrevocable beneficiary of your life insurance policy, it is advisable to choose a contingent beneficiary to receive their portion of your death benefit if the original beneficiary dies before you.
If your policy only has one beneficiary, and that beneficiary dies before you, this essentially leaves no beneficiaries to your policy. If you then die before updating your life insurance policy, then the death benefit will typically be paid to your estate, unless your policy indicates otherwise. This means it will be paid out according to your will, or, if you do not have a will, according to your state’s default intestacy rules. Though you may take some comfort that your life insurance benefits will land in your estate in the worst-case scenario, you should be vigilant to avoid this. Instead, make sure that your intended beneficiaries receive the payout from all those years of life insurance premiums you’ve paid.
What Happens If the Beneficiary Is Unclear?
Life insurance policies can become very murky as they change over time. Beneficiaries pass away, get divorced, and have disputes amongst themselves, among many other confusing scenarios. Insurance companies may file an interpleader in these cases, which is a lawsuit an insurance company brings if it anticipates a dispute between potential beneficiaries. The insurance company effectively asks the court to resolve the dispute by determining who is the rightful beneficiary under the policy. An interpleader is not an ideal way to resolve your policy dispute, so it is essential to make sure the terms of your policy and beneficiaries are clear.
With so many variables, it’s important to know what you’re signing up for when you buy into a life insurance policy. When a loved one dies, no one should have to worry about receiving the money they are entitled to. If you are concerned about a dispute between beneficiaries of a loved one’s life insurance policy, it's crucial to have an experienced attorney to help you bring it to a resolution and restore peace between your family and friends.