An irrevocable beneficiary in a life insurance contract is a person or entity named as beneficiary that a policy owner cannot remove or alter without the approval/agreement of the beneficiary. Normally speaking, the beneficiary is not a party to the life insurance contract and has no authority over decisions the policy owner makes concerning him/her. An irrevocable beneficiary takes on a more active role in the contract and has certain rights not extended to regular beneficiaries.
Revocable versus Irrevocable Beneficiaries
Most beneficiaries named to a life insurance policy are revocable. The policy owner has the right to remove or alter their proportional share of the death benefit at any time. The insurance company is under no obligation to notify the beneficiary that a change took place. Additionally, if the policy owner chooses to cancel the life insurance contract, the insurance company has no obligation to notify the beneficiary of the policy cancelation.
The irrevocable beneficiary has several rights that differ from revocable beneficiaries. The policy owner cannot remove an irrevocable beneficiary from a life insurance policy without the beneficiary's consent. Additionally, the policy owner cannot change the irrevocable beneficiary's share of the death benefit without the beneficiary's consent.
Also, if the policy owner fails the pay the policy's premium or contacts the insurance company to cancel his/her life insurance policy, the insurance company must generally notify the irrevocable beneficiary.
How does one become an Irrevocable Beneficiary? An Example
Irrevocable beneficiaries most often come about when a legally binding agreement between a life insurance policy owner and another person/entity exists that necessitates the irrevocable designation. The most common example of this is a life insurance collateral assignment.
Under a collateral assignment, the policy owner pledged the policy's value as collateral in order to accomplish some goal. This is usually in order to borrow money from a lending institution such as a bank. In this situation, the policy owner pledges policy cash value, death benefit, or (most often) both as collateral for the loan. Under this arrangement, the bank becomes an irrevocable beneficiary of the life insurance policy.
It's important to note that while the bank technically becomes a party to the life insurance policy insofar as it now has the right to certain information, just like any other form of real property pledged as collateral, it doesn't own nor does it control the policy. The policy owner is still free to do what he/she wants to do with portions of the policy in excess of his/her obligation to the bank–though some insurance company can be easier than others to work with in this regard.
You can learn about using collateral assignments in our whole life insurance course Predictable Profits.
Once the policy owner establishes the collateral assignment, and the bank becomes an irrevocable beneficiary of the policy, the policy owner cannot then remove the bank as beneficiary nor can he/she change the bank's death benefit interest in the policy without the bank's approval. The only ways to remove the bank as a beneficiary are to repay the loan–which releases the collateral–or offer the bank a different asset as collateral. The bank would have to approve of the new collateral.
Irrevocable Beneficiary versus Primary Beneficiary
While most beneficiary designations come as primary, secondary, or tertiary, the irrevocable beneficiary takes the position as primary and can force other beneficiaries into secondary and tertiary status.
Take for example the above-mentioned collateral assignment. If the interest pledged to the bank is 100% of the life insurance death benefit, than any primary beneficiary in existence prior to the assignment becomes a secondary beneficiary. The irrevocable beneficiary will take priority over revocable beneficiaries.
This also means that irrevocable beneficiaries will always be primary beneficiaries. It would be extraordinary uncommon for irrevocable beneficiaries to be secondary or tertiary beneficiaries.
