In part 1, we took a look at the definition of a beneficiary and the importance of naming one when you’re taking out a policy.
Choosing a beneficiary though is more than just writing down a name- the type of beneficiary you choose impacts how paying the proceeds of your policy works and the flexibility you have to make changes, should circumstances change.
Understanding the difference helps you to ensure the policy works in the way you intended, for your beneficiaries.
Let’s break it down.
Revocable vs Irrevocable Beneficiaries
Before naming a beneficiary, you should understand the difference between revocable and irrevocable beneficiaries.
A revocable beneficiary gives you the flexibility to change the beneficiary at any time, once your policy is active, without needing the permission of the named beneficiary. You can simply contact your insurer and complete the necessary paperwork to effect the change. This is ideal for persons who may want flexibility to make changes as their life circumstances change. A real life scenario is:
John took out a life insurance policy when he began his first job at the age of 25. At the time, he was single and lived at home. He added his mother as the beneficiary on this policy. At the age of 34, John decides to get married to Tricia and they immediately start planning for a family after settling into their new home. John decides to review his insurance portfolio with his Agent and decides to remove his mother and add his wife as the beneficiary to his policy so that his young, growing family will not be placed in financial turmoil should the unthinkable happen.
An irrevocable beneficiary on the other hand is different. Using the same example, if John were to take out a policy once he was married to Tricia and listed her as his beneficiary, she would now be considered an irrevocable beneficiary- which means general policy changes and updates cannot be made without Tricia’s consent, including, but not limited to removing her as a beneficiary. Spouses and children are considered irrevocable beneficiaries and they cannot be removed, nor their share reduced without their written consent.
Primary and Contingent Beneficiaries
Now that we’ve taken a look at revocable and irrevocable beneficiaries, let’s talk about primary and contingent beneficiaries.
A primary beneficiary is the person first in line to receive the proceeds of your policy. A contingent beneficiary on the other hand is someone who acts as a “back up” in the event your primary beneficiary is no longer alive, at the time of the claim.
For example, with John and his mother, John would have added his mother as a primary beneficiary to his policy, also naming his sister as a contingent beneficiary. The mother, however, dies before John. At the time of John’s passing, his sister would benefit from the proceeds of this policy since the primary beneficiary has already died. Naming his sister as a contingent beneficiary also meant that she did not incur legal costs in trying to access these proceeds from John’s estate, instead, she was paid soon after her brother’s passing directly by his insurer.
Naming multiple beneficiaries
DID YOU KNOW that you can name more than one person as a beneficiary to your policy’s proceeds? This is especially useful for circumstances such as being married with kids, being single with younger siblings, being single with parents who rely on you for financial support to name a few. You can also allocate, based on percentages, how the proceeds are to be paid. For example, you may wish for your spouse to get 50%, your child 25% and your sibling 25% of your policy’s proceeds. All of this is possible with your life insurance coverage and can be discussed with your Agent!
What Happens When Life Changes?
Life rarely stays the same and your policy should be able to adapt with you! If your beneficiary is revocable, you have the flexibility to update, remove, add or replace them as needed. This allows your policy to reflect major life events such as marriage, the birth of a child, divorce or even death. If the beneficiary is irrevocable on the other hand, changes are a bit more restricted, requiring written consent to effect changes. The good news is at the time of taking out a policy, all of this is explained by your Agent who can guide you based on any concerns you may have!
Special Considerations for Minors
Naming a minor as a beneficiary to the proceeds of your policy on the other hand, requires a bit more thought and planning. Because individuals under the age of 18 cannot legally manage financial payouts, arrangements should be put in place to manage the funds until they reach adulthood and are able to manage the funds themselves. One option is to establish a trust, where a trustee manages the money on the child’s behalf until they turn 18 or reach an older age specified by you.
Why Choosing a Beneficiary matters
Choosing a beneficiary isn’t only about who receives the proceeds of your policy, it also impacts how the proceeds are handled and distributed. The right structure can make the claims process simple, straightforward and stress free for your loved ones, avoiding complications and delays.
It’s worth taking the extra time to discuss with your Agent and periodically review your policy details and update as needed.
Stay tuned for Part 3 of this blog, where we dive into common mistakes when naming a beneficiary and how you can avoid them!
Disclaimer- This blog does not constitute as legal advice and policy terms and conditions may vary across insurers. We recommend speaking to your Agent to best understand your policy terms and conditions.
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