Understanding Irrevocable Beneficiaries

What is the difference between irrevocable and revocable beneficiaries in Canada?

Anna Dunaeva DLegal Anna Dunaeva January 30, 2023
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In the estate planning process, one of the most important decisions you can make is whom you will name as a beneficiary. This is the person who will inherit your assets when you die.

There are many different kinds of beneficiaries; however, in the context of life insurance policies, you will often hear the term irrevocable beneficiary. An irrevocable beneficiary is a type of beneficiary that can not be easily changed.

There are many advantages to irrevocable beneficiaries but very little flexibility. The level of control you would like will help you determine whether choosing an irrevocable beneficiary is right for your circumstances.

Life Insurance Beneficiary

When most people think about estate planning, they think about drafting a will. However, life insurance can also be an important tool for ensuring that your wishes are carried out after your death. By including life insurance in your estate planning, you can help to ensure that your loved ones are taken care of financially after you are gone.

When entering into a policy with your insurance company, you will likely be asked a series of questions about your lifestyle, habits, and who should receive benefits when you are longer with us. Including whether you would like to assign revocable or irrevocable beneficiaries to your policy and who that should be.

In the context of life insurance, an irrevocable beneficiary is the person who will receive the life insurance payout from your policy in the event of your death. Therefore, it is vital to choose someone you trust to handle the money wisely and who knows your wishes.

Irrevocable Beneficiary

An irrevocable beneficiary is someone who has been designated to receive assets from an estate, trust, retirement account, or life insurance policies. Once the designation is made, it cannot be changed or cancelled without the beneficiary’s consent. This type of designation is often used when someone wants to ensure that certain assets go to a specific person.

For example, a parent might name their child as the irrevocable beneficiary of their life insurance policy. This ensures that the child will receive the death benefit even if the parent remarries or changes their will.

While an irrevocable designation cannot be easily changed, it is important to review it periodically to make sure it still meets your needs. For example, you may want to change the beneficiary if your child gets married or has children of their own. However, you must get the consent of the designated beneficiary to do so.

Irrevocable Beneficiary vs Revocable Beneficiary

There are two types of beneficiaries: irrevocable and revocable. An irrevocable beneficiary is someone who cannot be removed from a life insurance policy, whereas a revocable beneficiary designation can be. This designation is generally only used in cases where there is someone deemed as high-risk, such as a child with a chronic illness. The idea behind an irrevocable beneficiary is that they will always have the coverage, no matter what happens.

On the other hand, revocable beneficiaries can have their status changed at any time by the policyholder. This is often done when there are changes in circumstances, such as a divorce or change in financial circumstances.

What Happens If You Don’t Name a Beneficiary?

If you do not name a beneficiary on your life insurance policy, the death benefit will typically be paid to your estate. Depending on the size of your estate and the province where you live, this could mean that your loved ones will have to go through probate in order to receive the money.

Probate is a legal process that can be both time-consuming and expensive, so it is important to name a primary beneficiary and at least one contingent beneficiary if you want to avoid these delays and costs. Contingent beneficiaries or a “secondary beneficiary” will be paid the life insurance funds if the primary beneficiary dies or is no longer able to receive them.

In addition, many life insurance policies have “living benefits” that allow policyholders to access a portion of their death benefit while they are still alive. If you do not have a named beneficiary, these benefits will generally be paid to your estate as well. As a result, naming a beneficiary is an essential step in ensuring that your life insurance policy meets your needs and preferences.

Who Can Be an Irrevocable Beneficiary in Alberta?

In Alberta, any person can be a beneficiary under a will, including charities, corporations, friends, spouses, common-law partners, parents, grandparents, children, grandchildren, and others.

When deciding whom to name as your irrevocable beneficiaries, you should take into account several factors, such as: whether the person is capable of managing the inheritance; whether the person is likely to need government benefits; whether the person is under age; and whether there are any possible conflicts of interest.

Naming a contingent beneficiary is recommended in case your primary beneficiary is unable or unwilling to act as beneficiary when the time comes. Usually, you can name more than one beneficiary for each item, and you can specify what percentage of the item each beneficiary will receive. You can also state that the beneficiaries will receive their share “in equal shares,” meaning that if one of them dies before you, their share will be divided among the surviving beneficiaries.

If you have any questions about whom to name as your beneficiaries or how best to provide for them in your will, you should speak with a will and estate planning lawyer before proceeding with naming your life insurance beneficiary. They should be chosen in accordance with your greater estate plan.

Advantages of an Irrevocable Beneficiary

Having an irrevocable beneficiary designation on your life insurance policy has several advantages. First, it ensures that your death benefit will be paid out according to your wishes. If you name a revocable beneficiary, they could change the beneficiary at any time, which could result in the death benefit being paid to someone other than whom you intended.

An irrevocable beneficiary designation protects your death benefit from creditors. If you name a revocable beneficiary and later experience financial problems, your creditors could potentially go after the death benefit to satisfy your debts. However, if you have an irrevocable beneficiary designation in place, your creditors will not be able to touch the death benefit.

An irrevocable beneficiary designation can help you avoid estate taxes or probate fees. For example, if you name a revocable beneficiary, the death benefit would be included in your estate and subject to estate taxes or probate fees. But if you have an irrevocable beneficiary designation, the death benefit will not be included in your estate and will not be subject to estate taxes or probate fees.

Disadvantages of an Irrevocable Beneficiary

There are some potential disadvantages to choosing irrevocable beneficiaries for your life insurance policy. For one thing, if your circumstances change and you want to change the beneficiaries, you may not be able to do so. Once someone is designated as an irrevocable beneficiary, they usually remain so for the duration of the policy.

Additionally, if the irrevocable beneficiary dies before you do, the death benefit will typically go to their estate unless you have other individuals named in the policy. As such, it’s important to carefully consider all of these factors before designation someone as an irrevocable beneficiary on your life insurance policy.

The bottom line is that naming a beneficiary is an essential part of your financial and estate planning. By taking this step, you can ensure that your assets will be distributed according to your wishes and that your loved ones will be taken care of in the event of your death.

At DLegal Calgary, we welcome you to discuss your will and estate planning strategies with us. We offer flat legal fees and dedicated service for a variety of estate planning matters.


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