Only an owner of a life insurance policy retains the abilities to name and change beneficiaries in a life insurance contract. While a policy’s owner and insured might be the same, a person can purchase a life insurance policy on someone else with the prospective insured’s consent and by demonstrating an insured interest in the insured’s continuing life. Under these circumstances, the insured forgoes his right to designate the contract’s beneficiaries.
In addition to choosing a policy’s beneficiaries, an owner assumes responsibility for all costs associated with the policy, including the contract’s premiums. Whether the owner and insured is the same person or not, only a policy’s owner possesses the right to access any cash accumulated within the policy. Although an owner’s choice to take a withdrawal from a policy may impact the benefit amount dispensed to beneficiaries upon the expiration of the insured, beneficiaries can neither prevent an owner from taking a policy loan nor compel him to pay back the funds withdrawn.
A policy owner identifies two tiers of beneficiaries when the insurance policy becomes a binding contract. Primary beneficiaries receive funds when the insured passes away. A contingent or secondary beneficiary receives funds at the time of the insured’s death if the policy’s primary beneficiary expired before the insured. Potential primary and contingent beneficiaries include current and former spouses, relatives such as children or parents, trusts, estates, charitable organizations and business interests. Unlike an owner of a life insurance policy, designated beneficiaries do not have to have an insured interest in an insured when identified in the contract or upon the death of the insured.
Revocable vs. Irrevocable
In the majority of instances, a policyholder maintains his right to change beneficiaries named in an insurance contract, meaning the identification of beneficiaries is revocable. In some cases, the naming of a beneficiary is irrevocable, meaning the policyholder cannot remove or replace the beneficiary with another entity or reduce the potential benefits the irrevocable beneficiary receives upon the insured’s expiry without the beneficiary’s express written consent. In the case of divorce, a judge may elevate the status of an ex-spouse to an irrevocable beneficiary in a life insurance contract to replace alimony he would not receive in the event of his ex-wife’s death, for instance.
Exercising caution and using precise language when identifying beneficiaries enables a policyholder to avoid disputes between beneficiaries upon the insured’s death. Acknowledging a beneficiary by name rather than status, Jane Doe instead of current wife, prevents confusion about who should receive death benefits, for instance. Creating a trust or naming a guardian to receive funds dedicated to a minor beneficiary is necessary for an insurance company to release funds for the child’s benefit. Insurance companies will not release funds to individuals who are not considered legal adults. If an owner holds a cash value policy, dividing the death benefit among beneficiaries as percentages accounts for fluctuations in the policy’s cash value. If a policy’s $100,000 death benefit increases by $25,000 due to accumulated cash within the investment account, dividing assets among four children in increments of 25 percent prevents the confusion which would result if an owner dedicates only $25,000 to each child leaving $25,000 unaccounted for, for example.