Irrevocable Beneficiary

The term “irrevocable beneficiary” is often used in connection with life insurance policies. An irrevocable beneficiary is an individual who is named as the beneficiary of a life insurance policy. Unlike revocable beneficiaries, an irrevocable beneficiary cannot be removed as a beneficiary of the life insurance policy unless they agree to be removed.

It might not make sense why a life insurance policy owner would choose to name an irrevocable beneficiary on the policy. After all, irrevocable beneficiaries are very difficult to remove once named, since removing the beneficiary requires the beneficiary’s approval.

But even though they might not be apparent, there are a few benefits to naming an irrevocable beneficiary:

First, it’s important to recognize that the irrevocable beneficiary does not change, even if the circumstances of the policy owner do change. Establishing an irrevocable beneficiary locks that beneficiary into place regardless of future circumstances.

Second, irrevocable beneficiaries are often used by small businesses to ensure business continuity. If two business partners own a startup together and one passes away, there needs to be something in place to ensure that the remaining business owner can continue to support the business. 

In many cases, the business itself will be named as the irrevocable beneficiary of the life insurance policy. This is often called a “key man” policy, as the death of a key employee may harm the life of the business. Establishing an irrevocable beneficiary for the business-owned policy is a great way to ensure business continuity.

Third, parents may choose to name their children as irrevocable beneficiaries to provide for their children’s financial future. This is especially common if the parents have a special-needs child. Naming the child as the irrevocable beneficiary of the insurance policy will ensure that the child is financially protected.

The “key man” policy is one of the most common real-world examples of irrevocable beneficiaries. Let’s suppose that Keith and John are co-owners of ABC Inc., a tech startup that the pair founded in Keith’s garage.

While John is more of the CEO and focuses on the “big picture” of the company, Keith is the technical genius behind the startup. Keith has programmed an app for the company and is in the process of launching the app. Because Keith’s skills are so difficult to replicate, Keith and John worry that the company will fail if anything ever happens to Keith. 

The co-owners decide to establish a life insurance policy for the business. They name Keith as a “key man,” meaning that Keith has technical skills that are vital to the startup’s success. They name the business as an irrevocable beneficiary. 

Unfortunately, Keith passes away in an accident two years later. Because the business is named as the irrevocable beneficiary of the life insurance policy taken out on Keith’s life, the business gains the proceeds of the policy. This ensures that the company is able to remain financially viable — or is at least in a position to pay off debts and not go bankrupt — even after losing its key employee.