Definition
A revocable beneficiary is a person nominated in a life insurance policy or other similar agreement who can be altered or removed by the policyholder at any time without the consent of this designated individual. This process is subject to the terms of the policy. Therefore, ‘revocable’ refers to the ability of the policy owner to change the beneficiary designation as desired.
Phonetic
The phonetic pronunciation of the keyword “Revocable Beneficiary” is:Ree-voh-kuh-bul Ben-uh-fish-ee-ary
Key Takeaways
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- A revocable beneficiary refers to a person or entity that is given beneficial interest to a trust or insurance policy, but the designation can be revoked or changed by the policy owner at any time without consent from the beneficiary.
- Because the status of the revocable beneficiary is not final until the owner’s death, it allows the owner flexibility to change beneficiaries as life circumstances evolve. However, the control over the policy or assets remains totally with the owner, not the beneficiary.
- For a will, revocable beneficiaries will not have a claim or legal right to the assets until the death of the owner, and may be left with nothing if the owner decides to change the beneficiary before their death. However, if specified as beneficiaries, they may receive a more favorable tax treatment upon inheritance.
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Importance
The term ‘Revocable Beneficiary’ is an essential concept in business/finance, particularly in the sphere of insurance and estate planning. This term refers to a beneficiary designation in a life insurance policy or segregated fund contract that can be changed without the consent of the beneficiary. The policy owner reserves the right to change the beneficiary at any time until their death. It’s important because it offers flexibility to the policy owner, enabling them to modify their decision based on changing personal or financial circumstances. This is in contrast to an irrevocable beneficiary, whose permission is needed for any changes. Therefore, understanding the distinction is crucial when planning for future financial stability and the distribution of assets after death.
Explanation
Revocable beneficiaries, as a financial concept, serve a significant role in insurance and estate planning as flexible tools allowing policyholders to retain control over their plans. When an insured party designates an individual as a revocable beneficiary, it means the policyholder has chosen this person to receive the benefits of their insurance policy or aspects of their estate upon their death. The term ‘revocable’ signals that the policyholder can change the beneficiary, if needed, without the beneficiary’s consent, adding a layer of flexibility. This control over the policy allows them to navigate changes in circumstances or relationships, offering a sense of security in maintaining their final wishes.The purpose of a revocable beneficiary is to provide a clear path for the distribution of assets after the policyholder’s death, yet still allows for changes during their lifetime. This can include financial assets like life insurance policies, retirement accounts, or other monetary holdings that could become part of an estate. Revocable beneficiaries hold an advantage over wills or trusts because they provide immediate benefits without the need for probate, which can be a lengthy and costly process. Thus, the use of revocable beneficiaries is an important strategic decision in finance, providing a blend of flexibility, control, and efficiency in estate planning and wealth distribution.
Examples
1. Life Insurance: The most common scenario where the term ‘Revocable Beneficiary’ is used is in a life insurance policy. The policyholder can choose a revocable beneficiary who will receive the proceeds upon the death of the holder. However, as it is “revocable” , the policyholder maintains the right to change the beneficiary at any time without the beneficiary’s consent.2. Retirement Plans: Another real-world example can be found in pension plans or retirement plans like 401(k), IRA etc. The account holder may set a revocable beneficiary who is entitled to receive the retirement assets upon the death of the holder. The beneficiary title is revocable here implying the account holder can make changes to the beneficiary designation as and when needed.3. Trusts and Wills: In the legal documents like trusts or wills, a person can nominate a revocable beneficiary. This appointment enables the person to have the flexibility to revise the beneficiary as per their desire. It allows the person (grantor/trustor) to retain control and make modifications as long as they are alive.
Frequently Asked Questions(FAQ)
What is a Revocable Beneficiary?
A revocable beneficiary is an individual or entity named by a policyholder to receive the benefits of a policy or account in the event of their death. The designation is ‘revocable’ because the policyholder retains the right to change the specified beneficiary at any time.
What kind of policies can have a revocable beneficiary?
Policies such as life insurance policy, retirement accounts or annuities can have a revocable beneficiary.
Can a policyholder change a revocable beneficiary?
Yes, as the name suggests, a revocable beneficiary can be changed by the policyholder at any time, without requiring any consent from the previously named beneficiary.
What happens when the policyholder dies?
Upon the death of the policyholder, the policy’s benefits will be distributed to the revocable beneficiary or beneficiaries named in the policy at the time of their death.
Can the revocable beneficiary claim benefits while the policyholder is alive?
No, a revocable beneficiary cannot claim benefits from a policy while the policyholder is alive. They only have access to the benefits after the death of the policyholder, assuming they are still named as the beneficiary at that time.
Can a policyholder name multiple revocable beneficiaries?
Yes, a policyholder can name more than one revocable beneficiary. The policyholder can also decide the percentage of benefits each beneficiary would receive.
Is there a difference between a revocable and irrevocable beneficiary?
Yes, there is a significant difference between a revocable and irrevocable beneficiary. A policyholder can change a revocable beneficiary at any time without any form of consent from said beneficiary. In contrast, once an irrevocable beneficiary is named, the policyholder cannot change this designation without the written consent from the irrevocable beneficiary.
What happens if the revocable beneficiary dies before the policyholder?
If the revocable beneficiary dies before the policyholder, the benefits would typically go to the policyholder’s estate upon their death unless secondary beneficiaries are named in the policy.
How can a policyholder designate a new revocable beneficiary?
The process to change a revocable beneficiary varies from one institution to another. Often, it involves completing and submitting a form to the policy’s issuing company. It is recommended that the policyholder consult with the policy’s issuer for their specific procedures.
Does assigning a revocable beneficiary have tax implications?
Assigning a revocable beneficiary doesn’t typically result in a tax responsibility for the policyholder. However, depending on the nature of the policy and the benefits received, the beneficiary may have a tax obligations. As tax regulations can vary, it’s recommended that both parties seek advice from a qualified tax professional.
Related Finance Terms
- Life Insurance Policy: A contract between an insured and an insurance company where the insurer promises to pay a designated beneficiary a sum of money upon the death of the policyholder, often designating a revocable beneficiary.
- Irrevocable Beneficiary: Contrary to a revocable beneficiary, an irrevocable beneficiary is a beneficiary in a life insurance policy or segregated fund contract whose rights to receive payments from the policy or contract cannot be revoked by the policy owner without the consent of the irrevocable beneficiary.
- Insurance Premiums: Regularly paid amounts to the insurer by the insured to keep the policy in force, often relevant in arrangements involving a revocable beneficiary.
- Estate Planning: The process of arranging the disposal of an individual’s assets in the event of their death or incapacitation where the designation of a revocable beneficiary often plays a big role.
- Probate: The legal process of administering a person’s estate after their death, which could be affected by the designation of a revocable beneficiary.
