For millions of Americans, life insurance provides protection, access to tax-free emergency funds and other benefits as well. But policyowners are often unaware of the rules pertaining to the designation of their beneficiaries. These designations can be either revocable or irrevocable, and the ramifications of both choices need to be understood.

In most cases, the standard beneficiary option is going to be revocable, because most policyowners want the option of being able to change who they name as beneficiary if they desire. This obviously allows for flexibility in estate planning, and can also provide leverage to policyowners with unreliable beneficiaries, as it allows the insured to effectively disinherit the beneficiary if he or she becomes unreliable. This leaves the beneficiary without any tangible rights or interests in the policy, only the future expectancy of receiving the policy proceeds. Only upon the death of the insured does the beneficiary’s interest become tangible.

Generally, there are three situations where irrevocable life insurance beneficiaries are elected by the insured. The first instance pertains to estate planning, where making an irrevocable beneficiary election will reduce the value of the policyowner’s taxable estate by the amount of the policy death benefit. Business buy-sell agreements constitute another use of this practice. In this situation, each partner in the business must have the assurance of the other partners that they will be privy to the appropriate portion of the deceased partner’s death benefit proceeds. The receipt of these proceeds will then allow them to buy a proportional share of the deceased partner’s interest in the business. The final instance where irrevocable election of a life insurance policy may be appropriate is to satisfy creditors, who may not be willing to extend credit to the policyowner without assurance of repayment in the event of the policyowner’s death. For example, a lending institution may not be willing to make a loan to a small business owner unless he or she is willing to take out a life insurance policy that irrevocably names the lender as the beneficiary. This assures the lender that they will recoup their loan proceeds upon the death of the policyowner.