Life insurance policy ownership

The insured or the beneficiary: Who actually owns a life insurance policy?

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How does life insurance policy ownership work?

There are three main components to a life insurance policy: The owner, the life insured and the beneficiary. Depending on the ownership type, the policy owner is generally either the insured or the beneficiary.

  • The policy owner. The policy owner pays for the policy and has full and total control to cancel or change the policy. The owner can be either the insured or the beneficiary, and some policies may have more than one owner.
  • The beneficiary. This is the person who files a claim with the insurer and receives the payment if the life insured dies. Some policies may have more than one beneficiary.
  • The life insured. This is the person who’s life is insured against them passing away. If the life insured passes away within the term of the policy, then a payment is made to the beneficiary.

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What are the responsibilities of the policy owner?

The key roles of the policy owner can include:

  • Canceling the policy
  • Updating the policy to include additional benefits or options
  • Adjusting the amount insured
  • Naming beneficiaries and updating as needed
  • Managing any investment components of the policy
  • Paying for premiums

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Who can be the owner of a life insurance policy?

Several types of policy ownership options are available. Policy ownership can usually be changed, depending on the terms of the policy.

  • Self ownership. Self-owned policies are perhaps the most common form of life insurance. The life insured owns the policy and has full control over their own life insurance.
  • Cross ownership. This common approach for married couples involves each spouse owning their partner’s policy. Cross ownership has its advantages, especially for those who rely on someone else for a stream of income. However, if you get divorced and you have cross owned life insurance policies, difficulties may arise.
  • Joint ownership. A hybrid of self and cross ownership, joint ownership allows you to still have some control over your policy. However, keep in mind that any proposed changes to the policy must be approved and signed off by both owners. This is usually called joint first-to-die term insurance. Once again, a divorce or relationship breakdown can result in difficulties.
  • Via a company or organization. Insurance policies can also be owned by a corporate entity. Businesses may take out key person insurance on an employee to cover the loss of revenue resulting from the loss of a key person.

What happens if the life insurance policy owner dies?

What happens in these circumstances depends on whether the owner of the policy is also the life insured or not. If the policy owner and the life insured are one and the same, a benefit will be paid to the beneficiary and the policy will then be terminated.

However, if the policy owner is not the life insured, ownership of the policy would typically become part of the deceased’s estate. At that point, there are a few possibilities for what could happen to the policy.

  • If a contingent owner designation was named in the policy, than that person will take on ownership of the policy.
  • The ownership can be passed on according to the terms of the deceased’s will.
  • If the will does not specifically mention the policy, whoever the will dictates as the primary recipient of the estate could inherit the policy ownership.
  • If there is no will, ownership will be set by laws of intestate succession, which may result in the policy being surrendered for its cash value.

What happens if the beneficiary dies?

If a person listed as a primary beneficiary dies before the life insured, the payment passes to others listed on the policy — these people are known as contingent beneficiaries. If all named beneficiaries die and the policy owner does not add any new beneficiaries, any money they receive will go to the policy holder’s estate if they die.

What can I update on my life insurance policy?

It’s not uncommon for people to make adjustments to their life insurance policy as situations change. Such changes can include:

  • Change of policy owner
  • Change of policy beneficiary
  • Change of payment frequency
  • Change of amount insured
  • Change of address listed on the policy
  • Change of name on policy

In the event that you need to make adjustments, each insurer will have different procedures to request a change, which may be as easy as filling out a form online. It’s worth noting that there’ll likely be tax implications when you make certain adjustments, like changing ownership. Talk to a tax lawyer to ensure you fully understand your tax obligations.

Bottom line

There are many different types of life insurance and ways to structure a policy. Talk with your loved ones to decide which option works best for you and will give the most benefit to them.

To learn more about your life insurance options and to compare providers, check out our helpful guide.

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