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Life insurance policy ownership
The insured or the beneficiary: Who actually owns a life insurance policy?
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 whose 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.
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
- Transferring policy ownership
- Naming beneficiaries and updating as needed
- Becoming the default beneficiary if there’s no beneficiary selected
- Paying for premiums
Who can be the owner of a life insurance policy?
Several types of policy ownership 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.
- Ownership on someone else. This form of ownership allows you to take out life insurance on someone else, while naming yourself as the beneficiary. However, you’ll need the person’s permission, and you’ll have to prove insurable interest — proof that you’d suffer financially if the die.
- 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. Once again, a divorce or relationship breakdown can result in difficulties.
- Business ownership. 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.
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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 become part of the deceased’s will. Ownership can then be passed on according to the terms of the will. If no such terms are in the will, ownership will be set by laws of intestate succession.
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, the policy owner becomes the beneficiary. After the policy owner dies, the money will to their estate.
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 to your policy, each insurer will have forms located on their website that can be accessed to request a change to the policy ownership or beneficiary. It’s worth noting that the policy can only be updated by the policy owner.
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 to get the best deal on a new policy, compare life insurance providers.
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