The insured or the beneficiary: Who actually owns a life insurance policy?
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 can be owner by either the insured or the beneficiary.
- The policy owner. The owner can be either the insured, the beneficiary or a joint ownership between the two parties. The policy owner has full and total control and can cancel or change the policy.
- 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 a beneficiary.
- The beneficiary. This is the person who’s paid out in the event where the life insured passes away.
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What types of life insurance policy ownership are there?
Several types of policy ownership are available. Policy ownership can usually be changed, depending on the terms of the policy. Ownership types are as follows:
- Self ownership. Owned by the life insured.
- Cross ownership. Owned by the spouse or partner of the life insured
- Joint. Owned by both the life insured and their spouse/partner
- Corporate-owned life insurance (COLI). Owned by a corporate entity, for example, the employer of the life insured.
Can ownership be changed?
Policy ownership can usually be changed, depending on the terms of the policy.
What is the role of a life insurance owner?
Because the insurance contract is actually an agreement between the policy owner and the insurance company, the policy owner has complete control over the policy in question. The key roles of the policy owner can include:
- Cancelling the policy
- Updating the policy to include additional benefits or options
- Adjusting the amount insured
- Making changes to listed beneficiaries
- Becoming the default beneficiary if there’s no beneficiary selected
- Paying for premiums
It’s important to understand the ownership structure of your life insurance policy. Each ownership structure has its own advantages and disadvantages, so read on to find out which one best suits your situation.
- 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 entails 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.
- 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, and this lets them claim a tax deduction for the premium and also cover the loss of revenue resulting from the loss of a key person.
Life insurance owner vs. beneficiary
It’s important to point out that the role of the owner of a life insurance policy is different to the policy’s beneficiary.
The policy owner
The policy owner is ultimately in control and oversees many aspects of the policy, such as:
- Paying premiums
- Ensuring the right level of coverage remains in place
- Determining the policy’s beneficiaries
- Can change beneficiaries at a later date
- Can make changes to the policy or even cancel it
- Can also be the beneficiary
A beneficiary is a person who will receive the life insurance payout upon death. Most people nominate their spouse or a child as their primary beneficiary, but who you choose is entirely up to you.
If a person listed as a primary beneficiary dies before the life insured, however, the payment passes to others listed on the policy — these people are known as contingent beneficiaries.
It’s possible for policies to have multiple primary and contingent beneficiaries, and you can determine the amount (in terms of a percentage) you wish each beneficiary to receive.
If a minor child is listed as a beneficiary, a guardian or trust will need to be assigned to receive any funds.
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 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.
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