Life Insurance Policy Owner
What is a Life Insurance Policy Owner?
The Insured Person is the person whose life is covered by the life insurance policy.
When the Insured dies, the Death Benefit is paid out to the Beneficiary of the policy.
The Beneficiary is the person who receives the insurance money from the insurance company as proceeds of the policy.
Life Insurance Policy Owner Definition:
The Owner of the insurance policy is the person who owns and controls the policy.
The Insured is the person whose life is of concern to the policyholder – when this person dies, the benefit (proceeds of the life insurance) will be paid out.
The policyholder, who may or may not be the person whose life is insured, is also called the owner of the policy.
This person bears the responsibilities of maintaining the policy and choosing its parameters, including the amount of the death benefit designated for each recipient upon the death of the insured.
Finally, the Policy Beneficiary is the person to whom the money will be paid upon the death of the insured.
Sometimes the insured and the owner of the policy are not the same person.
For example, a company may buy life insurance on its partners in order to provide immediate cash in case of a sudden death.
In that case, the corporation might be the owner of the life insurance policy, rather than an individual.
Sometimes a spouse or parent is the owner of a policy that insures a family member.
What is the Policy Owner’s Role in Life Insurance?
The owner of life insurance is the person who has control over all of the insurance policy’s rights.
These rights include the right to change beneficiaries, the right to transfer ownership to another party, and the right to make material changes to the life insurance policy.
Material changes may include lowering a death benefit, adding or deleting a rider, or requesting a rating change for the insured person.
The owner is not necessarily the same person as the insured person, and while the owner of a life insurance policy may change, the insured person can never change.
What is the Owner of a Policy Entitled To?
The owner is entitled to 100% of the cash value of a life insurance policy (permanent insurance, not term).
While the person who pays the policy premiums does not have to be the owner, the policy cash value becomes the owner’s to control.
The owner is the only person who can take withdrawals or loans from an insurance policy, and the only person that can collaterally assign a policy for any purpose.
The owner is also the only person who can surrender the contract, regardless of whether or not the insured person wishes the policy to exist.
Who Can Be an Owner of a Policy?
- An owner can be a single person, two people, or a corporation or trust.
- An owner can also be a township or a non-profit.
- Any legal entity has the right to own life insurance, by law.
It is common for companies to own life insurance policies on their employees, especially key employees to the company to protect against the cost of replacing them if they were to die unexpectedly.
Trust-owned life insurance policies are common for wealthy clients, who use the trust to maximize tax efficiency when passing assets to other generations.
Policy Owner Decides Who are Beneficiaries
The owner of a life insurance policy is the person who decides who the beneficiaries of the death claim will be.
The owner is the only person who can change beneficiaries (as long as they are not irrevocable beneficiaries) and permission does not need to be taken from the old or new beneficiaries to enact the change.
Life Insurance Is an Asset for The Owner of the Policy
A life insurance policy is an asset for an owner, just like any other financial asset.
The value may be taxable if transferred, and a life insurance policy must be listed as a major asset for any legal purpose.
The only time a life insurance policy is not an asset is when the insurance is term coverage, as there is no cash value.
Owners Can Sell a Life Insurance Policy in Viatical Settlement
The owner is able to sell a policy for a percentage of the policies face value to a third party, before the insured person passes away.
This is known as a viatical settlement. Only the owner has this right, and does not need permission from beneficiaries or the insured person.
Owner of a Policy Can Be the Same as the Insured, But Not Always
The owner of a life insurance policy can be the same person as the insured, but this is not necessarily the case.
In fact, it is not tax efficient for the policy to be set up this way, because when the owner and the insured person are the same the death benefit becomes taxable.
If the owner and insured person are different, the benefit is not taxable as long as the owner and insured have been different for at least 3 years.
Sometimes to avoid this issue ownership is given to a trust, and usually the same trust is also listed as a beneficiary of the death claim.
Policy Owner Must Have Insurable Interest in the Insured Person
In order to maintain ethical uses for life insurance, laws require that an owner have what is known as an "Insurable Interest" or must be a direct family member, to the insured person.
This means that the owner must have a financial interest in the insured person living, such as a parent who invests in a child’s education, or a spousewho may depend in part on the income of the insured.
An insurable interest is a very broad definition, and encompasses many types of relationships, professional, familiar, and others.
Keep in mind, is the owner has all the control over a life insurance policy.
The owner has rights to the cash value, decides the beneficiaries, and can keep the policy active or not at their discretion.
The owner and insured person can sometimes be the same, but are not necessarily the same person. Life insurance can be owned by different types of entities.
Life Insurance Policy Owner Rights
The owner of the policy has several important responsibilities. Primarily, the owner must maintain the premium payments on the policy.
The owner must also choose the beneficiaries and other options on the policy, and has the power to borrow on the policy if this is allowed.
The owner enjoys all the rights of the policy until the death of the insured person, at which time the policy is "Paid Out" or liquidated.
Life Insurance Policy Owner Transfer
The policyholder owns and controls the life insurance policy. If you are the owner, you may name another person as owner to replace you at any time.
Choose a policyholder whom you trust. Only the policyholder can give up ownership of the policy.
This means that when you are no longer the owner of the policy, you cannot reclaim the policy for any reason, even if you are the person insured under the policy contract.
Contact the life insurance company and request a change of policyholder form. The insurance company will send you the form in the mail.
Complete the form. You must include your name, address, date of birth, Social Security number, policy number and the new policyholder's personal information.
Both you and the new policyholder must sign and date the form.
Submit the form back to the insurance company and await processing, which may take up to a week or longer.
The new life insurance policyholder will now be responsible for all premium payments and will have control over any other functions of the policy.
Life Insurance Policy Owner versus Insured and Tax
While the issue of ownership is sometimes confusing, the real problem with ownership of a life insurance policy arises when the insured and owner are the same person, and estate tax is assessed on benefits.
If a person dies and owns a life insurance policy on his own life, the beneficiaries will be paid according to the terms of the policy.
However, in this case, the money paid will be considered part of the owner’s estate, driving up the total value.
Estate tax, which can be exorbitant, will be assessed on any amount over the estate tax threshold, barring any changes in estate tax law.
If the policy is for more than this amount, this could mean substantial tax consequences for the estate of the deceased – sometimes up to half the value of the policy.
Some financial advisors may suggest that ownership of large life insurance policies be transferred to a beneficiary at least 3 years prior to the insured's death, which will avoid the estate taxes.
However, before transferring any policy’s ownership, it is important to consult with a financial expert to ensure that you understand all the consequences of this action.
Life Insurance Policy Owner vs Insured
The owner of a life insurance policy is the one who has the rights stipulated in the contract. These include the right to:
- Name a beneficiary
- Surrender the policy for its cash value
- Receive participating dividends
- Transfer ownership
The insured, who is often the owner of the policy, is the person whose death causes the insurer to pay the death claim to the beneficiary, who can be a person, trust, estate, or business.
Although the owner has the right to name the beneficiary, whether the owner can change the beneficiary depends on whether the beneficiary designation is revocable or irrevocable.
Can the Owner of a Life Insurance Policy be The Beneficiary?
Who can collect the life insurance death benefit?
Only the beneficiaries named on policies can collect death benefits from life insurance companies.
This is why it's so important for policy owners to regularly review their life insurance decisions to make sure the named beneficiaries still are the people who should collect the money – especially if you’ve experienced major life changes.
Th owner of the insurance policy may also be the beneficiary.
Examples of these may include a husband owning a policy on his wife and being names beneficiary. Or, a wife owning a policy on her husband and being names beneficiary.
In addition, adult children may own life insurance policies on their parents, and be named as beneficiary of the policies.
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Resources:
- Term Life Insurance vs. Permanent Life Insurance
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- Top 10 Life Insurance Companies
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