Do you spend your evenings thinking about who should own a term life insurance policy on your life? Probably not, but it’s a very important factor to consider when putting financial protection into place for your loved ones. The vast majority of people choose to buy a policy that insures their own life. This is typically the most straightforward and simple route to go, but there are other ownership options available.
Being the owner of a policy, or policy owner, grants you several exclusive rights that allow you to modify the policy status (such as designating who pays life insurance premiums) and outcome (who receives the life insurance proceeds, known as the death benefit). Your beneficiary (or beneficiaries) can use the policy’s death benefit to help cover funeral expenses, meet day-to-day living expenses or plan for the future. It’s important to understand the potential impacts of choosing to own a policy on someone other than yourself or allowing your spouse or partner to buy a policy on your life.
Understanding the rights of policy ownership will help ensure the appropriate person in the household owns the policy and can help spare your loved ones the unintended stress that could come from mismanaged policy ownership.
What is a policy owner?
A policy owner is typically the person who:
- Is financially responsible for the premium payments
- Buys a policy to provide life insurance coverage for themselves or their spouse or partner
- Decides whether to maintain, renew or cancel the policy
- Designates beneficiaries
In deciding who should own the policy, it’s important to distinguish between the:
- Policy owner – defined above
- Insured person – the person whose life is insured
- Beneficiary – an individual, and less commonly, a trust, estate or business, who receives the death benefit
Who may own a life insurance policy?
Policies can be owned in a variety of ways. Most commonly, the owner and insured person are the same person. However, if you’re interested in exploring other options, the following are additional ownership options available to you:
- Spouse or partner: You can be the owner and the beneficiary of a policy on your spouse or partner.
- Any person or legal entity who you have an insurable interest in or has an insurable interest in you: Try saying that twice. Essentially, you can buy a policy on a person with whom you have a financial interest in his or her life. Or someone who has an insurable interest in you can purchase and own a life insurance contract on your life. One example is a parent who takes out a policy on their children, which typically happens if the parent has cosigned a private student loan. Another example is a trust holding a policy for a minor. Yet not every life insurance company allows for more complex policy ownership.
Why policy ownership matters
Policy ownership grants the following rights exclusively to the policy owner:
- Choosing how much coverage and for how long
- Naming and changing of beneficiaries
- Transferring policy ownership
- Renewing or canceling the policy
The above rights, and their impact on the beneficiary, are why policy ownership matters. Choosing an inappropriate owner for a policy could cause the beneficiaries more stress at an already trying time.
Choosing how much coverage and for how long
So how do you answer the question, “how much life insurance do I need?” A simple way of choosing a term life insurance policy length is to let an online life insurance calculator do the work for you. It will take into consideration your age, income, debts and family structure to provide you with a suitable recommendation for a term length and coverage amount.
Naming and changing beneficiaries
When you get down to it, the entire goal of life insurance is to protect your loved ones, which is why the selection of your beneficiaries is a crucial part of the application process.
You will need to designate primary beneficiaries and contingent beneficiaries. What’s the difference? A primary beneficiary is a designated individual, chosen by the policy owner, who would receive the proceeds of the insurance policy (the death benefit) if the policy owner dies while covered under the policy. A contingent beneficiary is your back-up. If for some reason the primary beneficiary is unable to receive the death benefit, the contingent beneficiary will receive the policy proceeds.
Typically, people list their spouse or partner as the primary beneficiary and their child as the contingent beneficiary. However, your beneficiary can be anyone whom you intend the life insurance proceeds to be paid to – that can be parents, friends, siblings, a favorite charity, a living or revocable trust and more.
It is important to review your beneficiary designations from time to time. This is especially true if you have a major life event, such as marriage or divorce. If your life circumstances dictate a change in beneficiary designation, it’s usually a simple process to change your beneficiary designation if needed.
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Transferring policy ownership
If you think you’ll change your mind on who should own the life insurance policy, transferring policy ownership is generally easy. Complete the Owner Change Request Form provided by your insurer, and send it back to the life insurance company. Remember that once you transfer ownership, you no longer have control over the policy, including choice of a beneficiary or the ability to change ownership yourself.
Since life insurance is crucial to financial protection for your family, choosing the right policy owner is an important decision for your household. Additionally, policy ownership shouldn’t be met with a set it and forget it mentality. After you buy a policy, it’s important for you to review it regularly to ensure your life insurance coverage and ownership remain on track with its purpose.
Renewing or canceling the policy
What if the coverage term for your term life insurance ends and you want to be insured for longer? Some policies allow for coverage to be extended.You can usually renew the policy annually, which gives you time to consider your options if you want coverage for longer. Be aware that those options will involve paying more in premium than you used to. As you get older, life insurance premiums become significantly more expensive, which is one reason it’s important to purchase the right amount – and length – of coverage for you when you first get life insurance, so you can lock in a low rate while you’re young and healthy. Ideally, you’ve chosen a long enough term length so that when your policy ends, you don’t need it anymore (your kids are grown, your mortgage is paid off), and you don’t have to purchase additional coverage at greater cost.
You can cancel your life insurance policy in a couple ways. Most life insurance companies have a “free look” period, usually 10 days, to cancel if you feel that the coverage is not right for you. You can also notify your life insurance company that you want to cancel coverage in force. Finally, if you don’t pay your premiums on time or within the defined grace period, which is typically a month after its due, your term life insurance policy will be cancelled.
Should you own your own policy?
Owning your policy is the most predictable form of ownership: You pay the premiums, you’re the insured person and you name your beneficiaries. Yet, some financial planners recommend cross-ownership between spouses whereby each person owns, and thereby controls, a policy on the other’s life:
- The benefit of cross-ownership is that you’re protecting yourself financially if your spouse or partner were to die suddenly. You’ll know all the information necessary to receive the death benefit.
- The disadvantage of cross-ownership is that you have no control of the policy on your own life. (Who wants an ex owning a policy on their life?)
If your spouse owns a policy on your life, find out whether you can be named a contingent owner. This way, you’ll have a right to own the policy if your spouse dies. Typically, it’s simplest and most common for couples to own individual policies on their own lives. This way, you’re both have coverage and can make any necessary changes to your own life insurance policy.
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Haven Life Insurance Agency offers this as educational information only.