With great power, comes great responsibility. And, this is certainly the case if you’re about to be an owner of a life insurance policy.
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 ensuring financial security for your loved ones. The vast majority of people choose to purchase a policy on their own life. This is typically the most straightforward and simple route to go, but there are other ownership options available to you.
Being the owner of a policy grants you several exclusive rights that allow you to modify the policy status (such as paying the required premiums) and outcome (who receives the death benefit). 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 purchase 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 cover themselves or their spouse/partner/fiancé
- 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 – 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 is the same person. However, if you’re interested in exploring other options, the following are additional ownership options available to you:
- Self: You may own a policy on your life, in which case you are the owner and insured
- Spouse/Partner/Fiancé: You can be the owner AND the beneficiary of a policy on your spouse, partner or fiancé.
- 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 purchase 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 co-signed a non-Federally funded student loan. Another example is a Trust Fund holding a policy for a minor. Yet not every life insurance provider allows for more complex policy ownership.
Why policy ownership matters
Policy ownership grants the following rights exclusively to the policy owner:
- Choosing the term duration of the policy
- Renewing or canceling the policy
- Naming and changing of beneficiaries
- Transferring ownership rights
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 and potentially cost them money by making the death benefit taxable as a gift (we discuss this further in a past blog post), at an already trying time.
Should you own your own policy?
Owning your policy is the most predictable form of ownership: you pay the premiums, you’re the insured, 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 ensuring your own financially security if your spouse 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 spouse 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 life. This way, you’re both covered and can make any necessary changes to your own life insurance policy.
Transferring policy ownership
If you think you’ll change your mind on who should own the life insurance policy, there’s no need to worry. Transferring policy ownership is easy. Simply complete the Owner Change Request Form provided by your insurer, and send it back to the company. Remember that once you transfer ownership, you no longer have control over the policy, including choice of beneficiary, or the ability to change ownership yourself.
Since term 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 a policy is purchased, it’s important for the owner to review it regularly, particularly in case of major life events, to ensure the policy’s coverage and ownership remain on track with its purpose.