The owner of a life insurance policy is the person who has control over all of the policy’s changes and rights. These rights include the right to change beneficiaries, which is significant because this is who gets the death benefit payout. Other rights include the right to transfer ownership to another party, and the right to make material changes to the life insurance policy. Material changes may include increasing or lowering a death benefit or face amount, 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 policy may change, the insured person can never change.
Importantly, the owner of a permanent life insurance policy can also claim the policy as an asset on their personal balance sheet. They have the right to take out loans or withdraw money from the policy. They may also use the policy as collateral for a loan or sell the policy to another person in what is known as a viatical settlement.
Who can be the owner of a life insurance policy? What is the owner entitled to? Below, we’re explaining everything you need to know about an owner’s role in a life insurance policy.
Table of Contents
- Rights of the owner
- Who can be an owner?
- Permanent Life Insurance is a Financial Asset
- The Owner Must have Insurable Interest in Life of Insured
- Final Word About Policy Ownership
Rights of the Owner
The owner of a life insurance policy is entitled to 100% of the cash value of the policy while the policy is still in force and before the insured person dies. While the payer of the policy premiums does not necessarily have to be the owner, the cash value of the policy becomes the owner’s to control. This is right up until the insured person passes away. Once that happens, the money no longer belongs to the owner but the full face amount is paid out to the insured (sometimes the owner and the insured are the same person or entity, and sometimes they are not).
The owner is the only person who can take withdrawals or loans from a 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. A life insurance policy can never be taken out on someone’s life without their consent, but once given they can not revoke it.
As mentioned above, the owner is also the only one who can make policy changes. The most common policy changes involve changing dividend options, converting a term policy to whole life, dropping riders from the policy, changing the face amount, or changing beneficiaries. If a beneficiary is irrevocable, they can never be changed.
Who can be an Owner of Life Insurance
An owner can be a single person, multiple people, or a corporation or trust entity. An owner can also be a township or a non-profit. Technically, 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 policies are common for wealthy clients, who use the trust to maximize tax efficiency when passing assets to other generations. Typically, the owner of the policy is also the beneficiary but it is not uncommon for them to be different people.
Life Insurance is a Financial Asset of the Owner
A permanent life insurance policy is an asset for an owner on their personal balance sheet. Just like other assets, 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.
Owner Can Sell Policy in a Viatical Settlement
Because the policy has value before the insured person dies and in addition, the life expectancy of the insured person can be projected it can be sold. While not for the full face amount, the owner is able to sell a policy for a percentage of the policy’s face value to a third party. This type of transaction is known as a viatical settlement. Only the owner has this right and does not need permission from the beneficiaries or from the insured person. Typically, a viatical settlement trades for a significant discount to the face amount, but more than the cash value of the policy.
Owner Of Policy Can Be Same As 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.
Owner Can Make Trades In A Variable Universal Life Insurance Policy
A specific right of the owner arises in the case of variable life policies. Because the cash value is invested in the market, there are choices to make regarding the way the cash is invested. A variable universal life insurance policy has different investment options, known as “sub-accounts”. These are essentially equivalent to mutual funds. The allocation of money into each sub-account is chosen by the owner, and only the owner has the right to reallocate money within the contract. It is wise for the owner of a variable policy to review the way that the money is invested at least annually with their financial advisor. It is also wise to rebalance when necessary, or set up an automatic rebalancing schedule. Well-chosen investments can result in much faster growth of the cash value of the policy.
The Owner Must Have an Insurable Interest in the Life of the Insured Person
In order to maintain ethical uses for life insurance and to prevent fraud, 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 spouse who may depend in part on the income of the insured person. An insurable interest is a very broad definition and encompasses many types of relationships, professional, familiar, and others. If you plan on owning a life insurance policy you must be certain that you have an insurable interest in the person who will be the “insured”. A person is always assumed to have an insurable interest in their own life.
Final Word on Policy Ownership
The most important fact to keep in mind is that 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 the insured person can sometimes be the same but are not necessarily the same person. As an owner, it is very important to understand your rights. As it is a complex financial instrument, a life insurance policy has many options even after it is issued. As the owner, the stewardship of the policy is ultimately in your hands. A well-educated owner has the best chance of maximizing the benefits and minimizing the cost over the lifetime of the policy.
What laws cover the above information.
Hi Jay,
Insurance is heavily regulated at the state level, and life insurance in particular has been subject to countless acts of fraud and court cases, both at the state and at the national level. Laws and regulations are enacted to protect both the consumer and the insurance companies, with each court case and decision playing a role in what goes into the language of each insurance policy. Each state has it’s own department of insurance, so regulations do vary a bit state by state.
Who becomes the beneficiary if the beneficiary passes before the insured?is it the owner of the policy?
If the owner named contingent beneficiaries, or tertiary beneficiaries, it will continue to pass down the line. If not, the money is paid into the estate of the insured and subject to probate.
Can the owner of her mother’s life insurance policy change the beneficiaries of the policy after her mother’s death?
Hi Laurel,
While the owner of the policy is the only person who can make beneficiary changes, this wouldn’t apply after the policyholder has passed away, at least not with most insurance companies. If there is any unwarranted delay in claiming the death benefit or if there is a change in beneficiaries after the policyholder dies, typically the insurance company will investigate and find out. While you probably have good intentions, in a broad sense insurance companies have to be on the lookout for fraud, which something like this could lead to. You can always ask your company and they can tell you what their policy is on this.
Can the insured cash it in before the policyholder?
The insured can never cash in a life insurance policy, only the owner of the policy has this right, and the money belongs to them.
If the owner and the insured are different, and the insured dies, does the cash value get counted for taxes for estate tax purposes or does the death benefit? Say it’s for a husband and wife, when this really matters.
If a beneficiary is named and the owner and insured are different, the money does not pass through the estate. You should consult with a CPA for specific tax advice since taxation and estate taxation are extremely nuanced.
I currently pay for life insurance through my yearly benefits with the company I work for. Are there any advantages or disadvantages to keeping it through my work or should I cancel that and go with a policy with an advisor outside of the company? In the current situation, the coverage and costs are the same whether it is through the company or an advisor. Thoughts? Thanks!!!
Make sure that you are issued the policy outside of your company before canceling anything through work. You should review the additional benefits and compare them. You may have more benefits with an outside advisor such as the waiver of premium rider, or a longer period of term coverage past your retirement age. You may also have the option to purchase additional life insurance at the same rate without any additional underwriting, beyond what you can purchase at work. Beyond differences like this, there probably isn’t much difference as long as you can keep the coverage at the same price if you separate employment.