NEWS & ARTICLES

owner of life insurance policyThe owner of a life insurance policy is the person who has control over all of the 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 policy may change, the insured person can never change.

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.

What Is the Owner of a Life Insurance Policy Entitled To?

The owner of a life insurance policy is entitled to 100% of the cash value of the policy. While the payer of the policy premiums does not necessarily have to be the owner, the value becomes the owner’s to control. 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.

Who Can Be an Owner of a Life Insurance 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 policies are common for wealthy clients, who use the trust to maximize tax efficiency when passing assets to other generations.

Owner Decides the 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

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.

Owner Can Sell Policy in a 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 the beneficiaries or the insured person.

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 variable universal life insurance policy has different investment options, known as “sub-accounts”. 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.

Owner Must Have Insurable Interest In 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 spouse who 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.

Final Word on Life Insurance Policy Owners

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. A policy can be owned by different types of entities.

12 Comments

  1. What laws cover the above information.

    1. 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.

  2. Who becomes the beneficiary if the beneficiary passes before the insured?is it the owner of the policy?

    1. 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.

  3. Can the owner of her mother’s life insurance policy change the beneficiaries of the policy after her mother’s death?

    1. 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.

  4. Can the insured cash it in before the policyholder?

    1. 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.

  5. 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.

    1. 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.

  6. 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!!!

    1. 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.

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