Buying life insurance is a big decision, so it’s essential to understand the many terms that go along with it. Among the most confusing terms are owners, beneficiaries, and the insured.
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It sounds confusing, but the owners and the insured can be the same, or owners and beneficiaries can be the same, but the insured can’t be the beneficiary. When you’re the insured – it’s your life that is insured. If you die, the money must go to someone, which is your beneficiary.
So what does the owner of a policy do? Here’s how it works.
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Who is the Owner of a Life Insurance Policy?
The owners of the life insurance policy are the person who buys the policy. The owner has complete control over the policy, including naming beneficiaries, making policy changes, and transferring ownership.
Traditionally, the owner is the insured.
For example, if you bought life insurance on yourself, you are the owner and the insured. If you die, your beneficiaries (the people you name to receive the proceeds) receive the money. You also pay the policy premiums.
When is an Owner Not the Insured?
Sometimes people buy life insurance on others. For example, if you work but your spouse doesn’t, you may want life insurance on your spouse. If he/she died and was the primary caretaker of the house and children, you’ll need money to pay for services to help you.
In this case, you own the policy since you bought it, but the insured is your spouse, and you are the beneficiary. You would receive the proceeds if your spouse died.
To take life insurance out on anyone but yourself, you must have their permission. They must be of sound mind and be able to sign the application themselves, or it’s against the law.
What can an Owner of Life Insurance Do?
The policyholder or owner has a few major roles:
- Pays the premiums to keep the life insurance active
- Access the cash value of a permanent life insurance policy
- Take loans out of the cash value
- Choose or change beneficiaries
It’s important to understand that only the owner of the policy can do these things. The beneficiaries, even though they are entitled to the proceeds, cannot make any changes to the policy. The only exception is if the owner has a durable power of attorney and appoints the beneficiary as the person to decide when they are unable.
Who is the Payer of a Life Insurance Policy?
The payer is typically the owner. In our example above, you bought insurance on yourself, and you pay the premiums. You are the owner and the payer.
Who Owns a Life Insurance Policy when the Owner Dies Before the Insured?
If a life insurance policy owner dies, it becomes a part of the estate because the insured is still alive and the policy intact. If the owner named a successor in his/her will, the policy passes to the next owner. If no one was named, the policy goes to the next successor or successors in line. This may or may not be who you intended to take the policy from, so it’s important to include any life insurance policies you own in your will.
The owner of a life insurance policy has a lot of responsibility. He/she must pay the premiums, keep the policy up-to-date, and leave the policy in his/her will if the owner dies before the insured.
If you want to take life insurance out on someone else, for instance, your parents, you are the owner, and they are the insured, but remember, you always need the insured’s permission before you can conduct the transaction.