With a life insurance policy, the focus is often on the insured (the person whose life is covered by the policy) and the beneficiary (the person who receives money if the insured dies while the policy is in force). The third role associated with life insurance is that of the policy owner also called the policyholder. As we tell people at our Yuba City life insurance agency, if you are considering buying a policy, it is important to understand your role as the owner.

Ownership Rules

There are very few restrictions around owning a life insurance policy. Any adult or legal entity can have life insurance on another person. The only requirements are that there is what’s called an insurable interest (meaning the death of the insured would negatively impact the other party) and mutual consent. The most common life insurance scenario involves one spouse having life insurance on the other, so that the surviving spouse won’t suffer financial hardship if their partner dies. Other common policyholder/insured relationships include:

  • Parent owning a policy on a child
  • Business owning a policy on a key employee
  • Business co-owners having policies on each other
  • A person owning a policy on his/herself

Rights and Responsibilities of Policy Ownership

As a policy owner, you are responsible for picking the duration of the policy and paying the premiums. Doing so gives you a number of rights related to the policy. This includes:

  • The right to choose and change beneficiaries
  • The right to transfer ownership
  • The right to decide how beneficiaries will receive the proceeds from the policy
  • The right to borrow against the policy or withdraw cash value from it (if applicable)
  • The right to cancel the policy

As a policy owner you are also responsible for reviewing the coverage periodically to ensure it is at the appropriate level.

Owning a Policy on Yourself

Owning a life insurance policy on yourself sounds a little odd, but it’s not uncommon for people to be both the policy owner and the insured. Some people do this because the death benefit can be used to pay medical or funeral expenses. However, it’s important to note that in that scenario, the proceeds from the policy become part of your federal taxable estate (if your estate exceeds the exclusion amount) and may become part of your state taxable estate (laws vary by state).

Understanding the Power of the Policy

Life insurance is a powerful tool for ensuring the financial wellbeing of the beneficiary. If you are (or plan to become) a policyholder, be sure you understand what’s involved in managing it. If you’ve got questions, Ernstam Insurance in Yuba City is happy to provide answers. Call us at 530-751-1212.

No Comments Yet.

Leave a comment