Who can get life insurance? What are the related terms of coverage and responsibilities? When it comes to being the owner of a life insurance policy, there are three distinct roles related to one policy you should know about:
- the owner of the policy,
- the insured person, and
- the beneficiary.
When you get life insurance, the policy covers one person’s life, called the insured. The policy owner is the individual who has purchased the coverage on the insured’s life. The beneficiary is the person (or people) who will receive the death benefits (the money that is paid out by the life insurance company) when the insured dies. In this article, Quotacy focuses on the role of the owner of the policy and what it means to get life insurance.
The owner of a life insurance policy has control over the policy. The insured and policyowner are often the same person, but not always. The policyowner and beneficiary can also be the same person, but the insured and beneficiary cannot be the same person.
Being a policyowner has its benefits, but also the responsibility to keep the policy inforce, or active. A policyowner should also review the policy occasionally to make sure it still fulfills insurance needs.
Who can get life insurance?
Any person (an adult, not a minor) or legal entity can own life insurance on another person as long as there is insurable interest and mutual consent.
The most common example of insurable interest is a spousal relationship. If one spouse died, the surviving spouse would likely have trouble continuing to maintain his or her same standard of living (paying the mortgage, raising children, etc.) on one income.
Below are some common scenarios for the owner of the policy and the insured:
- A husband can get life insurance on his wife or same-sex husband (and vice versa),
- A parent can get life insurance on a child,
- A business owner can get life insurance on a key employee,
- A business co-owner can get life insurance on another co-owner, and
- You can get life insurance on yourself.
What does it mean to be a policyowner of life insurance?
Life insurance policy ownership means you have full responsibility and control of your policy.
Being the owner of a life insurance policy means:
- You determine how long your coverage lasts; either the length of your term life policy or lifelong, permanent coverage.
- You are responsible for paying the policy premiums each month or annually.
- You may transfer ownership of your policy.
- You choose the beneficiaries and change them, if necessary.
- You determine how the beneficiaries receive the death benefit proceeds.
- You can borrow against or withdraw from policy cash values, if you own permanent insurance.
- You can surrender or cancel your policy.
- You may review your policy occasionally to ensure it’s beneficial for you and your family.
When should owners review their life insurance policies?
Below are four common life events when we recommend that you review your life insurance policy:
- If you get married or divorced,
- If you have a baby or adopt a child,
- If you purchase a new home or a second one, and
- If you change jobs.
Marriage or Divorce
You would be surprised at how often someone with life insurance dies and ends up leaving their current spouse with nothing because their ex-spouse is still listed as the primary beneficiary of their life insurance policy.
If the policyowner forgets to update his policy to reflect the needed change of beneficiary, there is nothing the should-have-been-beneficiary can do about it.
New Baby or Adopted Child
If you purchased life insurance before having children (or adopting) and only purchased enough to cover your mortgage, but not the costs of raising your child or college tuition, consider purchasing more coverage.
Don’t forget to add any new children to your policy as well. However, if you name your children as beneficiaries and die before they reach legal age, the court will appoint a guardian to handle the proceeds until the child reaches 18 or 21, depending on the state. This is a costly and inconvenient process which is why we don’t recommend listing young children as beneficiaries.
» Learn more: Naming Minors as Beneficiaries: UTMA and UGMA
Instead, you should set up a trust to benefit the child and name the trust as the beneficiary of your life insurance policy or name an adult custodian for the life insurance proceeds under the Uniform Transfers to Minor Act (UTMA).
John Smith and his ex-wife Jane have a 10-year-old child named Lola. When he bought his life insurance policy, John set it up so that 100% of his death benefit would go to Jane, as custodian of Lola, his minor child.
John remarried. He and his new wife Nancy had a baby named George. John decides to update his life insurance policy so that 50% of his death benefit will go to Jane, as custodian of Lola, and 50% of his death benefit will go to Nancy, as custodian of George.
Good job, John. He just saved the moms of his kids a lot of stress and strain.
New Home or Vacation Home
Selling your bachelor pad and buying a house for your growing family? You may need more life insurance coverage to cover your mortgage.
If you’re buying your dream vacation home in the Florida Keys after you retire, you may want to take out another term life insurance policy to cover your extra mortgage payments. This can ensure your spouse or life partner can enjoy the fruits of retirement even if you were to unexpectedly die.
New Job or Contract Work
It’s a nice bonus if your employer offers a group life insurance plan, but when you change jobs, your plan won’t follow your new career move. It’s always a good idea to review your financial portfolio when you get a new job. Not all employers offer life insurance, so if you have a family, we recommend buying an individual life insurance policy to ensure you’re covered.
If you get a promotion that increases your monthly income substantially, will your family’s lifestyle change? This new salary may mean new cars, private school for the kids, or maybe even a lavish home. You may need to increase your coverage to protect your family’s new standard of living.
See what you’d pay for life insurance
Should I own my life insurance policy?
It’s quite common for an individual to be both the owner of the policy and the insured. Being both the policyowner and the insured keeps things pretty simple. Your life is strictly in your hands. There are certain situations, though, when this isn’t the best choice.
If you own your own policy, the proceeds become part of your federal taxable estate if your estate exceeds the exclusion amount. The exclusion amount for 2018 is $11.2 million per person, though this expires on December 31, 2025. State estate taxes differ by state and are in addition to the federal taxes. This includes any property you would leave to heirs as well.
Most Americans will not have this estate tax issue, however.
There is an exception to the estate tax rule. If you own your own life insurance policy and the beneficiary is your spouse, the policy proceeds are not included in your estate via the marital deduction law. You can transfer an unlimited amount of property to your spouse and not get hit with an estate tax.
Cross-ownership between spouses is also common. This means that a husband would be the owner of a policy in which the wife is the insured and vice-versa. The benefit to this is that because you are in charge of the policy on your spouse, you know you are financially protected should the unexpected occur and you have easy access to all the information required to receive the death benefit.
» Learn more: When Should Someone Else Own My Life Insurance?
How can I change the owner of my life insurance policy?
If you are the owner of your policy, you can transfer ownership. All you need to do is fill out a simple form and send it to the life insurance company. You can call the life insurance company directly and ask for this form. If Quotacy is your agency, you can always call us and we will get you the forms you need.
To fill out a change of ownership form, you’ll need the new owner’s following information:
- First name, middle initial, last name
- Their relationship to the insured
- Phone number
- Social Security number
A trust or organization can also own a life insurance policy. With these owners, you may need a few more pieces of information, such as what type of business it is (LLC, Inc., etc.) or the name of the trustees—but it is typically still the same simple change of ownership form.
When transferring ownership of a policy, there are some tax issues to consider. If you change owners to avoid estate taxes, but die within three years of making this change, the policy proceeds may still be included in your estate. When transferring ownership, the IRS also requires you to forfeit all legal rights to the policy. If any incidents of ownership occur by the person who transferred the policy, it may cause the policy to lose certain tax benefits.
The action of changing the owner of your policy may be simple, but check with a financial professional to see if there will be tax consequences. Before changing ownership, call your Quotacy agent to discuss the potential changes you want to make. If you have any further questions about policy ownership or are looking to change the owner of your policy, feel free to contact us. We’re happy to help. If you don’t have life insurance, get life insurance quotes at Quotacy today.