Who can own a life insurance policy? The most common way of ownership with life insurance is the primary insured to own the policy on themselves. The primary insured is the person’s life on whom the life insurance is written. The owner is the person who maintains all rights to the policy. Typically, the owner is also the payer as well. As the owner on the policy, the primary insured:
As the primary insured and owner, you’ll have full control over the life insurance policy from its inception to the day it ends. Since the policy is on your own life, typically you will also bear the responsibility of having any special instruction on the payout of the policy, such as within your will or trust. By purchasing life insurance on yourself, you are taking initiative in protecting the financial aspects of what you are leaving behind.
A spouse is the next most common owner of a life insurance policy. Some spouses will own life insurance on each other, as your spouse is generally someone with whom you share the greatest financial burden should something happen to them. A house, car or child could be a shared financial burden, or any item which might be co-signed by your partner. A spouse owning a policy on their partner also allows for the life insurance to be kept in the event of a divorce, where it can sometimes not only be mandated by the court system, but also a lingering protection against things like child support or alimony.
Often times a parent will own a small portion of life insurance on their children, whether it is an individual policy or a rider on their own policy. But also, a child can own a life insurance policy on their parent. Parents own life insurance on their children for things such as burial or simply protecting their insurability, but a child might own it on their parents because of alternative insurable interests. For example, if a child has agreed to pay all premiums for their parents long-term care policy because their parents can’t afford the premiums, the parent might allow their child to also purchase a life insurance policy on them to get a return of the premiums which were paid out to the long term care insurance.
A child may also purchase a policy on their parent to protect themselves from large estate taxes when the estate is passed down.
A business may take ownership in a life insurance policy on either its owners or other key people. This would allow the business to replace the lost revenue or expense of hiring a replacement. Buy/Sell agreements also allow for the surviving partner, if there were more than one, to use the proceeds from the life insurance policy to smooth over any changes in ownership after the first has passed.
A charitable organization may own a policy on just about anyone, as long as the person agrees. Let’s say a person was a long time contributor to a charity, but wants to discontinue making their annual contributions. They could, instead, buy a life insurance policy, pay a single premium up front, and name the charity as the beneficiary. They could then transfer ownership to the charity. The charity is now the owner and the beneficiary of the proceeds when the person passes.
A bank can own life insurance, and is even a category of life insurance on its own (BOLI–Bank Owned Life Insurance, or also COLI–corporate owned life insurance). Its typically put on the upper management of the company, and can be used for a deferred compensation plan for the insured. Banks typically use a whole or universal life insurance policy, and are actually one of the largest holders of life insurance in the United States.
Basically, if there is an established insurable interest, a case can be made to own life insurance on virtually anyone else’s life, should they agree. Co-signed loans, other debts, or some sort of dependency financially can be seen as insurable interest. Every company will ask to verify the interest, and some may even go as far as to ask for proof to be sure. A person can not simply go and purchase insurance on anyone they choose. A policy can also be denied if the insurable interest is not strong enough in the eyes of the issuing company.
Ownership can also be transferred where appropriate. For example, if a parent owns a small policy on their child, they could pass on the ownership when the child reaches the age of majority, or upon a life event such as marriage where the insured might want to change beneficiary from their parent to their new spouse. While ownership is not the most important aspect of buying a policy, the decision can make a big impact in the long run.