Life insurance is typically owned by an individual. While the policy owner and the insured are generally the same, this is not always the case. It is often expected that the policy owner is also the insured, or will outlive the insured named in the policy. However, if the insured and the policy owner are not the same person, you should be aware of what happens to the ownership of the policy when the policy owner dies.
Ownership vs. Insured
The policy owner is the person who owns the life insurance contract. The insured is the person whose life is insured under the policy. The policy owner controls all functions of the policy, can borrow any available cash value from the policy, can reassign ownership of the policy and can terminate the policy.
Death of the Insured
When the insured dies, the policy will terminate. This termination will result in the policy's death benefit being paid out to the beneficiary or beneficiaries named in the policy. A death claim needs to be filed with the insurance company. Once this is done, money will normally be paid within seven business days, but may depend on the individual policies and procedures of the specific insurance company.
Death of the Policy Owner
If the policy owner dies, and the policy owner and the insured are not the same person, the ownership of the policy will revert to the insured. If the insured is not beyond the age of majority (normally 18 years of age in most states), the policy ownership is transferred to a legal guardian until the insured has reached the age of majority.
One major consideration when setting up a life insurance policy is who will own the policy. Policy ownership can dramatically affect what happens to the life insurance policy. Because of this, life insurance companies will only allow policy owners to take out life insurance policies on people in whom the policy owner has an insurable interest. This normally includes only the policy owner and immediate family members (spouse and child). Other examples of insurable interest persons would be business partners.
A common misconception is that the policy owner is always the insured. This is usually true, however, there are instances where this is not true. For example, the policy owner may be a parent taking out a life insurance policy on a child or a businessman taking out a policy on his business partner.
- "Practicing Financial Planning for Professionals, practitioner's 10th edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007.
- "Ernst & Young's Personal Financial Planning Guide, 5th edition"; Martin Nissenbaum, Barbara J. Raasch, Charles L. Ratner; 2004.
- "Life & Health Insurance, License Exam Manual, 6th Edition"; Dearborn Financial; 2004.