Who Owns Your Life Insurance Policy?

The owner of a life insurance policy has a critical role. They are responsible for its continued payment and upkeep, and they have the right to name or change beneficiaries, transfer ownership, and cash value and dividends, if applicable. The owner of a life insurance policy can be the insured person or someone who purchased life insurance for someone else, such as a child or partner. The owner can change the beneficiary at any time by contacting the insurance company, but there are some cases where the owner needs approval to make changes. For example, if the owner lives in a community property state and bought the policy after getting married, they will need their spouse's permission to name someone other than them as the beneficiary.

Absolute assignment

An absolute assignment is the act of completely transferring the ownership of a life insurance policy to another party. This means that all rights, benefits, liabilities, and coverage are transferred to the new owner, who is referred to as the assignee. The original owner of the policy, or the assignor, does not need to state their reasons for the transfer or stipulate any conditions. The transfer of ownership is irrevocable, and the assignee gains full control of the policy, including the ability to change the beneficiary without the beneficiary's permission.

The owner of a life insurance policy has critical rights and responsibilities, including the right to name or change beneficiaries, transfer ownership, and receive dividends and cash value, if applicable. The owner is also responsible for paying the premiums. It is common for the owner and the insured to be the same person, but this is not always the case. The insured must provide honest and complete information during the application process and may have obligations related to maintaining specific health or lifestyle standards as stipulated by the policy.

Collateral assignment

A collateral assignment is a method of providing a lender with collateral when applying for a loan. In this case, the collateral is the face value of your life insurance policy, which could be used to pay back the amount you owe in the event of your death. It is a common requirement for business loans, and lenders may require you to get a life insurance policy to be used for collateral assignment.

Here's how to apply for collateral assignment of life insurance:

• Understand the requirements: Find out if your lender will accept collateral assignment of an existing permanent or term life insurance policy. If so, confirm that your current policy's death benefit amount is sufficient collateral for the loan. If the lender requires that you get a new life insurance policy for the collateral assignment, you may need to shop around for life insurance with a death benefit amount that's sufficient loan collateral.
• Apply for life insurance: If you're buying a new life insurance policy, you'll apply with the insurer. Once you're approved, double-check with your lender that the policy you've qualified for meets their loan requirements.
• Complete the collateral assignment form: Once your first life insurance premium is paid, you can proceed with completing a collateral assignment form via your insurer. On the form, you'll need to provide your lender's contact information so they can be added as the death benefit collateral assignee until your loan is repaid. The form also requires signatures from both the assignor (you) and assignee (your lender).
• Proceed with your loan application: Once your bank can confirm they're the collateral assignee for your life insurance policy, you can proceed with your loan application.

With collateral assignment, you should still name beneficiaries as usual, but the total death benefit available to them will depend on when you pay off your loan. If you pay it off before you pass away, your death benefit won't be affected. However, if you pass away before paying off your loan, the total death benefit your beneficiaries can file a claim for will be reduced by the amount needed to fully pay back your lender.

Irrevocable life insurance trust (ILIT)

An Irrevocable Life Insurance Trust (ILIT) is a type of trust that holds one or more life insurance policies. It is an important part of estate planning, helping individuals, families, and business owners meet a range of goals.

ILITs are irrevocable, meaning the insured cannot change or undo the trust after its creation. This allows the premiums from the life insurance policy to avoid estate taxes. The benefits from a life insurance policy can, therefore, avoid estate taxes and follow the interests of the insured. If the policy is not created under an ILIT, any insurance benefits plus other assets of the insured above the applicable exclusion amount could trigger both state and federal estate taxes.

ILITs are funded during the lifetime of the insured with one or more life insurance policies. They are set up between three legal parties: the grantor (who creates and funds the trust), the trustee (who manages the trust and pays insurance premiums), and the beneficiary/ies (who will receive the trust assets upon the grantor's death).

The benefits of an ILIT include tax advantages, asset protection, and government benefit protection. By removing taxable assets from the grantor's portfolio, an ILIT may help lower their current tax burden. It also helps protect legacy assets from potential creditors. For those with a family member with special needs, an ILIT can help set aside assets for their care without interfering with their eligibility for government benefits.

The main downside of an ILIT is that it is irrevocable. The grantor gives up all rights to the property in the trust, including who the trust beneficiaries are and the conditions under which they receive the assets. The cost of setting up and maintaining an ILIT may also be high, requiring professional fees and the filing of a gift tax return.

Change of beneficiary

The policyholder is the only person who can change the beneficiary of a life insurance policy, with rare exceptions. The policy owner has the right to name or change beneficiaries, and they can do so at any time, depending on the terms of the policy, without any penalty or fee.

To change the beneficiary, the policyholder must contact their insurance company and submit a change of beneficiary form, either online, on paper, or over the phone. The form will ask for personal information about the beneficiary, such as their social security number, and the reason for the change.

There are three instances when the policyholder may need approval to change the beneficiary:

• If they have given power of attorney to someone else, allowing them to make financial, legal, or medical decisions on their behalf.
• If the policyholder lives in a community property state and bought the policy after getting married, they will need their spouse's permission to name someone else as the beneficiary.
• If they have named an irrevocable beneficiary, they will need this person's approval to remove them from the policy.

It is important to keep beneficiary designations up to date, especially after major life events such as a birth, marriage, divorce, or death in the family. This ensures that the death benefit payout will go to the intended recipient.

Sale or gift

Gifting or selling a life insurance policy to another person is possible. However, there are some important considerations to keep in mind.

Firstly, it is essential to understand the difference between the owner and the insured. The owner of a life insurance policy has control over it and is responsible for paying the premiums. The insured is the person whose life is covered by the policy. The owner can be the insured person or someone who purchases life insurance for someone else, such as a child or a partner.

When gifting or selling a life insurance policy, the owner can either designate the recipient as a beneficiary or transfer ownership of the policy to them. If the recipient is designated as a beneficiary, they will receive the death benefit upon the owner's death but have no control over the policy. On the other hand, if ownership is transferred, the recipient becomes the new owner and gains control over the policy, including the ability to make changes, name beneficiaries, etc.

It is important to note that transferring ownership of a life insurance policy is a permanent decision. Once the transfer is made, the previous owner loses all power over the policy and cannot cancel the transfer or change the beneficiary. Additionally, there may be tax implications associated with transferring ownership of a life insurance policy. The transaction may be considered a gift by the IRS, and if the policy has a fair market value above a certain threshold, gift taxes may apply.

Another option for gifting or selling a life insurance policy is to establish a new policy for the recipient. This option is commonly chosen for young relatives who may not otherwise have life insurance. When establishing a new policy, it is necessary to provide proof of insurable interest, obtain the recipient's consent, and provide their personal information. Additionally, a medical exam may be required.

In summary, while it is possible to gift or sell a life insurance policy, it is important to carefully consider the options and potential implications, especially regarding taxation and the permanent nature of ownership transfers.

Frequently asked questions