Life Insurance Policy Ownership
Who actually owns a policy and can ownership be changed?
There are several types of policy ownership available. Policy ownership can usually be changed (depending on the terms of the policy). Ownership types are as follows:
- Self Owned. Owned by the life insured (ie: you)
- Joint. Owned by both you and your spouse/partner
- Cross ownership. Owned by your spouse/partner and visa verca
- Superannuation. Owned by your super fund.
- Trust or Company. Owned by a corporate entity (eg: your business or your employer).
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Who is usually involved in a policy?
There are three main components to a life insurance policy:
- The Policy Owner
- The Life Insured
- The Beneficiary
What is the role of the life insurance owner?
The insurance contract is an agreement between the policy owner and the insurance company. The key roles of the policy owner can include:
- Cancelling the policy
- Adjust the sums insured
- Make changes to listed beneficiaries
- Become the default beneficiary if there is no beneficiary selected
- Paying for premiums
Who can be the owner of the life insurance policy?
It’s important to understand the ownership structure of your life insurance policy. Each ownership structure has its own advantages and disadvantages, so read on to find out which one best suits your situation.
- Self Ownership: The most common and possibly the easiest to look after. This obviously means that the life insured owns the policy and therefore has full control over their own life insurance
- Joint Ownership: This is another ownership structure generally used if married or in a relationship. It gives both owners the ability to change sums insured and administer the policy. This may also make it quicker at claim time. However, keep in mind that any proposed changes to the policy must be approved and signed off by both owners, which can cause frustration. But relationship breakdown can result in difficulties with this type of ownership
- Cross Ownership: Also known as third-party ownership, this structure means that someone other than you will own your policy. This can be common with either joint venture partners (like a loan you and a parent takes out?), or a spouse. Once again, if that relationship breaks down and you have cross owned life insurance policies, difficulties may arise as you rely on the other person for control over your cover, and vica versa
- Through a super fund: You can also own a life insurance policy through your superannuation fund. This may not suit everyone, depending on a range of things including account balance, tax rates, and purpose for the cover
- Through a company or trust: Insurance policies can also be owned by a corporate entity. Businesses may take out key person insurance on an employee, and this lets them claim a tax deduction for the premium and also cover the loss of revenue resulting from the loss of a key person
Do you have the right structure?
Life insurance owner vs beneficiary
It’s important to point out that the role of the owner of a life insurance policy is different to the policy’s beneficiary.
The policy owner
The policy owner is responsible for paying premiums and ensuring the right level of cover remains in place. The owner can also make changes to the policy or even cancel it. At the time the insurance contract is created, the life insurance policy owner must determine the policy’s beneficiaries, and also has the authority to change those listed as beneficiaries at a later date.
Note: the policy owner can also be the beneficiary
A beneficiary, meanwhile, is a person who will receive your life insurance payment. Most people nominate their spouse or a child as their beneficiary, but who you choose is entirely up to you.
These types of beneficiaries are known as primary beneficiaries. If a person listed as a primary beneficiary dies before the life insured, however, the payment passes to others listed on the policy—these people are known as contingent beneficiaries.
It’s possible for policies to have multiple primary and contingent beneficiaries, and you can determine the amount (in terms of a percentage) you wish each beneficiary to receive.
If a minor child is listed as a beneficiary, a guardian or trust will need to be assigned to receive any funds.
What are the benefits and disadvantages of superannuation life insurance ownership?
If you’re considering taking out life insurance cover through your superannuation fund, consider first the associated pros and cons.
Benefits of taking out a policy through super include:
- Cover is usually cheaper because super funds can buy insurance policies in bulk.
- No individual medical checks are usually required to take out this type of cover as insurance is usually taken out as a group policy.
- The funds to pay for your premiums can be taken from your super contributions or those made by your employer. Therefore, if you are self-employed the premiums can be a tax deduction, and if your contributions are made as part of a salary sacrifice then they will be paid from your pre-tax income.
- Whereas previously you had to consider life insurance benefits paid from a super fund in your Reasonable Benefit Limits, which could create tax issues—those limits have now been abolished.
- Most super funds include some level of life insurance cover as standard. You may already have some cover in place and not even be aware of it, so even if something happens while you’re contemplating taking out a policy, you will probably be covered to a certain extent.
Life insurance through superannuation isn’t without its drawbacks. These include:
- You may not get a sufficient level of cover. Because superannuation policies are purchased in bulk, you’ll likely get a ‘one size fits all’ policy rather than cover that is tailored to your specific needs. This may not be enough cover for your circumstances.
- Any benefits are paid to your super fund, not straight to your beneficiaries. As a result, there may be a delay from the time of your death to the time the benefit payment reaches its intended recipients.
- You are not in full control of choosing your beneficiary. In some cases, the trustee of a super fund has absolute discretion over who receives the death benefit, so all potential beneficiaries are required to express an interest in the benefit.
- Different tax rules apply to life insurance policies held inside a super fund than to those held outside super. There are more limitations on who can receive a tax-free benefit payout—for example, life insurance payments from super fund policies are usually only tax free if the beneficiary is a dependent.
What happens if the life insurance owner dies?
What happens in these circumstances depends on whether the owner of the policy is also the life insured or not. If the policy owner and the life insured are one and the same, a benefit will be paid to the beneficiary and the policy will then be terminated.
However, if the policy owner is not the life insured, ownership of the policy would become part of the deceased’s will. Ownership can then be passed on according to the terms of the will or, if no such terms for transfer of ownership are set out, by laws of intestate succession.
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Updating life insurance policy ownership
It is not uncommon for people to need to make adjustments to the structure of their life insurance policy as their situation changes. Such changes can include;
- Change of policy owner
- Change of policy beneficiary
- Change of payment frequency
- Change of sum-insured
- Change of address listed on the policy
- Change of name on policy
In the event that you need to make adjustments to your policy, each insurer will have forms located on their website that can be accessed and resubmitted requesting a change to the policy ownership or beneficiary. It is worth noting that the policy can only be updated by the policy owner.
You can receive a no sales approach comparison on your existing policy below. Simply send us the basic details and we’ll do all the work for you, with some suggestions if needed.
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