Who's who on a life insurance policy
When it comes to life insurance, understanding the roles and responsibilities of parties to a life insurance contract is crucial. When learning about or purchasing a life insurance you may wonder:
- Who's a policy owner?
- Who is an insured person under a contract of insurance?
- Who is a beneficiary and what is their role?
In this article we will explain who's who on a life insurance policy to help you make decisions and choices related to protecting your financial wealth.
Parties to a life insurance policy: Key takeaways
In a nutshell, there are three main roles to a life insurance contract:
The policy owner :
The person who owns a life insurance policy and is responsible to pay the premiums. In most cases, a life insured and a policy owner are the same individuals, but they can be different individuals as well.The insurer :
The entity with whom a person enters into a contract to insure their life or lives of other individuals against a set list of risks. The insurer is usually a company that offers various coverage plans tailored to customer requirements. The ability to purchase a specific life coverage plan may be subject to them meeting eligibility criteria.
The beneficiary :
An individual named in a life insurance policy to receive a death benefit.
Understanding the roles of the parties to a life insurance contract:
Let's take a closer look at the key players involved.
The policy owner and life insured
When you purchase a life insurance policy, you become the policy owner. This comes with the responsibility of making timely payments towards that policy, which are commonly referred to as premiums. A life insured is the person whose life is insured under a life insurance contract. If you decide to insure your own life under a life insurance policy, you are both the policy owner and the life insured. If a life insured was to pass away, then, subject to applicable limitations and exclusions, a tax-free lump sum death benefit is paid to the beneficiary named in the policy.
As a policy owner, you can manage several aspects of the policy such as:
- Naming or changing the beneficiaries
- Deciding the amount and length of coverage
- Transferring ownership
- Renewing or cancelling the policy
- Updating the frequency of payments
The insurer
The company with whom you enter into a contract to insure your or someone else's life against eligible risks, is known as the insurer or insurance company. The insurer will assess the risk they are willing to take based on the life insured's personal information such as age, overall health, sex and other factors. They will also determine if a life insured applicant is in fact eligible for a policy and quantify the premiums payable by the policy owner. The insurer is also in charge of assessing a claim made under that policy by its beneficiary (described below) and paying out the death benefit where the claim is approved.
The beneficiary
This is the named person(s) or entity to whom a death benefit is paid upon the life insured person's death. The beneficiary could be a loved one, a trust, or even an organization such as a charitable institute. The beneficiary should be made aware by the policy owner of the policy's existence so they know to make a death benefit claim when the time arrives. Without this knowledge, it might be difficult for the insurer to find the beneficiary and some time-consuming investigations may be required. When it comes to the claims process, the beneficiary must complete the relevant form(s) and provide any other information required by the life insurance company.
Learn more about life insurance beneficiaries.
Example of a life insurance policy and the involved parties
Archer and Lana have two children, Roy and Chris who are young adults aged 18 and 20 respectively. Archer has purchased a life insurance policy insuring his life, for $900,000 of coverage which makes him the policy owner and the life insured. He has designated his family members as beneficiaries with equal shares. Should Archer pass away Lana, Roy and Chris, will each receive a tax-free lump sum of $300,000 which they can use however they wish.
In this example:
Archer is the policy owner and the life insured. Lana, Roy and Chris are the beneficiaries.
The policy owner can change the beneficiaries and the percentage of the benefit designated for each beneficiary (provided the beneficiaries have been designated as revocable) at any time while the policy is active.
Now that we've got a basic overview of the parties to a life insurance contract, you may also want to take a look at more life insurance terminologies.
To get started with a policy of your own, please proceed to our life insurance page.
FAQs
1. What happens to a life insurance policy when the policy owner dies?
If the policy owner is also the life insured, the death benefit gets paid out to the designated beneficiary. Where there isn't a beneficiary named, the benefit is paid out to the estate. In case the owner isn't the one whose life is insured; the policy passes to the estate as long as the premiums are paid for.
2. Can I change the owner or transfer the ownership of life insurance policy?
If you are the sole owner of the policy, you can change the ownership. However, if there's an irrevocable beneficiary designated on the policy, both the owner and the irrevocable beneficiary are required to sign off on any changes.
3. What happens if the beneficiary dies?
The policy owner can choose a primary beneficiary and a contingent beneficiary. If the primary beneficiary was to pass away before the life insured, the death benefit is paid to the contingent beneficiary. If no contingent beneficiary was chosen, the death benefit then becomes a part of the policy owner's estate.
4. Can the life insured also be the beneficiary?
No, the life insured and the beneficiary can't be the same person as the death benefit is only paid out once the life insured dies. In cases where there's no beneficiary to be named, one can simply arrange for the death benefit to become a part of their estate.
Share this article
The content on this page is for general information purposes only and does not constitute legal, financial or insurance advice. Speak to a licensed professional advisor regarding your specific situation.
The information contained herein, is subject to change without notice.