Whether you have an existing life insurance policy or are considering purchasing one, understanding the differences between the policy owner vs insured is essential to grasping your rights, responsibilities, and overall control of the policy. This distinction can impact everything from who pays the premiums to who can make changes to the policy or access its cash value. Maximizing your policy’s value begins with evaluating your current financial situation and how the roles of policyowner and insured affect you and your beneficiaries.
This guide provides a comprehensive breakdown of who the policyowner and the insured are, and how each plays a vital role in a life insurance contract. We’ll also explore what it means when the policyowner and insured are the same person, versus when they are two different individuals—a scenario that can have important legal and financial implications.
Key Takeaways
- Owning a life insurance policy carries significant responsibility for you or a loved one. By knowing the key differences between the policyowner and the insured, you can make the best decisions for your policy based on your role.
- A policyowner is the individual who owns the life insurance policy, while the insured is the person covered by the policy.
- The key difference between the policyowner and the insured is that the policyowner must pay the premiums and is in charge of the policy; the insured doesn’t have to do anything unless the policyowner and insured are the same individual. Once the insured passes away, the beneficiary will receive the death benefit.
- You can determine if you are the policyowner or the insured by looking at your copy of the life insurance policy to see who is listed as the policyowner and who is the insured. If you can’t access your policy, contact your life insurance provider for details.
Detailed Explanation of Policyowner and Insured
When purchasing a life insurance policy, knowing the responsibilities and roles of a policyowner and an insured before initiating the policy is essential.
What is a Policyowner?
A policyowner is an individual who owns a life insurance policy. They are the people who can make changes to the policy, name beneficiaries, and manage the policy as a whole. Policyowners must also make the premium payments as they are the ones who took out the policy on the insured, which makes the policy and its maintenance their responsibility.
What is an Insured Person?
The insured is covered by the life insurance policy, which provides the basis for benefit payouts or coverage claims. They are not obligated to pay the premiums to keep the policy active unless they are also the policyowner. Once the insured passes away, the death benefit will be dispersed to the beneficiaries.
Key Differences Between Policyowner and Insured
The main difference between policyowners and insureds is the control over the policy. Since the policyowner owns the policy, they have the right to change the beneficiaries, surrender or sell the policy, and access the cash value component in cases of permanent life insurance. The insured does not have the same responsibilities and cannot make any decisions regarding the policy since they are only covered by the policy. However, if the policyowner is also the insured, then that individual is responsible for paying premiums since they have sole ownership.
Common Questions About Policyowners and Insureds
Considering the roles and responsibilities of a policyowner and insured is crucial to manage your life insurance policy successfully. This section will address common questions about policy ownership and the insured to clarify any misconceptions.
How Can I Determine if I am the Policyowner or the Insured?
- Locate your life insurance policy. Whether you have a physical or digital copy, try to find your life insurance policy because it contains all the necessary information. If you cannot find the policy, call your insurance provider to gather the information.
- Review the policy. Your policy will clearly indicate who the policyowner is and who the insured is under each title.
- Check who pays the premiums and can make changes. If you can pay premiums and make changes to the policy, you are the policyowner; however, if you don’t pay premiums and have no control over the policy, the policyowner is someone else.
Can the Policyowner and Insured Be Different People?
Yes, the policyowner and the insured can be different people. For instance, you can take out a life insurance policy on your spouse to provide yourself with financial coverage if something happens to them. It’s also possible to take out a life insurance policy on a parent or another loved one if their passing could cause financial strain due to a loss of income, paying off their debts, or other expenses (such as funeral costs).
If you take out a policy on another individual, they would be classified as the insured because the policy covers them, and you would be classified as the policyowner. As the policyowner, you would be responsible for paying premiums, naming beneficiaries, and performing any other policy maintenance. You could also sell or surrender the policy if you no longer want it on the insured.
Financial and Legal Considerations
When you or someone else purchases a life insurance policy, you should be aware of the financial and legal aspects related to the policyowner and insured. Some of these include certain tax implications, Medicaid considerations, and the role of a Power of Attorney (POA).
Role of a Power of Attorney
Under specific circumstances, a POA can manage a life insurance policy as the policyowner for the individual they represent. If precise language is met in the POA document that grants them permission to access and review the life insurance policy, they could have the ability to pay premiums, change beneficiaries, and surrender or adjust the policy on behalf of the original policyowner. Typically, the POA document must specifically state that the principal (the original policyowner) permits the agent (the POA) to modify and uphold the life insurance policy. Occasionally, proof of incapacity for the principal (such as a doctor’s note) might be required to prove that the agent has the authority over the policy.
Medicaid Considerations
If you have a life insurance policy with a policyowner who differs from the insured, there could be circumstances that impact Medicaid applications and asset evaluations.
When you apply for Medicaid, your assets will be evaluated to see if you qualify. If you are a policyowner with a life insurance policy that has a cash value component, it will most likely count as an asset. You might not be eligible for Medicaid if the policy you own has a high cash value.
If you are an insured on a life insurance policy and someone else owns the policy as the policyowner, the policy asset value might not count during the Medicaid qualification because you do not control the policy’s cash value. This gives you, as the Medicaid applicant, a better chance to qualify since you don’t have access to the cash value within the life insurance policy.
Tax Implications of Death Benefits and Ownership Transfers
When purchasing a life insurance policy, it is important to consider certain tax consequences from death benefit payouts and transferring policy ownership. Most of the time, the death benefit is not subject to income tax, so the beneficiaries will receive the entire amount when the insured passes. However, there are exceptions.
For example, if the death benefit is paid in installments that accrue interest, the interest earned will be taxed. There are also tax implications that come from transferring ownership of a policy. If you want to transfer policy ownership to another individual, it’s considered a taxable gift. If the policy’s value exceeds a certain amount —which changes yearly and is currently $19,000 per recipient —the person transferring ownership must fill out a gift tax return. Sometimes the lifetime gift tax exemption could prevent immediate taxation, since it has a much higher limit. The lifetime gift tax exemption allows individuals to give away $13.99 million of their wealth per individual in their lifetime. The lifetime gift tax exemption amount is subject to change.
Ownership Transfer Through Will and Probate
Transferring the life insurance policy can be more difficult if the original policyowner dies without naming a successor. The policy will most likely go through the probate process, during which the deceased’s assets will be distributed according to their wishes. The probate court will determine who becomes the new owner of the policy based on the terms in the will, and if there is no will, state intestacy laws will usually pass the policy to a close family member.
Once a new policyowner is established, they will have complete control, including paying premiums, changing the beneficiaries, and lapsing or selling the policy if they desire. Premium payments must still be made during the probate process so the policy doesn’t lapse before a new owner is named.
Practical Steps for Managing Your Policy
As circumstances change, you might need to update your insurance policies to reflect your current financial needs. Here are the steps you can follow when updating your life insurance policy:
Checklist for Updating Life Insurance Policies
- Consult with a financial professional. A financial advisor can help you decide how much you can allocate to premium payments, what type of coverage you need, and anything else you need to adjust to ensure you meet your financial goals.
- Review your beneficiaries. In circumstances such as the birth of a child, marriage, divorce, or death of a loved one, you may need to review your beneficiaries to see if they still align with your wishes. Whether you want to name a child as a new beneficiary or remove an ex-spouse, seeing who your beneficiaries currently are and updating your policy with who you now want to receive the death benefit for your policy is an important consideration.
- Assess your coverage needs and affordability. No matter what life changes come your way, assessing your coverage needs and how much you can afford ensures that you have the right amount of coverage for a price you don’t have to worry about. You might find that you want more coverage to secure a child or spouse’s financial future, but you also need to find a balance to ensure your premium payments fit your budget.
- Update policy ownership. If you have a policy with a different owner than the insured, transferring ownership to a new spouse or updating it after a divorce could prevent potential disagreements about policy management.
Tips for Naming Beneficiaries and Managing Policy Renewals
Here are some practical tips on correctly naming beneficiaries and effectively managing policy renewals to ensure continued relevance.
- Be specific with whom you are naming as a beneficiary, including their full name and relationship to you, to avoid any confusion.
- Add a contingent beneficiary to ensure that the payout will go to whoever you want it to in case something happens to the primary beneficiary.
- Avoid naming minors directly; instead, either name a legal guardian or set up a trust so that they can eventually get access to the funds.
- Review your beneficiaries regularly and make any necessary changes as circumstances change.
- Mark important dates in your calendar to review your policy and avoid it lapsing from missed premium payments.
- Review your financial situation and how much coverage you need, and stay informed about any changes to your policy.
- Be aware of changing premiums due to age, and make sure that they are still affordable and align with your needs.
By staying proactive with beneficiary designations and policy renewals, you can help ensure your life insurance continues to support your long-term goals. Just as important is knowing what your life insurance policy is actually worth. Understanding its current value can help you make more informed decisions—whether you’re planning for the future, considering selling your policy for a one-time cash payout, or simply making sure your coverage still fits your needs.
Comparative Analysis: Ownership Models
There are various ownership models of a life insurance policy that can impact policyowners and insureds. Below, we examine single- and dual-policy ownership and the different implications of owning a life insurance policy.
Single vs. Dual Policy Ownership
One benefit of single policy ownership is that you have sole control over your policy and can make any decision you want. As the sole policyowner, you don’t need to wait for anyone else to decide; thus, you can make decisions more quickly. Some cons are that if you become incapacitated, transferring ownership of the policy could be more complex. The policy also has the chance to become a part of your estate if you pass away without naming beneficiaries, which could cause a delay in payout or potential tax consequences.
For dual policy ownership, keeping the policy could be easier because the policy has two people maintaining it. Additionally, it can offer some estate planning benefits by ensuring a spouse is financially protected in the case of the other owner’s death. Complications can arise whenever something needs to change because any policy updates must be agreed upon by both parties, which can cause delays if there is a disagreement. And if two people were to divorce, determining who would become the sole policyowner could lead to further complications.
Implications of Different Ownership Models
Whether the policyowner and insured are the same or different, specific financial, legal, and practical implications must be considered. Having a separate policyowner and insured can provide financial benefits for the insured, as they are not responsible for paying premiums but are still covered under the policy. However, since the policyowner is in charge of the policy, any changes to the policy must go through them, even if the insured’s circumstances change. Legal complications can arise if the policyowner dies or cannot fulfill their duties before the insured dies. This can cause delays in transferring policy ownership and potentially cause other tax and estate planning considerations. A separate policyowner and insured can be helpful in specific financial planning strategies, such as business partners, to ensure a financial safety net for the business.
If the policyowner and insured are the same individual, that person has complete control over their policy and does not need to consult with anyone to make changes. So, while they have to pay the premiums, they can also change beneficiaries and further manage the policy to their liking. This allows for easy and efficient policy management since only one person is on the policy. Also, if the insured and owner are the same, they avoid legal complications since the owner has full control over their policy. Once they pass away, the death benefit then goes to their beneficiaries.
Inspirational and Success Stories
Understanding the difference between the policyowner vs insured can make a significant impact on how a life insurance policy functions—and ultimately, how it benefits loved ones. The following stories highlight the importance of this distinction and how proactive, informed policy management can lead to peace of mind and long-term financial security.
Real-Life Examples of Effective Policy Management
Retired CEO Unlocks Value from Term Policy
A 75-year-old retired CEO possessed an $11 million term life insurance policy provided by his company. Facing the options of assuming high premium payments, letting the policy lapse, or exploring a life settlement, he chose the latter. Coventry facilitated the sale, providing $2.75 million for a policy with no cash surrender value. The proceeds were used to establish a trust for his grandchildren, turning an otherwise valueless policy into a meaningful legacy.
Policyholder Transforms Underperforming Policy
An 87-year-old woman was dissatisfied with her universal life policy, which had underperformed despite being in its tenth year of a seven-year vanishing premium plan. Still requiring life insurance for estate planning, her attorney recommended a policy valuation. Coventry purchased the policy for $2.15 million—significantly more than its $705,000 cash surrender value. She utilized the funds to acquire a better-performing policy, aligning with her financial objectives.
Lessons Learned from Policy Management Experiences
Importance of Policy Valuation
These cases underscore the value of regularly assessing life insurance policies. By understanding the market value of a policy, individuals can make informed decisions, whether it’s selling an unneeded policy or restructuring existing coverage to better suit their evolving needs.
Aligning Policy Ownership with Financial Goals
Properly aligning policy ownership with one’s financial and estate planning goals is crucial. In the examples above, proactive steps taken by the policyholders and their advisors led to outcomes that enhanced their financial well-being and fulfilled their legacy intentions.
Conclusion
When purchasing a life insurance policy or evaluating one you already have, it is important to understand the differences in the policyowner vs insured relationship. While a policy can have one person serve as both the insured and the policyowner, it is also possible for them to be different individuals. Since these roles can be held by separate people, considering the unique responsibilities tied to each can help you better understand your position and what actions you may need to take for effective policy management.
One key difference is that the policyowner can decide whether they want to lapse or sell the life insurance policy. Since they are the decision-makers for the policy, they determine the outcome of the policy and how things move forward. If you’re interested in a policy valuation and want to find out if you qualify to sell your policy, reach out to Coventry Direct today!
