The Differences Between Life Insurance Policyowners & Beneficiaries

Taking out a life insurance policy includes multiple individuals, such as the policyowner, the insured, and one or more beneficiaries. Whether you’re looking to purchase a life insurance policy, need to make changes to your current policy, or are exploring how to get rid of your policy, it’s important to know the difference between the various roles in order to make informed decisions about your policy. After all, it can be confusing to understand who has full ownership of a life insurance policy when talking about policyowners, insureds, and beneficiaries – so let’s dive deeper into the differences in ownership.

What Does Ownership of a Life Insurance Policy Involve?

Owning a life insurance policy means that a policyowner has purchased a contract that provides financial protection to their designated beneficiaries at the time of the insured’s death. As the policyowner, you pay premiums to the insurance company, and in exchange, they agree to pay out a death benefit.

There are many reasons why someone might purchase a life insurance policy, including:

• Providing for beneficiaries and dependents.
• Offsetting estate taxes and other expenses related to estate planning.
• Covering the financial responsibilities of a business owner.
• Providing funds for charitable giving.

Rights and Responsibilities of Life Insurance Owners

As a policyowner, you inherit rights and responsibilities with your life insurance policy. Knowing these can help you make critical decisions, like naming your beneficiaries, transferring policy ownership, and updating the policy along the way.

Here’s a list of rights you have as a life insurance policyowner:

• The right to transfer ownership rights to an owner of your choosing.
• The right to choose the type of life insurance policy that best fits your needs.
• The right to select beneficiaries who will receive the life insurance proceeds.
• The right to change the beneficiaries at any time (as long as it’s documented).
• The right to access the cash value of certain types of policies.
• The right to cancel or surrender the policy at any time.
• The right to request policy loans (if available) against the cash value of the policy.
• The right to receive a copy of the policy and any updates to it

In addition to your rights, you also have responsibilities as a policyowner, which include:

• The responsibility to pay premiums on time to keep the policy in force.
• The responsibility to keep the insurance company informed of any changes in personal, insured, or beneficiary information. The responsibility to keep the policy in force until death, unless canceled or surrendered.
• The responsibility to ensure the policy’s death benefit is adequate for your needs.
• The responsibility to read and understand the policy terms and conditions before purchasing the policy.
• The responsibility to notify beneficiaries of the policy and provide them with the necessary information to claim the death benefit upon the insured’s death.
• The responsibility to inform beneficiaries of the sale of a policy to a third-party.

What Does it Mean to Be A Life Insurance Policy Owner?

Now that you understand why someone might want to take out a life insurance policy and the policyowner’s rights and responsibilities, let’s explore what it means to be a life insurance policyowner.

As noted above, a policyowner is the person who buys a life insurance policy and pays the premiums. Oftentimes the policyowner is also the insured (the person whose death causes the death benefit to be distributed), but it’s not a requirement. In addition to owning a life insurance policy to insure your own life, you can own a life insurance policy on another person, making the policyowner and insured two different entities. You can even transfer life insurance ownership to someone else entirely via transfer or sale of the policy.

The only person who can make changes to the policy is the policyowner. Policyowners can:

• Change the beneficiaries.
• Increase or decrease coverage.
• Borrow against the policy’s cash value.

To become a life insurance policyowner, the first step is to determine what type of policy you need and how much coverage you want for the policy’s beneficiaries. To make this decision, most people consider the number of beneficiaries they want to provide coverage for, any outstanding debts they may have upon death, and their financial goals (including legacy planning). Once the policyowner has determined the type and amount of coverage needed, they can work with an insurance agent or company to select a policy and submit an application. The application will typically require personal and medical information about the insured party, as well as information about the beneficiaries who will receive the death benefit.

Owning A Life Insurance Policy of Your Own

Owning a life insurance is a necessity that only you can determine. Some may take out a life insurance policy to ensure that their loved ones are financially protected in the event of their unexpected death, while others may simply need a policy for business or tax purposes.

If you’re like most life insurance policyowners, however, purchasing a life insurance policy can help you achieve peace of mind knowing your family can maintain their standard of living, pay for outstanding debts, and cover the costs of final expenses after your death. Some life insurance policies even offer a savings component that can be used as a source of retirement income or as a means of building wealth.

But a policy that fit your needs 20 years ago may no longer fit your current situation. After decades of policy ownership, you may decide that you no longer need the life insurance coverage you once did. If you find yourself in that situation and are interested in cashing in your life insurance policy, learn all you need to know about how to sell your life insurance here.

Owning A Life Insurance Policy on Another Person

As we mentioned above, the policyowner is most commonly also the insured. However, it’s possible to purchase a policy insuring another person’s life. For example, someone may purchase a life insurance policy for their spouse and name themselves the beneficiary. That way, when their spouse dies, they can maintain their standard of living and cover any outstanding debts in the event of their partner’s unexpected death.

Similarly, a business owner may purchase a life insurance policy on a key employee to protect the business in the event of that employee’s death. In these cases, the policyowner has an insurable interest in the life of the insured, meaning that they would suffer a financial loss if the insured were to pass away unexpectedly. By owning a life insurance policy on another person, the policyowner can help to ensure that they are financially protected if the insured passes away.

How to Change the Beneficiary on Your Life Insurance Policy

When a policyowner would like to change the beneficiary on a life insurance policy, the process is usually straightforward—especially if the beneficiary is revocable (which is the most common type of beneficiary designation). The policyholder (not the insured, unless they are the same person) has full control over the policy, including the right to name or update beneficiaries. This distinction between policyholder vs. insured is important: the insured is the person whose life the policy covers, while the policyholder is the one who holds contractual rights, including beneficiary designation.

Understanding Beneficiary Designations

A beneficiary is the person or entity designated to receive the death benefit when the insured person passes away. Naming the right beneficiary is essential for ensuring that life insurance proceeds go to the intended recipient. Common reasons a policyholder might want to update the beneficiary include:

• Getting married or divorced
• Having a child or adopting
• Death of the previously named beneficiary
• Changes in financial responsibilities or family dynamics

Steps to Update Your Life Insurance Beneficiary

If a policyholder would like to change the beneficiary, they can typically follow these steps:

1. Review Your Policy – Locate the section in your policy documents that outlines the current beneficiary designations.
2. Contact Your Insurance Provider – Reach out to your insurer to request a beneficiary change form.
3. Complete the Required Form – Provide the new beneficiary’s full legal name, relationship, and contact details.
4. Submit the Form – Send the completed form to your insurance company as instructed.
5. Confirm the Change – Ask for written confirmation once the update is processed to ensure your records are accurate.

Eligibility and Restrictions

In most cases, a policyowner can change the beneficiary without anyone else’s consent—unless the existing beneficiary is irrevocable. If a beneficiary is designated as irrevocable, the policyowner must obtain written consent from that beneficiary before making any changes.

Some policies purchased through an employer or trust may also have restrictions on changes, so it’s essential to understand your policy’s terms.

Legal and Financial Considerations

Before changing a beneficiary, the policyholder should:

• Update Related Documents – Ensure that wills, trusts, and estate plans reflect the same beneficiary choices to avoid legal conflicts.
• Consult a Professional – Speak with a financial advisor or estate attorney if your beneficiary structure is complex, or if you’re planning to name a minor or a trust.

Example Scenario

After going through a divorce, Alex, the policyowner of a term life insurance policy, realized their ex-spouse was still listed as the primary beneficiary. Since the policy allowed revocable changes, Alex contacted their insurance provider, submitted a change form, and designated their child as the new beneficiary. This ensured that the life insurance benefit would go to their child in the event of Alex’s death.

What Does it Mean to Be the Insured on a Life Insurance Policy?

The insured on a life insurance policy is the person — or persons in the case of a joint policy — whose life is insured. Their death causes the payout of the death benefit to the beneficiaries on a policy. While it’s very common for the insured to also own the policy, a policyowner and the insured are not one in the same role. A policyowner and insured can be two separate entities. One final distinction to make about the insured: unlike policyowners and beneficiaries, insureds typically cannot be changed on a life insurance policy.

Rights and Responsibilities of Insureds

The insured’s main role in a life insurance policy is to provide the insurance carrier with an accurate look into their health before the policy is purchased. In many cases, the potential insured is required to have a medical exam performed before the policy is issued.

The rights of insureds include:

• The right to be aware of all life insurance policies that list them as the insured. You cannot take a life insurance policy out on someone unless they’ve agreed to the policy. Insureds have a right to know who owns their life insurance policy if they are not the policyowner.
• The right not to disclose health changes to the insurance carrier after the policy has been purchased. Insureds are not held responsible for keeping the life insurance carrier updated on any health-related changes after the policy has been purchased. The cost of insurance has an average health decline factored into the insured’s life expectancy.

The responsibilities of insureds include:

• Providing an accurate medical history during the application process. Oftentimes insureds are required to have a medical exam performed to provide the insurance carrier with accurate, up-to-date health records. The health of the insured is factored into the cost of insurance.

What Does it Mean to Be A Life Insurance Policy Beneficiary?

Now that you’ve gained a better understanding of the policyowner and insured’s roles in life insurance policy ownership, it’s time to dive into the role of a beneficiary. When it comes to who the beneficiary of a life insurance policy may be, it can be a person, multiple people, or an entity that receives the death benefit payout upon the death of the policyowner.

The beneficiary (or beneficiaries) is named by the policyowner when they first take out a life insurance policy. The policyowner retains the right to change beneficiaries throughout the term of the policy. Oftentimes, a beneficiary of a life insurance policy is a spouse or child, but the beneficiary can be anyone, including family members, friends, business partners, or even charities.

Rights and Responsibilities of Beneficiaries

As a life insurance policy beneficiary, there are certain rights and responsibilities that come with this role. Here’s what beneficiaries should know about their rights and responsibilities to collect the death benefit of the insured.

The rights of life insurance policy beneficiaries:

• The right to receive the death benefit payout. The primary beneficiary has the first right to the death benefit payout, and the contingent beneficiary has the right to the payout if the primary beneficiary is unable to receive it.
• The right to contest the beneficiary designation. If the beneficiary feels that they were wrongfully removed from the policy or not designated as a beneficiary, they have the right to contest the beneficiary designation in court.
• The right to receive information about the policy. Beneficiaries have the right to request information about the policy, including the death benefit amount and any policy loans or other charges.

Additionally, beneficiaries have responsibilities they must uphold, including:

• The responsibility to notify the insurance company of the insured’s death. The beneficiary must notify the insurance company of the policyowner’s death as soon as possible.
• The responsibility to provide proof of death. The beneficiary may be required to provide proof of death, such as a death certificate before they can receive the death benefit.
• The responsibility to use the death benefit payout for intended purposes. The beneficiary should use the death benefit payout for the intended purposes, such as paying off debts or covering funeral expenses.

Types of Life Insurance Beneficiaries

There are different types of beneficiaries you can designate on your life insurance policy, and understanding the differences can affect the control and flexibility you have over your policy. It’s important to carefully consider the beneficiary options and choose the one that best fits your needs and goals.

Here are the four types of life insurance beneficiaries that may exist on a policy:

• Primary Beneficiary: A primary beneficiary is a person or entity named by the policyowner to receive the death benefit of the policy. The primary beneficiary can be one or more people, and they have the first right to the death benefit payout.
• Contingent Beneficiary: A contingent beneficiary is a person or entity named by the policyowner to receive the death benefit payout if the primary beneficiary is unable to receive it. For example, if the primary beneficiary passes away before the policyowner, the contingent beneficiary will receive the death benefit payout.
• Revocable Beneficiary: A revocable beneficiary is a beneficiary that can be changed at any time by the policyowner. The policyowner has the right to change the beneficiary designation without the consent of the current beneficiary.
• Irrevocable Beneficiary: An irrevocable beneficiary is one that cannot be changed without the consent of the beneficiary. Once the policyowner designates an irrevocable beneficiary, they cannot change it without the beneficiary’s permission. An irrevocable beneficiary can provide greater protection for the death benefit payout, but it also limits the policyowner’s flexibility in making changes to the policy.

How to Choose a Life Insurance Policy Beneficiary

Choosing a life insurance policy beneficiary can be quite complex. From understanding your family dynamics to considering what your business may need in the event of your death can require very careful consideration. Here are some steps to follow to choose a beneficiary for your life insurance policy.

1. Consider dependent family members. Many people choose their spouse or children as their primary beneficiaries. Your family may rely on your income, and having the death benefit as a safety precaution can help them get through an unexpected or difficult time, such as your death.
2. Think about business partners. Business owners may choose their business partner or key employee as their beneficiary to help ensure the continuation of the business in the event of their death.
3. Consider favorite charities. Some people choose to name a charity as their beneficiary to leave a legacy of giving.
4. Review and update beneficiary designations regularly. Life changes constantly, so it’s important to review your beneficiary designations often — especially after major life events such as marriage, divorce, or the birth of a child.

Common Questions and Answers

1. What is a Life Insurance Policyowner?

The policyowner is the individual who purchases and controls the life insurance policy. They’re responsible for paying for premiums, designating or updating beneficiaries, and making policy changes. They may or may not be the insured on the policy. The policyowner also has the right to access any cash value in the policy, transfer ownership, or cancel the policy altogether. This role is central when a policy would like to change the beneficiary.

2. Who is the Insured in a Life Insurance Policy?

The insured is the person whose life the policy covers. If the insured passes away, the death benefit is paid out to the designated beneficiary/beneficiaries. In many cases, the policyowner and the insured are the same person, but they can also be different individuals. Understanding the distinction between policyowner vs. insured is important when managing a policy.

3. What is a Beneficiary in Life Insurance?

A beneficiary is the person or entity chosen to receive the death benefit when the insured dies. A primary beneficiary is first in line, while a contingent beneficiary steps in if the primary cannot claim the payout. Keeping beneficiary designations up-to-date is essential to ensure the right individuals receive the benefit. When a policyowner would like to change the beneficiary, it’s usually due to major life changes like marriage, divorce, or the birth of a child.

4. Can the Policyowner and Beneficiary Be the Same Person?

Yes, a policyowner can also be the beneficiary, especially when they have an insurable interest in the insured person. For example, a spouse or business associate may take out a policy on their partner and name themselves as the beneficiary. In these cases, they can also update the beneficiary designation if their circumstances change.

5. What Rights Does a Beneficiary Have?

Before the insured’s death, beneficiaries generally have no legal rights to the policy and cannot make changes. After the insured passes away, beneficiaries can file a claim to receive the death benefit. However, a policyowner would like to change the beneficiary may do so at any time—unless the current beneficiary is designated as irrevocable.

6. How Can Ownership of a Life Insurance Policy Be Transferred?

A policyowner can transfer ownership by submitting a form provided by the insurance company. The new owner takes on all responsibilities, including premium payments and the ability to update beneficiaries. The insured person remains the same. Ownership transfer is separate from beneficiary changes—a policyowner can change the beneficiary without transferring the policy.

7. What Happens if the Policyowner Dies Before the Insured?

If the policyowner dies while the insured is still alive, ownership typically passes to a named contingent owner. If no one is designated, the policy may become part of the estate and subject to probate. It’s important to assign a contingent owner to avoid delays in managing or updating the policy, especially if changes to the beneficiary are needed later.

8. Can a Beneficiary Be Changed After the Policy is Issued?

Yes, a policyowner who wants to change the beneficiary can usually do so at any time by submitting a request to the insurance company. However, if an irrevocable beneficiary is named, the beneficiary’s written consent is required. It’s smart to review your beneficiary designations regularly, especially after life events like marriage, divorce, or the birth of a child.

9. What Is an Irrevocable Beneficiary?

An irrevocable beneficiary is someone whose designation cannot be changed without their consent. This means the policyowner gives up the right to unilaterally change the beneficiary or make certain policy changes. If a policyholder would like to change the beneficiary in this case, they must obtain the irrevocable beneficiary’s approval first.

Life Insurance Policyowner vs. Insured vs. Beneficiary: The Bottom Line

Understanding the differences between your responsibility as a life insurance policyowner, an insured, and a beneficiary can ensure the life insurance policy serves everyone the way it was originally intended. While life insurance can provide a level of protection during a time of need, it’s also an asset that can be cashed in during the policyowner’s life as well. As a policyowner, if you find that your life insurance policy has become a burden instead of a benefit, you may want to consider selling your policy for cash. Get in touch to find out how much your policy may be worth in a life settlement today.