The insured or the beneficiary: Who actually owns a life insurance policy?
There are three main components to a life insurance policy: the owner, the life insured and the beneficiary. Depending on the ownership type, the policy owner can be owner by either the insured or the beneficiary.
- The policy owner. The policy owner has full and total control and can cancel or change the policy. The owner can be either the insured, the beneficiary, a joint ownership between the two parties or even a third party like a superfund.
- The life insured. This the person who's life is insured against them passing away. If the life insured passes away within the term of the policy then a payment is made to a beneficiary.
- The beneficiary. This is the person who is paid out in the event where the life insured passes away.
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 ownership. Owned by the life insured.
- Cross ownership. Owned by the spouse/partner of the life insured
- Joint. Owned by both the life insured and their spouse/partner
- Superannuation. Owned by the life insured's superannuation fund.
- Trust or corporate entity. Owned by a corporate entity e.g. the employer of the life insured.
What is the role of the life insurance owner?
Many people assume that the life insured is the most important person in any life insurance policy, but the policy owner has complete control over the policy in question. This is because the insurance contract is actually an agreement between the policy owner and the insurance company. The key roles of the policy owner can include:
- Cancelling the policy.
- Update the cover to include additional benefits or policy options
- Adjust the sums insured
- Make changes to listed beneficiaries
- Become the default beneficiary if there is no beneficiary selected.
- Paying for premiums
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. Self-owned policies are perhaps the most common form of life insurance and are the easiest to administer. This obviously means that the life insured owns the policy and therefore has full control over their own life insurance. Changes to the policy can all be taken care of by the one person, while the policy is simple to administer if changes occur to your life circumstances e.g. when you get divorced.
- Cross ownership. Also known as third-party ownership, this structure means that someone other than you will own your policy. This can be quite a common approach for married couples where each spouse owns their partner’s policy. Cross ownership does have its advantages, especially for those who rely on someone else (eg their spouse) for a stream of income. However, if your marriage breaks down and you have cross owned life insurance policies, difficulties may arise.
- Joint ownership. This is another ownership structure you can consider if you’re married or in a relationship. A hybrid of self and cross ownership, joint ownership allows you to still have some control over your policy. However, keep in mind that any proposed changes to the policy must be approved and signed off by both owners. Once again, divorce or relationship breakdown can result in difficulties with this type of ownership.
- Through a superannuation fund. You can also own a life insurance policy through your superannuation fund. Because super funds can offer life insurance policies purchased at group rates rather than individual rates, these policies will be offered at very competitive prices. No medical exams are required for you to take out basic cover, while many policies also often also include TPD and income protection cover. However, cover under these policies might not be enough for your needs, and also cannot be specifically tailored to your circumstances.
- Via 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.
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.
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.