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Life insurance policies are set up with two core components: a policy owner and a life insured. These are usually the same person but it's possible for the policy owner to be someone else, a trust or a corporation. A policy owner has authority over the policy, which includes the ability to amend or cancel it and to select the beneficiaries.
The policy owner
The policy owner has full control over the policy. They choose who the beneficiary is e.g. who receives life insurance payout. The policy owner is usually also the life insured but they can sometimes be the beneficiary or even a third party like a superfund.
The life insured
This is the person who's life is insured against them passing away. They're the one who goes through the underwriting process, answering questions about their health, occupation and age. When the life insured dies, a payment is made to a beneficiary.
The beneficiary
This is the person who is paid out when the life insured passes away or becomes terminally ill. There can be more than one beneficiary and each beneficiary can receive different amounts – this decision is decided by the policy owner.
The policy owner has control over the life insurance policy, not the life insured. 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
The policy owner
The policy owner has control over the policy. They're 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 choose 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 – for example, if you purchase a policy on your partner's life (making them the life insured), naming yourself as the person receiving the payout when they die.
The beneficiary
A beneficiary is a person who receives the 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.
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 means that the life insured owns the policy and 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. if 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 (e.g. 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 include TPD and income protection cover. However, cover under these policies might not be enough for your needs, and also cannot be 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.
What are the benefits and disadvantages of superannuation life insurance ownership?
Pros
- It's usually cheaper because funds can buy policies in bulk.
- No individual medical checks.
- There are sometimes tax benefits if you're self-employed.
- It's usually automatically included so you will probably be covered to a certain extent already.
Cons
- You may not get a sufficient level of cover.
- You'll likely get a 'one size fits all' policy rather than cover that's tailored to your needs.
- Any benefits are paid to your super fund, not straight to your beneficiaries which can create delays.
- You're not in full control of choosing your beneficiary – that responsibility lies with the Trustee of your super fund.
If the policy owner and the life insured are the same person, 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.
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.
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