Life Insurance: Owners and Beneficiaries
Life Insurance: Owners and Beneficiaries
If you're covered by life insurance, you're the "insured", and you're most likely the owner of the policy, too but not necessarily. In some situations, you might choose to have your spouse, your children, or a trust own the policy. If you're a business owner, your company might own a life insurance policy on you and your partners to cover the value of your ownership interest in the company.
The Owner Controls the Policy
The owner of a life insurance policy isn't just the person who makes the premium payments; it's the person who controls where the life insurance proceeds go when you pass away. What does it mean to control the policy? An owner has the right to:
Name and change beneficiaries
Transfer the policy to a different owner
Borrow from the policy, if it has a cash value
Change the features of the policy
Cancel the policy
Why Does Ownership Matter?
The primary reason that people choose to transfer ownership of their life insurance policy to someone else is to avoid estate taxes. The value of a life insurance policy is included in the estate of the person who owns the policy, not in the estate of the beneficiaries, and not necessarily in the estate of the insured. Transferring ownership is not without consequences, and it shouldn't be done without the advice of an experienced professional.
Who are Your Beneficiaries?
Of course, the person or people who stand to inherit your life insurance proceeds are the "beneficiaries" of the policy. If you own the policy, you can name the beneficiaries of your choice, and you have the right to add or change beneficiaries. Usually, married people name their spouse as primary beneficiary, and their children as secondary beneficiaries.
A Word About Children and Insurance
What if your children are minors? Then you'll likely want to establish a trust for their life insurance proceeds. Children who receive a substantial inheritance aren't allowed to take control of that money until they reach legal adulthood. If you don't make arrangements ahead of time, a judge will need to choose a guardian to manage the life insurance proceeds while your children are still minors. While this will likely be a family member, it won't necessarily be and, family member or not, you won't have a say in who controls your kids' inheritance. Setting up a trust for your children's life insurance proceeds lets you control who's in charge of the funds and how the money is used.
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