Understanding Life Insurance Policy Ownership | The American College of Trust and Estate Counsel
hi, my name is jonathan w. Michael. i’m an actec intern in chicago and i’m here today with larry brody, an actec intern in st. louis hello, larry. how are you?
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hi jonathan. I am good. how are you?
Reading: Who is the policy owner in life insurance
I’m fine. Larry, thanks for joining us. Today, I assume your topic is life insurance policy ownership options. So who is available as the owner of a life insurance policy to begin with?
I think probably the way to start this is to remind people that there are a number of people involved in any life insurance policy. the first person, if you will, is the insured, whose life is insured. that’s the person who has to take the physical to get the policy. that is usually the person who is going to pay the premium. and each life insurance policy has a named insured. Some life insurance policies insure two insureds, usually husband and wife, payable only on the death of the survivor. therefore, you can have only one life insured or you can have several lives insured, but each policy has an insured or insured.
The other person involved in a life insurance policy is the owner of the policy. There are several options for who can own a policy, but every policy has an owner. The owner is the person who has control of the policy during the life of the insured. they have the power, if they wish, to surrender the policy, sell the policy, give away the policy, change the beneficiary of the policy’s death benefit. they have complete control over the policy during the life of the insured. and the third person involved in the insurance policy is the beneficiary. that is the person, sometimes an entity such as a corporation, partnership, or trust, that is entitled to receive the policy’s death proceeds upon the death of the insured.
so, all life insurance policies have three people involved, three categories of people. sometimes the categories overlap, as we will discuss. but there are generally three people involved in the policy: the insured, the owner, and a beneficiary.
so larry, maybe you can talk a little bit about the different owners? so, one, could be the insured?
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Yes, the first person people think of as the policy holder is the insured. is the easiest way to do it. So, in this case, there would only be two people involved in the policy because the insured and the owner would be the same. There would still be a beneficiary but there would not be a separate owner of the insured. my feeling is that most life insurance policies are owned by the insured. the insured is one whose life is insured. they are the ones who pay the premium and, in general, I think they want to control the policy. they want to make the decisions about politics. if the policy has investment options, they want to make those decisions. they want to have the right to change the beneficiary. So if I own the policy on my life, I am both the insured and the owner, I name my son as the beneficiary. If at any time my child and I have a fight, I have the right to change the beneficiary. Right? I have full control.
The next possible owner, in no particular order, is my spouse. so, in that case, there would be three people involved. I would be the insured. she would be the owner and she could be the beneficiary, or she could name our son as the beneficiary. again, she would have complete control over the policy, and as the insured, he would have to be willing for her to do so. some policyholders are comfortable with that. some policyholders are not. and again, it may depend on the relationship between the spouses.
again, some policyholders are control freaks. if they are paying the premium, they want to own the policy. other policyholders may feel more comfortable with their spouse owning the policy. An advantage of spouse owning the policy, for example, is that if the insured is worried about creditor problems, having the spouse own the policy should solve that for the insured.
but could you have your children as owner?
sure. yes, you could certainly have responsible adult children as policy owners. in that case, again, there could be three people. there can be two people. I would be the insured. my son would be the owner. he could be the beneficiary. he could name someone else as the beneficiary, but would generally name himself as the beneficiary. it’s pretty easy with a kid. if I have three children, for example, if I make all three owners of the policy, no child can do anything without the other two. In my case, three are needed for the tango. all decisions have to be unanimous.
then, if two of the children want to collect the policy and the third doesn’t, you can’t collect it. you have two who want to change the beneficiary and the third does not; you cannot change the beneficiary. In that case, we sometimes suggest that the insured create some entity, like an LLC or general partnership, name one of the children as trustee to give that child control of the policy, although, again, upon death, all three children be the beneficiaries.
how about this thing called an irrevocable life insurance trust? I know you know what that is. Can you explain to our listeners what an irrevocable life insurance trust is and when you might own it?
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There are irrevocable life insurance trusts. They are usually created by wealthy policyholders to own a policy on their lives where the trust would be the beneficiary. so in this case, again, there would be two people involved. i am the insured my insurance trust, with someone else as trustee, is both the owner and beneficiary of the policy. They are typically created by wealthy clients who think they are going to have a federal estate tax problem upon their death because their estates are large enough. The benefit of the policy being owned by an irrevocable insurance trust is first and foremost, again, that it is no longer subject to claims from my creditors.
I can also keep the trust for my beneficiary, so if I have a son who is a spender, if I make my son the owner of the policy and he is the beneficiary, he gets the check from the insurance company . he can do what he wants with it. if my trust gets it with a trustee i trust, they will hold the proceeds for him and maybe just pay the bills directly from him. But the real incentive for an irrevocable insurance trust, again, is to keep the policy’s death proceeds out of the insured’s estate for federal estate tax purposes. because the rule for federal estate tax purposes is, again, if the client’s estate is large enough, if the insured owns the policy, you count the policy’s death benefit as part of the value of your estate on which we have a tax estate.
If it’s an irrevocable insurance trust and it’s been there for more than three years after I created the trust and placed the policy, the proceeds from the policy are not subject to federal estate tax, which is generally the incentive to create an irrevocable insurance trust trust. they’re complex, they’re expensive, and they’re really only for high-net-worth people.
but it seems like there are a lot of options in terms of not only who can be the owner, but also who can be the beneficiary and who are the other parties to these policies.
yes. And again, I think that’s part of the insurance agent’s job: to make it clear to the proposed insured what the options are for the property and what the pros and cons of each are. and everyone will have a different view of who should own the policy. I guess most policies are owned by the insured, but they are not the only option.
very good. well, thanks, larry. this has been very helpful. thank you for leading the discussion on life insurance policy ownership options. have a great day.
thank you jonathan.