What is the Difference Between the Insured, Owner and Beneficiary of a Life Insurance Policy??

All life insurance policies have three primary parties that are required as part of the application process: the insured, the policy owner and the beneficiary(s). Each of these are defined below with examples of the common designations.

The Insured

In any life insurance policy, the insured is the person on whom the protection is purchased. In other words, the insured is the covered individual in the life insurance contract.  The life insurance policy rates are based upon the insured’s age, health and lifestyles factors at the time of application. At the insured’s death, the policy proceeds are paid to the named beneficiary.

The insured can also be the applicant or policy owner. In fact, in most cases the insured does own the policy as well.

The Policy Owner

Every life insurance policy also has an owner, sometimes called the Applicant or Policyholder, of the contract. The owner is the person or entity that actually applies for the life insurance policy and retains certain rights and responsibilities.

One responsibility of the policyholder is paying premiums and assuring the policy doesn’t lapse. Additionally, the policy owner has the right to change the mode of premium payment, i.e. annual, semi-annual, quarterly or monthly bank draft as well as the payout method, i.s. lump sum, lifetime annuity or period certain annuity.

In cash value policies, only the owner of the contract is the only person that can take withdrawals or loans against the policy. In fact, with any life insurance policy, the policy owner is the only person or entity that has access to policy information from the customer service department at the insurance company.

Finally, and most importantly, the Applicant or policy owner has sole rights to change the policy beneficiary.

The Beneficiary

The policy beneficiary or beneficiaries can be a person or entity and is designated to receive the policy proceeds or death benefits at the insured’s death. The beneficiaries are usually listed in a specific order: Primary, Secondary and Tertiary. There can be multiple  beneficiaries at each of these levels.

The most common beneficiary example is:

Primary Beneficiary: Spouse, 100%

Secondary Beneficiary: Children Equally

In this case, when the insured dies, His/Her Spouse will receive 100% of the policy proceeds. In the event the spouse predeceases the insured, the Children will share the policy death benefits equally.

As mentioned, entities can also be named beneficiary of a life insurance policy. Such is the case with business owned policies.

An example would be key employee insurance. In many cases, a corporation or other business entity purchases a policy on one of its key people to protect against his/her premature death and the consequences to the company’s revenues. In these case, the company is the policy owner and beneficiary and the insured is the key employee.

In the event of the death of the key person, the company receives the policy proceeds and can use the funds at their discretion.

Another common situation with an entity owning and being the beneficiary of a life insurance policy is for purposes of Estate Planning.  With estate planning, the general goal is to removed assets from the taxable estate and at the same time have the tax free death benefits of a life insurance policy pay eventual estate taxes.

When using life insurance as an estate tax planning tool, an irrevocable life insurance trust (ILIT) is established to own the life insurance policy and be the policy beneficiary. The ILIT is set up by an attorney and has its own tax identification number essentially making the trust a separate entity. If set up properly, this removes any ownership from the insured (who is doing the estate planning). Finally, the trust names trustees which are responsible for the administration of the trust and trust proceeds.

At the insureds death, policy proceeds are paid tax free to the irrevocable life insurance trust. The trustee(s) can then use these funds to pay the IRS and estate taxes due.

Conclusion

The parties to a life insurance contract are the insured, policy owner or applicant and the beneficiary(s). When taking out any life insurance policy, it is critical for you to recognize the roles and responsibilities of each of these designations. This post is designed to be a brief summary and is not a comprehensive review of the ins and outs of policy ownership or beneficiary designations. For specific questions, contact your insurance professional or call MEG Financial at (877) 583-3955

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