5 September 2012 0 Comments

The Policy Owner

In addition to the insurance company, there are three other parties to an insurance contract:

  •             The Insured
  •             The Owner
  •             The Beneficiary

Very often the insured is also the owner.  In fact, if there is no other owner named the insured is automatically also the owner. If there is a third party owner, that owner is also very often the beneficiary.   Obviously the insured cannot be the beneficiary, validating the old saying “you can’t take it with you.”

The policy owner is the only party who can change the beneficiary, withdraw or borrow cash during the life of the insured or make any policy changes.  When should the owner be other than the insured?

  • When a divorce decree or other legal instrument stipulates that a spouse or other designated party is to be a permanent recipient of any policy proceeds.
  • When a third party would suffer economic loss at the death of the insured and is paying the premium, such as a key-employee policy owned by an employer.
  • To avoid the death proceeds from being included as a taxable asset for purposes of Federal Estate Tax calculation.

In each of these instances the owner should also be the beneficiary.  In simple family situations where the intention is to leave all death benefit directly to the spouse it is not necessary to name the non-insured spouse as the owner since there is currently no federal estate tax because of the full marital exemption for spouses.*  On the other hand, if the marriage is on shaky grounds and the non-insured spouse wants to be sure that he/she has complete control, cross ownership is probably a good idea.

In the case of ownership to avoid Federal Estate Tax, the best third party owner is an Irrevocable Life Insurance Trust (ILIT).  Naming an adult child as the owner will also work, but if there is more than one child an ILIT is highly recommended to avoid dissent among family members and ambiguity with regard to whom has the authority to instruct the insurance company to make policy changes or borrow or withdraw funds.

Since the assets to pay Federal Estate Tax should come from the estate and the death proceeds will be paid to the third party owner, the ILIT will instruct the trustee when to move those proceeds into the estate by either purchasing assets from the estate or loaning money to the estate.  This could become problematic with individual owners as opposed to the ILIT.

Whenever estate tax avoidance or liquidity is involved the services of an attorney experienced in this filed is essential.  Life Insurance Agents are not estate planners.  They can provide liquidity required to facilitate the plan, but the ultimate plan is drafted by an attorney.

*The full marital exemption for spouses is only extended to a spouse who is a U.S. citizen.

I just received another promotion from AARP for their Guaranteed Acceptance Life Insurance Program, so I’ll be covering that and other plans like it in my next entry.

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