Who Should Own Your Life Insurance Policy?
Are you the owner of your policy?
The best place to check is your most recent documents sent from your insurance company, you are typically sent an annual policy schedule with this information.
It is important to note on your schedule who the insured is, and who the policy owner is.
The insured is the person who the claim can be made on, the owner is the person who receives the funds when a claim is made. This could be an individual, multiple people or even a company, or even still a combination.
Within the ownership of the policy also lies the responsibility for the premium payments.
Joint ownership of a policy also works well with a couple who own the Life insurance together, this way when a claim occurs and one party is no longer alive, the survivor receives the funds, usually, this is where the funds are intended to go.
Where ownership can become tricky to organise is when there are blended families with funds that need to be directed to certain people who are not owners of the policy. In this case, having a detailed Will that explicitly talks about your intentions with your Life insurance is key.
The entire reason to implement insurance for yourself, your family, your business is to ensure that in the event of a claim, the right funds get into the right hands at the right time.
Insurers all have the same basic ownership structure which can be implemented for most situations, for example, a husband & wife can have joint ownership of their policies with a Will behind the scenes to enforce their instructions.
In this scenario, as there are two owners, the funds would be paid to the survivor. A Will with clear instructions can dictate the intended use of those funds.
Some couples do not have joint ownership, they elect to own their own cover.
The one major downside to this is, that all the funds in a Life insurance claim are paid to the estate to be divided up as the Will sees fit. Executing a Will can take between 4-6 weeks for the funds to be paid out if there is nothing tricky in the Will. This can really impact a family’s ability to fund a funeral which happens usually within the first 3 – 10 days of passing.
If, for example, your insurance is to support the funding of a shareholder agreement, ensuring the ownership of the insurance is set up correctly is vital to getting the desired outcome.
When the ownership is not aligned correctly to a shareholder agreement, a claim can put the funds in the wrong hands, this could result in an unintended party who previously had no influence or shareholding of the company now holding a major shareholding, which could severely influence the future of that business.
There is an alternative structure in the market that allows you to nominate specific individuals or entities to receive allocated portions of the claim.
This means that you as the insured can retain full ownership of your policy, and likewise control of it, but nominate all the correct parties to receive the right amount of funds when something happens. This could be specific amounts to your spouse, children, business entity and even a charity if you wish.
Let’s take 3 mates buying their first home together
This is very common these days with high-interest rates, low deposits, and large mortgages working together to buy that first home is making sense for a number of people nowadays. At that point you have 3 mates, owning a home, each with a portion of the total debt they are individually liable for.
Being responsible young adults, they all have a Life Insurance policy to match their portion of the debt. They can each own and control their own policies, but at the same time nominate specific people to receive the right funds in the event of a claim.
These amounts are then paid directly to the 2 other mates and not held up at probate, a typical time frame is 5-10 working days for the full payment to be received by the surviving homeowners. Fast, effective and the right funds in the right hands. Like all partnerships, this needs to be supported by a signed agreement between the owners of the home.
Where this nominated structure works now and in the future with the 3 first home buyers is, eventually they will all use this home as their stepping stone into the next phase of their life.
As they own their own policies, they can adjust their nominated beneficiaries at any time they choose. If they were to sell this house and go their separate ways, being they all own their individual Life Insurance policies, their policy evolves as they do – simply completing a short one-page form to remove previous beneficiaries and nominate new ones makes life easier.
The alternative is trying to change ownership on a Life Insurance policy, which requires all involved parties to sign which isn’t easy if a relationship is strained.
Different insurance products require different considerations
This is just the tip of the iceberg, different insurance products require different considerations for ownerships, for example owning your own insurance works great when you are on an Income Protection claim because, you are the person who is unable to work, and you are the person who is receiving the claim funds, however, who is going to sign the claim forms if you are incapacitated in hospital to get the claim started.
If you are going to spend the money on implementing an insurance package, take the time to talk to your financial adviser about where the money is needed at claim time.
This is an area of your insurance that should be reviewed just as often as you review the other parts of your insurance.
Jonathan Whorwood
Financial Adviser
The Insurance Supply Co Limited