Before buying life insurance, you need to understand how it works, even as circumstances in your life change.
Transferring ownership of a life insurance policy is one strategy for adapting to those changes. For example, if your attorney suggests creating a life insurance trust, signing over your policy might be necessary. Similarly, you might find it easier to secure a business loan if you agree to transfer your policy’s ownership to the bank.
Below, we break down the basics of life insurance policy ownership transfers and how to do them.
Insurance policies’ parties and their rights
There are usually multiple people involved in a life insurance policy, and each person has certain responsibilities and rights.
The owner
The policy owner is the person who controls a life insurance policy during the insured person’s lifetime. They can be the insured person or someone who purchased life insurance for someone else, such as a child or partner.
The policy owner retains complete control over the policy. Usually, they’re the ones who pay the monthly insurance premiums, and they can decide to cancel, surrender, or gift the policy to someone else. They also have ownership rights to change the policy beneficiaries or update the allocations of death benefits.
Policy owners can choose how much coverage they want on the insured and how long the policy should last. They can increase or decrease coverage in accordance with policy terms.
A life insurance policy owner does not have the right to remove another owner from the policy. If the policy is jointly owned, then both owners have equal rights and responsibilities unless they willfully transfer them.
The insured
The insured person is the individual whose life is covered under the insurance policy. If they die, the life insurance benefits pass directly to the beneficiaries named in the policy.
Oftentimes, the owner and the insured are the same person. For example, a parent or spouse might purchase a life insurance policy on themselves to safeguard their family’s financial interests if they die. Other times, the owner and the insured are two different people, such as when a parent gets life insurance for a minor child.
Some policies insure several people at once, such as a husband and wife. With survivorship life insurance, the policy only pays out once both insured individuals die.
The primary beneficiary
A primary life insurance beneficiary is the first in line to receive death benefits when the insured individual dies. A primary beneficiary can be a person, such as a spouse, or a legal entity, like a revocable trust. A revocable trust is an estate planning tool that some people use to manage and distribute their assets when they die.
Some policyholders designate several primary beneficiaries on a single life insurance policy if multiple people depend on them financially. However, all primary beneficiaries must be legally competent to accept insurance proceeds. You can name a minor as a beneficiary if you take the proper steps, which include setting up a trust and naming a guardian to oversee it.
The contingent beneficiary
A contingent beneficiary receives life insurance proceeds if your primary beneficiary can’t. For instance, if the primary beneficiary dies in an accident with you, the contingent beneficiary would receive the death benefit payout.
No one can predict the future, so listing a contingent beneficiary on a life insurance policy is smart. If you don’t have a contingent beneficiary and the primary beneficiary isn’t there to accept the death benefits, they will pass to your estate. Then, they could incur estate taxes, and your survivors might find it challenging to divide and access the money. Or the money might not go to the person or entity you would have preferred.
3 methods to transfer a policy’s ownership
Common reasons for transferring ownership of a life insurance policy include estate tax planning and changes to your financial or life circumstances, such as a divorce or new financial obligations.
Typically, policy owners can transfer the ownership of a life insurance policy in one of three ways.
1. Absolute assignment
Absolute assignment involves transferring all rights and ownership of a life insurance policy from yourself to someone else or a legal entity. If you want to proceed with an absolute assignment, you must notify your insurer, who will provide you with the necessary ownership forms.
If you use absolute assignment to transfer policy ownership, it’s irrevocable. You can’t wake up the next day and decide to cancel the transfer.
Keep in mind that a life insurance policy owned by a third party gains complete control of the policy. If you are the insured person in the policy, you’ll remain insured, but the new owner can update coverage or designate new beneficiaries.
2. Collateral assignment
A collateral assignment allows you to use a life insurance policy you own to obtain a loan. Rather than putting up property you own, like a home or vehicle, you can use the life insurance policy as security. If you die before repaying the money you owe, the bank will receive the funds from your policy and use them to pay off your debts. Any remaining proceeds will go to your designated beneficiaries.
A collateral assignment is temporary. The original owner will regain control of the policy once they repay the loan or meet other specific criteria.
3. Irrevocable life insurance trust (ILIT)
An ILIT is a type of trust which owns a life insurance policy as its primary asset. Some people use ILITs to reduce or avoid estate taxes if they anticipate leaving a sizable taxable estate to their beneficiaries. Instead of using the estate’s value to pay taxes, which might be tied up in illiquid assets like real estate or existing businesses, the proceeds from the life insurance policy in the trust can be used by the trustee to purchase assets from the estate of the deceased. This provides the executor / personal representative with the necessary funds to pay the outstanding estate tax bill.
Discover term life insurance made easy
While life insurance might seem pretty complex, the truth is that it doesn’t have to be. At Haven Life, we aim to simplify the process of buying a term life insurance policy.
You can start with a free online life insurance quote, and complete our mostly online application process in minutes. Some of our policies don’t even require a medical exam. (Though, of course, you’ll need to be truthful on your application.) Begin your journey toward peace of mind today.