Your Complete Guide to Life Insurance Policy Ownership
Decide who will control the operations of your policy.
The person who owns your insurance policy is the policy owner, also known as the policyholder. Carefully consider who should control your life insurance policy.
If you’re taking out life insurance for the first time or already have cover but want to change ownership, it’s important to understand your options. Making the right decision can help your policy maintain long-term relevance and value:
Who’s who on your life insurance policy
Generally, there are 3 essential parties to a life insurance policy:
Responsibilities as the owner of a life insurance policy
The owner of the policy is responsible for paying the premiums to keep the life insurance policy in force and the life insured protected.
As a policy owner, you have the authority to perform a number of actions that directly impact the operations of the policy, like increasing or decreasing the amount insured or cancelling the policy altogether. It’s important to note that if the life insured is not the policy owner; they do not have to be informed of any of these changes.
As the policyholder you are responsible for:
- Ensuring the premiums are paid.
- Changing or updating the beneficiaries.
- Deciding how the beneficiaries will receive the death benefit.
- Updating the policy to include additional cover, like adding total and permanent disability (TPD) insurance.
- Transferring ownership to a different policy owner or different ownership structure.
- Submitting claims if the life insured dies.
- Cancelling the policy.
The different types of life insurance policy ownership structures
There are several different types of life insurance ownership options. It’s important to understand the difference between each before deciding on the option that best suits your particular circumstances.
Self-ownership
A self-owned life insurance policy refers to a policy that is owned by the life insured. You are the one who has taken out the policy, you are the life insured, and you are in charge of its operations.
The advantage is that you have the authority to make any changes to the policy, like updating the beneficiaries, removing the Consumer Price Index (CPI) increases to keep your premiums more affordable, removing or adding additional features.
Cross ownership of life insurance
Cross ownership is also referred to as third party ownership and means that someone else, other than you, owns your life insurance policy. You typically find cross ownership in marriages, where the husband or wife owns the policy and in mature families, where an independent adult child owns a policy providing cover for their older parent. This ownership structure might complicate things should you face issues if a separation or divorce in future.
You can also find cross ownership life insurance in businesses, where a life insurance policy is taken out for a valuable employee, and the business is generally both the owner and the beneficiary of the policy.
Joint ownership of life insurance
A jointly owned policy is a combination of self and cross ownership. You still have some control over your policy, but you won’t be able to make any decisions without your partner, business or personal. If a decision around your policy needs to be made, both policy owners must be present and sign off on any changes. With a joint ownership structure, you could face issues if a separation or divorce occurs.
Superannuation ownership
It has become popular for people to take out life insurance through their Superfund, as the fund will pay your premiums. However, there are a number of advantages and disadvantages you might want to consider before deciding on this ownership structure.
Pros and cons of a superfund owning your policy
| Pros | Cons |
|---|---|
| Might be more cost effective. Your premiums are deducted from your superannuation account balance, rather than out of your bank account. | Before you can receive a benefit, you have to meet the:
|
| Super funds can usually negotiate group discounts, making the premiums more affordable. | Not all superannuations allow you to apply for extra cover. Thus, your level of cover might not be enough for your specific requirements. |
| Generally, no medical exams are required, making it more convenient and easy to get a policy. | You might not be able to choose your beneficiaries as the decision regarding the distribution of the payout lies with the Trustee of your super fund. |
| Some super funds include both income protection insurance and total and permanent disability (TPD) cover, which can be cheaper. | Trauma insurance is no longer available through super funds. |
FAQs about life insurance ownership
If you would like purchase life insurance for the first time, or want to check that your current ownership structure is still relevant then take a few minutes to compare life insurance quotes from some of Australia’s top life insurance companies.
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I have a death benefit policy with TPD and Trauma riders. The policy is owned by my business partner so that if I should die, become ill or disabled his share of the business will be settled.
What are the pitfalls?
Hi, Dave.
Great question!
The type of insurance you are referring to, where the business is protected against the financial impact of losing a key person due to death, disablement or critical illness is called Keyman Insurance or Key Person Insurance.
Before I can answer your question properly, we need to determine the type of Keyman Insurance you have. There are 3 main types:
1.Loss of revenue: Provides compensation and covers the business for an extended period of time or indefinitely when losing a key employee or director.
2.Capital protection: Helps your business pay back the outstanding business loans or credit facilities.
3.Buy Sell insurance: Covers the shares on the business and/or partnership interests.
Because you refer to Death and TPD, it is most likely that you have a Buy Sell Insurance policy that is structured as Cross Ownership, meaning both you and your business partner owns an insurance policy on each other.
There are some major ‘pitfalls’ you need to be aware of, and I urge you to seek legal and taxation advice.
•A binding agreement should be drawn up to confirm what will happen when one of you dies or become disabled and exactly how much will be paid and when. A lawyer should ideally draw up this agreement.
•The policy owner, currently your business partner, can potentially update the beneficiary details and this will determine who receives the insurance proceeds. It needs to be clear in the agreement how proceeds need to be used. For example, to pay expenses and/or repay loans, buy the deceased shares, etc.
•From a tax perspective, it is critical to specify the purpose of the cover because this will affect whether premiums are tax deductible and how the insurance proceeds will be taxed.
•The policy needs to reviewed and regularly updated to ensure it keeps up to date with the changes in your business structure or valuation.
Tax and legal advice should be sought to ensure the funds end up with the remaining partner without any negative legal or tax consequences.
It is also important to note that generally a policy set up as a Keyman policy may not be appropriate to include your personal insurance requirements in the policy as your beneficiary/family needs may be different to those of your business or business partner.
If you would like more information on Keyman Insurance or Personal Insurance, you can reach out to our team by filling in the quote form above and have your information ready when they call you.
Have a great day.
Anneke