Your Complete Guide to Life Insurance Policy Ownership
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NEOSDecide 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:
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Who’s who on your life insurance policy
Generally, there are 3 essential parties to a life insurance policy:
- The policy owner
The person who owns the policy, the policyholder, has specific controlling right, for example, they can change the beneficiaries on the policy. However, the owner of a life insurance policy is also usually the person responsible for paying the premiums.A policy owner may also be the life insured. For instance, a wife might purchase an insurance policy on her own life to provide her spouse and children with financial security should she pass away.
Or, a policyholder could also be the beneficiary of the policy. For example, the wife might purchase a policy on her husband’s life, naming herself as the person receiving the payout should he pass away. The wife would then be the policy owner and beneficiary, while her husband is the life insured.
- The life insured
The person whose life is covered according to the life insurance contract. This is the individual who goes through the underwriting process and shares personal and health-related information on the application form. - The nominated beneficiary
A beneficiary is the person(s) who collects the death benefit when the insured person dies. The policy owner can choose more than one beneficiary, including primary beneficiaries and contingent beneficiaries. Primary beneficiaries will receive the allotted amount of the payout, as specified by the policyholder. If a primary beneficiary passes away before the life insured, the payment passes onto the next beneficiary, which is known as the contingent beneficiary.
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. |
Should I own my life insurance policy?
Although owning your policy is the most predictable form of ownership; you pay the premiums, you’re the insured, and you choose the beneficiaries, whether you should own your life insurance policy depends on your circumstances, requirements and budget. What’s best for a single, independent individual might not be the best for a married couple with small children.
If you are unsure which ownership structure would most benefit you; then it might be beneficial first to discuss your requirements with a specialist to help you make an informed decision.
Frequently asked questions
What happens when the owner of a life insurance policy dies?
If the life insurance policy owner has passed away, then what happens to the policy will depend on whether the owner is also the life insured or not.- What happens if the owner is not the life insured?
Ownership becomes part of the deceased’s estate and shall be passed on accordingly. - What happens if the owner is the life insured?
The beneficiary will receive the benefit payout from the policy, and the policy will stop.
- What happens if the owner is not the life insured?
Can you transfer ownership of a life insurance policy?
Yes, generally, you can transfer ownership of a life insurance policy. There may be circumstances in which you find it necessary to change ownership to make it more relevant to your changing life stage, for example, getting married.To transfer ownership of a life insurance policy, the policy owner must complete a memorandum of the transfer, detailing who the new owner will be. All existing policy owners must agree to the transfer and complete the memorandum forms.
Do you have to pay taxes on money you receive as a beneficiary?
You don’t generally pay taxes on the life insurance payout that you receive. However, the tax-free status of any life insurance benefits can possibly be influenced if the policy has been purchased through a superannuation fund or if the benefit is paid out to a beneficiary who qualifies as a non-dependant (for example, adult child).Can you change a life insurance policy beneficiary if you have a power of attorney?
Generally, power of attorney doesn’t give a person the authority to sign a beneficiary designation form. However, this may differ between insurance companies. Typically, only the policy owner(s) has the power to make changes to a life insurance policy, including changing beneficiaries.Do life insurance companies contact beneficiaries?
Typically, the policy owner or beneficiary must contact the insurance company to notify them of the death of the life insured and provide details of the claim. The insurer will provide you with the claim forms that need to be completed, as well as a list of any additional information they might require.Can the owner of a life insurance policy change the beneficiary?
Yes, the owner of the life insurance policy can make changes to the beneficiaries. This is why it is so important to understand the role of the policy owner before deciding who it should be.What happens if the beneficiary of a life insurance policy dies?
If a nominated beneficiary of a life insurance policy dies before the life insured, the payment is generally passed on to the other nominated beneficiaries listed on the policy. These people are referred to as contingent beneficiaries and are named just in case such a situation occurs.Can I have multiple life insurance policies?
In Australia, most life insurance companies allow you to purchase multiple life insurance policies, so long as you disclose all relevant policy information to each insurer and you aren’t over insured. The amount of cover you purchase in totality must be justified.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.
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
Are there any Australian owned Life Insurers?
Hi Sally,
Of the companies we compare, there are quite a few Australian owned life insurance companies, including Clearview, Neos and AMP. OnePath, BT, Asteron life and CommInsure are also Australian owned, however, they are in current negotiations to be sold to other life insurance companies that are not Australian owned.
I am the owner of 4 policies: one for myself, my wife, my son, and my daughter. I have paid for all premiums.
I want to cancel all policies and receive all fund values.
How is tax handled?
Hi Eugene.
Term life insurance policies have no cash-value component, so there is no cash back when you cancel a policy. However, if you paid premiums in advance, you might get a refund for those premiums minus stamp duty and any cancellation fees.
Life insurance premiums are generally not tax deductible. You can find out more here. Please note ComparingExpert and consultants are not tax specialist, so it would be best to contact your accountant or a tax professional.
Please give us a call on 1300 743 254 if you need assistance.
I have a joint vitality life insurance policy with my partner who passed away. Does the payout go to me or to my deceased partner. Thank you.
Hello Sharon. I’m sorry to hear about your husband’s passing.
The lump sum benefit will be paid to the policy owner’s nominated beneficiary. If no beneficiaries were appointed it will generally payout to the estate where it will then be divided as per the policy holder’s Will.
Have a look at your policy documents, it should state who the beneficiaries are.
My dad passed and left us [ 4 siblings ] as beneficiaries but my mom is co-owner. Are our siblings still gonna get our percentages?
Hello James.
Life insurance is a legal contract between the policy owner and the insurance company. As such, the policy will be paid only to the nominated beneficiaries listed in the policy documents. However, it’s always best to contact the insurer directly.