Who's who on a life insurance policy
Sorting out who can do what with a life insurance policy can be confusing.
- Can a son take out a loan against his elderly mother's life insurance?
- Can an insured woman change who receives the death benefit before she dies?
- Can a former wife claim the death benefit on her ex-husband's insurance policy even if the divorce was final 20 years ago?
The answers depend on which roles each of these people play on the policy. To make matters a bit more complicated, one person can play more than one role. Here's what you need to know to sort it out:
Three basic life insurance roles
Generally there are three parties to a life insurance policy:
- The policyholder: Person who owns the policy.
- The insured: Person whose life is insured.
- The beneficiary: Person who collects the death benefit when the insured person dies
The policyholder may also be the insured. For instance, a husband might purchase an insurance policy on his own life to protect his wife and children in case of his death. In that case, the husband is the policy owner and the insured.
Or a policyholder could also be the beneficiary. That same husband might purchase an insurance policy on his wife's life, naming himself as a beneficiary, to protect his family's financial welfare in case she died. In that case, the husband is the policyholder and the beneficiary, and his wife is the insured.
If there are three different people filling the three different roles, thre could be an unpleasant tax situation referred to as the Goodman Triangle. In general, two of the roles should be the same person in order to avoid the tax trap.
The policyholder controls life insurance decisions
The policyholder is responsible for paying the premiums to keep the life insurance policy in force – even if the beneficiary is someone else.
The policy owner controls everything, according to the Life and Health Insurance Foundation for Education. Only the policy owner can access the cash value in a permanent life insurance policy, decide on its beneficiaries or change them. The insured person does not have the right to do anything unless he owns the policy.
There can be misunderstandings and confusion among beneficiaries as the insured ages. A son who is named as beneficiary on his ailing parent's life insurance policy can't access the cash value or make any changes to the policy, even if his parent is elderly and incapable of making good decisions. The only exception is if the son has durable power of attorney to make insurance decisions.
The foundation recommends that older policy owners complete durable power of attorney documents, appointing trusted loved ones to make decisions for them in case they become incapacitated. To enable the loved ones to make decisions concerning life insurance policies, the durable powers must include rights for insurance purposes, not just for other decisions, such as health care choices.
Who can collect the life insurance death benefit?
Only the beneficiaries named on policies can collect death benefits from life insurance companies. This is why it's so important for policy owners to regularly review their life insurance decisions to make sure the named beneficiaries still are the people who should collect the money – especially if you’ve experienced major life changes.
Say, for instance, you name your spouse as a beneficiary on your life insurance policy, and then you go through a bitter divorce. A few years later you remarry, have children and live happily ever after. Unless you changed the name of the beneficiary on the life insurance policy, though, guess who collects the death benefit when you die? Your ex-spouse.
Sometimes people remember to update individual life insurance policies but forget to update group life insurance policies. Take a look at all your policies to make sure they reflect your current wishes. It can save the people you love from a difficult -- and costly -- battle disputing the policy in court. Clearly communicating your wishes and making sure the contracts are up to date is the best way to make sure your money goes exactly where you wanted it after you're gone.
If you're in the market for a life insurance policy, you can compare the best life insurance companies as reviewed by surveyed policyholders right here at Insure.com.