Who should own your life insurance policy?

You pay the policy’s premium and are listed as the life insured – but should you be the policy owner? While you may be uncertain about the idea of another person or entity holding a policy over your life, there are times when this can make sense.

Quite often, the answer to who should own your life insurance policy depends on who, or what, you want the policy to protect.

Owning your own life cover

Life insurance is often owned by the life insured – the person whose life is covered by the policy. If you’re setting up life insurance for personal reasons, there are advantages to this structure.

As the policy owner, you can take full control of how any death benefits are paid out through your will. For example, you might want the proceeds split between your partner and your children, or to go to your children from a previous relationship. You might also want some of proceeds to be used to support a cause close to your heart.

While some life insurance policies provide a cash advance to your beneficiaries to cover funeral expenses or your unpaid bills, most of the life insurance proceeds may not be able to be released until there has been a grant of probate for the will. This could mean your family has to wait until a lawyer validates the will before they receive the funds – often weeks later. In addition, some of the insurance payout may go towards paying the lawyer’s administration costs.

Cross ownership with your spouse or partner

To avoid the delays and costs involved with distributing life insurance benefits through your estate, you could list your spouse or partner as the policy owner – and vice versa. If you do this, the proceeds of your insurance go directly to them without any administration costs.

But there are some potential downsides to this type of cross ownership. For example, you can’t leave part of your insurance payout to other family members, like children or grandchildren, or to any charities.

What’s more, if you and your partner split up and you own each other’s life insurance policies, your partner could refuse to let you cancel or change their policy.

Joint ownership with your spouse or partner

Joint ownership means that you and your partner are both owners on each other’s policies. It provides the same benefits to each party as cross ownership but prevents either owner from giving policy instructions without the other’s agreement. You own the policy as joint tenants so, if one owner passes away, the ownership of the policy simply passes to the surviving owner.

But if you break up, you may not be able to change your policy or remove them as an owner without your ex-partner’s permission.

Giving ownership to your children

You can give ownership of your policy directly to your children. Your children will then receive the benefits directly if you pass away. You would need to consider contractual capacity issues though if your children are still minors (generally children under 18 in the case of a policy on a parent's life).

Giving ownership to people outside your family

Your insurance policy can also be set up to protect people outside your family. For example, an extended family member or close friend can own your insurance policy and receive the proceeds if you pass away.

If you own a property with another person but aren’t in a relationship with them, you can also protect each other by becoming joint owners. Owned as joint tenants, the surviving owner becomes the sole policy owner if one of you passes away.

It’s worth keeping in mind that the surviving owner receives the insurance payout, meaning the other owner’s dependants may miss out. It could also result in the same issues that joint ownership policies face if the relationship breaks down and the owners can’t agree on what to do with the policy.

Safeguarding your family through a trust

If you have a family trust, you can choose to make the individual trust members the owners of your policy.

A trust can help protect the insurance payout from being claimed by creditors if you have unpaid debts, or by family members outside of the trust. A trust can also be used to protect the life insurance proceeds until the intended beneficiaries are able to manage their own financial affairs.

Remember, the trustees become the owners of the policy and you will need to regularly revise your life insurance policy if there are any changes of trustee. And there will also be tax issues to think about.

Protecting your business and employees

If you’re a business owner, you can make your company the insurance owner. The company could then use the payout to cover any business debts or to cover for the loss of you or other key people who are insured in the business.

As an employer, you can also hold a life insurance policy to help you in supporting your employees or as part of their remuneration package. This provides a lump sum that could be given to their family if your employee dies. There may be fringe-benefit or other tax implications that you would need to consider with this structure though, so specialist tax advice is strongly recommended.

Your adviser can help

Life insurance is an important part of your overall financial plan, providing peace of mind about your family’s future. You’ll want to keep in mind that the ownership structure that works for you today may not be the structure that will work for you tomorrow. That’s why it’s important to consider who owns your policy as part of a regular review of your insurance.

To find out more or to make changes to your policy, contact your financial adviser.

Important information

Resolution Life Australasia Limited ABN 84 079 300 379, NZ Company No. 281363, AFSL No. 233671 (Resolution Life). The content on this website is for information only. The information is of a general nature and does not constitute financial advice or other professional advice. Before taking any action, you should always seek financial advice or other professional advice relevant to your personal circumstances. While care has been taken to supply information on this website that is accurate, no entity or person gives any warranty of reliability or accuracy, or accepts any responsibility arising in any way including from any error or omission.

A disclosure statement is available from your Adviser, on request and free of charge.