What Does the Ownership Clause in a Life Insurance Policy State?
Understand the critical role of the ownership clause in life insurance, defining who holds control and how policy decisions are made.
Life insurance policies offer financial security for individuals and their families. Policies contain various clauses defining their terms and conditions. Among these, the ownership clause holds a fundamental position, establishing who maintains control over the policy.
Understanding the Ownership Clause
The ownership clause in a life insurance policy legally designates the individual or entity controlling the policy. It explicitly names the policy owner, who holds legal title and dictates management decisions. This role is distinct from the insured individual whose life is covered or the beneficiary who receives the death benefit. The clause outlines the owner’s rights and responsibilities, ensuring clarity on who can act on the policy.
Rights of the Policy Owner
The policy owner possesses several rights over the life insurance contract. A primary right is to change the beneficiary designation, directing who will receive the death benefit. This flexibility allows the owner to update beneficiaries as life circumstances evolve.
Policy owners with cash value policies, such as whole life or universal life, can take out policy loans against the accumulated cash value. These loans typically accrue interest, and if not repaid, can reduce the death benefit. A policy owner can also surrender the policy for its cash value, effectively terminating the coverage. This provides a cash payout, though it may be subject to surrender charges and tax implications.
The policy owner can assign the policy as collateral for a loan, a process known as collateral assignment. In such cases, the lender has a claim to the death benefit up to the outstanding loan amount if the insured passes away before repayment. Policy owners can elect various policy options, including dividend options for participating policies or non-forfeiture options if premium payments cease. Owners are also responsible for premium payments and receiving official notices, ensuring the policy remains in force.
Identifying a Policy Owner
The designation of a policy owner is established when the life insurance policy is purchased. Typically, the applicant becomes the initial policy owner. However, the owner does not have to be the insured individual whose life is covered.
An owner can be the insured person, another individual like a spouse or parent, a trust, or a business entity. For example, a parent might own a policy on a child, or a business might own a policy on a key employee. The specific details of ownership are recorded in the policy application and become part of the contract. Understanding the distinct roles is crucial: the owner controls the policy, the insured is the person whose life is covered, and the beneficiary receives the death benefit upon death.
Transferring Policy Ownership
Changing the ownership of a life insurance policy after issuance involves a formal process to ensure legal validity. Policy ownership can be transferred through a specific procedure, often requiring a change of ownership form provided by the insurance company. This form facilitates the transfer of all rights, title, and privileges of the policy to a new party.
The steps typically involve completing documentation, requiring signatures from both the current and proposed new owner. This form is then submitted to the insurance company for processing. The transfer is not legally binding until acknowledged and recorded by the insurance company.