Recently we ran a quiz with our existing life insurance customers to check how well they knew their policy details. When we asked ‘who gets the money’ most people selected their spouse. For some people this might very well be correct, but it also may be wrong.
What does ‘policy owner’ mean?
Policy Owner is one of those terms that insurance companies bandy around assuming that everyone knows what it means. But its industry jargon, and therefore people might assume they understand without ever checking that they really do. On a Life Insurance Policy there are two parties to understand, the Life Insured and the Policy Owner.
The Life Insured is the person whose life is covered. If this person dies, or suffers anything else that qualifies for a claim such as a terminal illness, a claim will be paid.
The Policy Owner is the person who receives the money from the claim.
The Policy Owner may be the same person as the Life Insured. In which case when that person dies the money will go to their estate.
If the person insured is different from the person who owns the policy (for example you’re the person insured but your spouse is the owner), the owner is the one who will receive the money if a claim is made. It’s important to know that this means the life insured person can pay the premiums but the owner is the only one who can change or cancel the policy.
How does a joint policy work?
Most couples, when they take out life insurance, think they want the money to go to their spouse if the worst happens. To put this in effect, when the policies are taken out they make themselves each the owner of the other’s policy, or make themselves the owners of each other’s as well as themselves, that is, two owners for each policy. This is called a joint ownership.
With joint ownership the pay-out on the policy goes to the surviving owner. For example, a husband and wife have joint ownership. In the event of the husband’s death, the pay-out on the policy will go to the surviving owner, the wife, and in the event of the wife’s death, the pay-out will go to the surviving owner, the husband.
Unfortunately, if things don’t go to plan with the marriage, there can be problems with this approach.
If a marriage breaks up, the spouse will continue to be the beneficiary of the policy if the other spouse dies, because they are the surviving joint owner. There is nothing that can be done to change that, unless the remaining spouse agrees to sign away their rights. If the split is less than amicable this can be problematic.
We know when you take out a policy that’s the last thing you can imagine happening, but it is important to go into joint ownership understanding the potential implications. It’s for this reason that when life Insurance policies are first issued the person who is insured is usually also the owner of the policy.
