Understanding and defining the various roles in a life insurance policy
This article is the second in a three-part series, designed to help clear-up any confusion about life insurance.
First, the basics: No matter what type of policy you have, its basic purpose is to pay a death benefit to the policy beneficiaries when the insured dies.
Every policy has a few key roles, known as the insured, the beneficiary and the policy owner. The policy owner is responsible to pay the premiums, and in exchange, the insurance company promises to pay the death benefit to the named beneficiaries. With that backdrop in mind, let's take a closer look at the key roles.
The person whose life the insurance policy covers. When the insured dies, the policy pays a death benefit. The insurance company evaluates the underwriting risk based on the insured's physical condition and, to an extent, financial condition. In most cases, the named insured can't be changed.
The person(s), or party(ies) who receives the death benefit when the insured dies. The policy owner names one or more beneficiaries; the insurance company pays the named beneficiaries according to the most current beneficiary designations. Only the policy owner can name and change the beneficiary designation. With most policies, the beneficiary designations can be changed at any time.
Definition: Policy owner
Most often the policy owner is the only party with rights to the policy. A life insurance policy is considered property. Only the policy owner can request the policy be terminated, borrow against cash values, change beneficiaries and ownership or make other changes to the policy. Now that you've read the life insurance definitions, let's look at how these roles might play out. As you'll see below, sometimes one person or entity can fill more than one life insurance policy role.
Role example 1:
- Policy owner - 45 year old mom, Brenda
- Insured - 10 year old son, Jack
- Beneficiary - Charity cancer foundation
Role example 2:
- Policy owner - John's Manufacturing
- Insured - Key sales professional Sharon
- Beneficiary - John's Manufacturing
Role example 3:
- Policy owner - 30 year old dad, Sam
- Insured - 30 year old dad, Sam
- Beneficiary - Sam's wife, Suzi
Role example 4:
- Policy owner - Brown Family Trust
- Insured - Max Brown
- Beneficiary - Brown Family Trust
Now that you know the basic roles involved with life insurance, it may also be helpful to review some common life insurance policy terms. And, if you missed part 1 of this article series, learn about basic insurance types here.
Note: This basic information is intended to give you a good foundation on which to begin a conversation with your financial adviser about life insurance. Your agent should be able to answer all the questions you have about your insurance policy options, how much you will pay, and the protections each policy provides.