Ownership and Assignments | Life Insurance Provisions

Policy Ownership

The application identifies who will own the policy, who will be insured, and who will be the beneficiary. Often the owner and the insured are the same person, but this is not always the case. If anybody other than the insured owns the policy it is called third party ownership and it is necessary for the insured to sign the application in addition to the applicant.

Third party ownership of life insurance is common. An insurance contract is an agreement between two parties, the insurer and the insured. A third party is anyone who is neither the insurer nor the insured. Examples include:

Parents:

In the case of juvenile insurance, a parent or legal guardian is the third party owner.

Spouses:

It is not uncommon for a spouse to own a life insurance policy on the life of the other spouse.

Buy-Sell Agreements:

Persons with business or financial relationships often buy life insurance on one another.

The owner of the policy is the person who controls the policy and is entitled to all the rights of the contract, including the right to take policy loans on the cash value, to receive the cash value upon cancellation of the policy, and to designate the beneficiary. Another important right is that of assignment. This is the right of the policy owner to transfer all or part of the ownership in the contract to another party.

There are two types of assignment: absolute and collateral. Absolute assignment is the equivalent to a sale of the policy; it is an irrevocable transfer of all ownership rights. Collateral assignment is used quite often in securing loans from lending institutions. It is a transfer of some or all of the ownership rights on the condition that they will revert back to the assignor when the loan is repaid.

The assignment provision of a policy provides that the company will not be bound by the assignment if the company has not received written notice of it. The insurer assumes no responsibility for the validity, legality, or effect of any assignment.

Lesson Summary

Policy ownership involves identifying the owner, insured, and beneficiary of an insurance policy. Third party ownership is common when the policy owner is someone other than the insured. Ownership entails the right to all aspects of the contract, including policy loans and beneficiary designation. There are 2 types of assignment: absolute and collateral.

Chapter Vocabulary

Definitions

Absolute Assignment: The irrevocable assignment by a policy owner of all control and ownership rights of an insurance policy.
Assignment: The transfer of a legal right of interest in an insurance contract to another person.
Beneficiary: (1) A person who may become eligible to receive, or is receiving, benefits under an insurance plan other than as an insured.

(2) Any person enrolled in Medicare.

Collateral Assignment: Assignment of a life insurance policy as security for a loan or debt, with the creditor to receive the proceeds or cash values to the extent of the interest assigned.
Third Party: Person other than the insured or insurer who has incurred losses or is entitled to receive payment due to acts or omissions of the insured.