The main reason why people take out life insurance is to protect their loved ones in case of their death. Life insurance can provide financial protection for your family, paying for children’s education, your mortgage or debt, and providing security if you are the main income earner.
Business owners also take out life insurance to cover the death of a key person in the business or to be used as funding for a buy/sell agreement.
When taking out insurance, or at the time of your yearly review, it is important to consider policy ownership. Who should own your policy so that the money paid out ends up where you want it to? Do you fully understand how policy ownership works and the consequences of not having the right structure? The policy owner, who is not necessarily the life insured, has the right to deal with the policy – changing the level of cover and contact details.
The policy owner is also responsible for paying the premium. The right ownership structure will depend on your individual circumstances. That’s why it is important to review the structure you set up when you take out the policy. There are a number of ways to set up the ownership structure, and most of them have their advantages and disadvantages:
Sole policy ownership
In this scenario, the life insured is also the policy owner. In case of death the policy will be paid to the estate and distributed in accordance with a will. This can mean delays if the family needs to access the money immediately to pay for daily expenses or funeral costs as the policy will be locked up in probate after death.
Joint policy ownership
In this case, a policy is owned by more than one person – often a couple will jointly own each other’s policies. During the life of the policy any changes that are made will require signed authorisation from both owners and in the event of death, the funds go directly to the remaining policy owner. This type of ownership however might create problems when a marriage or partnership breaks up, as both parties will need to agree to split the policy.
Policy managed by a trust
A person’s policy can be managed by a trustee of a trust, as trusts themselves are not classed as ‘people’ and therefore can’t own policies. With this option, it is important to have the right beneficiaries set up in the trust. To make sure funds reach children, it is best to make sure the will is up to date and specifies where the funds should go.
It is important to get advice from professional advisers like lawyers, accountants and financial advisers so that you have the peace of mind of knowing that your loved ones will be looked after should you pass away.
