Can the insured and owner be the same person on a life insurance policy?

On a life insurance policy, the insured is the person whose life is being covered. The owner controls the policy and makes decisions about it. Oftentimes, the insured and owner are the same individual. But they can also be different people.

So can the insured be the owner of their own life insurance policy? The short answer is yes. Let’s discuss the details of life insurance policy ownership, when the insured owns their policy, the pros and cons, and alternatives.

What is life insurance policy ownership?

The owner of a life insurance policy has full control over the contract. They can:

• Name and change beneficiaries
• Make withdrawals and loans against the policy
• Cancel or surrender the policy
• Select investment options if applicable
• Pay premiums

The owner does not have to be the insured. It can be a spouse, child, trust, or business entity. But the insured can also own their own policy.

When the insured owns the policy

It is common for insureds to own their own policies, especially if they are paying the premiums. Reasons an insured may want to be the owner include:

Simplicity – The insured deals directly with the insurance company, rather than going through another owner. This avoids complexity.

Control – The insured retains full control over policy changes, cash value access, beneficiaries, etc.

Accessibility – It’s easier for the insured to make withdrawals or policy loans if they need access to cash value.

Privacy – If the insured does not want to involve others in their coverage, owning the policy themselves maintains privacy.

There are some scenarios where it makes perfect sense for the insured to be the owner:

• Single adults – Unmarried policyholders often own their own coverage. This gives them control without the need for others’ involvement.

• Married couples – Spouses may own policies on each other’s lives. The insured spouse controls their own policy.

• Minor children – Parents/guardians purchase policies for minors and retain ownership until adulthood.

• No estate tax – If estate taxes are not a concern, the insured owning their policy is uncomplicated.

• Small estates – Even with estate taxes, smaller estates may benefit from insured ownership.

So in many common situations, the insured also being owner is perfectly appropriate. It can simplify policy management and provide the insured control.

Pros of the insured owning their life insurance

There are a few advantages when the insured is also the policy owner:

Simplicity – As mentioned, this scenario avoids involving other parties, which simplifies administration.

Control – The insured makes all choices regarding the policy as the owner.

Privacy – Details about coverage and beneficiaries remain private between the insured and insurance company.

Accessibility – The insured can easily access cash value through withdrawals or policy loans if needed.

Creditor protection – Life insurance cash value and death benefits are generally exempt from creditors.

For many insureds, these benefits make owning their own coverage the right decision. It gives them full control in a straightforward arrangement.

Cons of the insured owning their life insurance

There are also some potential drawbacks to an insured owning their policy that should be considered:

Estate taxes – If subject to estate taxes, insured ownership causes death benefits to be taxable.

Probate – The policy must go through probate when the insured dies, which can be costly and time-consuming.

Creditors – While cash value is protected, death benefits paid to the insured’s estate could be subject to creditors.

Legal challenges – Disputed policies could end up tied up in the insured’s estate during legal proceedings.

Unintended heirs – Assets passing through probate may go to heirs the insured did not intend to receive policy proceeds.

For these reasons, insured ownership does not make sense for everyone, particularly the very wealthy concerned about estate taxes or legal challenges.

Alternatives to insured ownership

If the potential drawbacks of insured ownership are a concern, there are a few alternatives:

Spousal ownership – Naming the insured’s spouse as owner avoids some issues like probate and estate taxation.

Child ownership – An adult child could be named owner to keep death benefits out of the insured’s estate.

Trust ownership – An irrevocable life insurance trust (ILIT) owns the policy to avoid estate taxation.

Business ownership – A business insuring a key employee or owner could own the policy.

In these cases, the policy owner has control rather than the insured. This can mitigate risks like estate taxes, probate, and creditor claims depending on the owner.

Can an ILIT own the insured’s policy?

An irrevocable life insurance trust (ILIT) is a common way for an insured to have their policy owned by another party. The ILIT owns the policy, avoiding estate taxation and probate. The trustee makes policy decisions and distributes proceeds to beneficiaries tax-free.

The insured cannot be the ILIT trustee, but they can be involved in choosing a trustee. Trustees have a fiduciary duty to manage the ILIT appropriately. Beneficiaries are often the insured’s spouse and children.

An ILIT must be set up and funded at least three years before the insured’s death to keep proceeds out of their taxable estate. This strategy can save considerable estate taxes when done properly.

Is it OK for a business to own an employee’s life insurance?

It is quite common for companies to own life insurance policies on key executives and employees. This “corporate-owned life insurance” or COLI insures the business against financial loss if the employee dies.

Reasons a company may buy COLI include:

• Fund executive buy-sell agreements
• Pay estate taxes to owners’ heirs
• Cover loss of an important employee
• Fund deferred compensation plans

The employer is named owner and beneficiary of the corporate-owned policies. The coverage is a business asset, not the insured individual’s. COLI death benefits are received tax-free by the business.

Can you change life insurance ownership?

Yes, policy owners can change ownership by submitting the proper forms to the life insurance company. Reasons owners might transfer a policy include:

• The initial owner dies or becomes incapacitated
• Ownership no longer makes sense for estate planning
• A business is sold and COLI policies transfer
• The policy is gifted to another person

Changing ownership can have tax and legal implications. It’s important to discuss the impacts with financial and legal advisors before completing a transfer.

How does co-ownership work?

Some policies have co-ownership arrangements between two people, such as spouses or business partners. This means multiple owners share control of the policy and must agree on decisions.

Common co-ownership setups include:

• Joint owners with right of survivorship – When one owner dies, the other gets full ownership.

• Tenants in common – Each co-owner has a partial interest that can be left to heirs.

• Community property – Spouses equally own all assets including life insurance in community property states.

If owners disagree on changes to a co-owned policy, a legal dispute could arise. Contract details may specify default procedures if consensus cannot be reached.

Can minors own life insurance?

Minors cannot legally enter into contracts, so a child cannot be the direct owner of a life insurance policy. Parents or guardians initially own coverage purchased on a minor’s life.

Once the insured child reaches age 18 or 21, depending on state law, ownership can transfer. At that point, the insured child becomes both owner and insured on their policy as an adult.