The major reason most people buy life insurance is to provide financial support for beneficiaries in case the insured person dies prematurely. However, there are additional reasons for purchasing: to pay off a home mortgage or other debts, to pay for funeral expenses or a college education for children, or for investment or estate planning.
Knowing who owns a life insurance policy, who the policy covers, and who stands to benefit in the event of death are all important, but sometimes confusing factors. At the end of this fact sheet you will find a short glossary designed to help you understand terms related to life insurance and ownership.
The owner could be the insured, the beneficiary, or some other party. Usually, the owner is the person whose life is insured. The owner could also be the insured's spouse or children. In other cases, none of these parties is the owner. One example is when a business buys insurance on its partners to cover the value of the insured's share of assets in the company.
The policy owner has certain important rights to the policy, including:
A life insurance policy is a legally binding contract and, as with any other contract, you need to know what the contract actually says. Here are some commonly used insurance terms and their definitions.
Primary beneficiary(ies): the individual(s) or organization(s) who will receive money (called death benefit, face value, or "proceeds") from the insurance company when the insured person dies.
Contingent beneficiary(ies): the individual(s) or organization(s) who receives the proceeds if the primary beneficiary(ies) dies before the insured dies.
Insured: the person whose life is covered by the policy. When the insured dies, the death benefit is paid.
Owner (policyholder) of life insurance contract (policy): the person who exercises control over the policy. The owner can make any changes without the consent of anyone else, including beneficiaries, unless there are court-imposed constraints in place.
Reviewed by Raymond E. Forgue, Department of Family Studies, University of Kentucky, co-author of Personal Finance, and Joe Botta and Lou Gorr, Virginia Cooperative Extension agents.
Virginia Cooperative Extension materials are available for public use, reprint, or citation without further permission, provided the use includes credit to the author and to Virginia Cooperative Extension, Virginia Tech, and Virginia State University.
Issued in furtherance of Cooperative Extension work, Virginia Polytechnic Institute and State University, Virginia State University, and the U.S. Department of Agriculture cooperating. Edwin J. Jones, Director, Virginia Cooperative Extension, Virginia Tech, Blacksburg; M. Ray McKinnie, Administrator, 1890 Extension Program, Virginia State University, Petersburg.
May 1, 2009