Life Insurance Policies: Ownership Rights & Options

Instructor: Deborah Schell

Deborah teaches college Accounting and has a master's degree in Educational Technology and is holds certifications as a CIA, CISA, CFSA, and CPA, CA.

Owning a life insurance policy provides a policyholder with certain rights to control the policy. In this lesson, you will learn more about ownership rights for life insurance.

Definition of Ownership Rights and Options

Life insurance is a type of insurance where a policyholder pays a premium and when the owner dies, the insurance company pays an amount of money known as a death benefit. An owner of a life insurance has certain rights, including:

  • The right to change a beneficiary
  • The right to cancel or surrender the policy
  • The right to transfer ownership
  • The right to change certain policy provisions

Let's meet Marcia who met with her insurance agent to discuss purchasing a life insurance policy. Marcia's agent provided her with a brochure outlining the rights she would have to control her policy, but she isn't sure how they might apply to her. Let's see if we can help Marcia with this problem.

Right to Change a Beneficiary

A beneficiary is someone who receives the policy proceeds when the insured dies. Beneficiaries can be revocable meaning that the owner can designate a new beneficiary or make policy changes without obtaining the consent of the beneficiary, or irrevocable in which the current beneficiary must provide his/her written approval of beneficiary changes or removal from a life insurance policy. Most owners designate revocable beneficiaries.

If Marcia's policy had revocable beneficiaries, she could submit a written request to the insurance company to change her beneficiary designation and the change would be effective on the date that she signed the form. If her policy has irrevocable beneficiaries, she will have to obtain the written approval of all current beneficiaries before the insurance company will process her change.

Right to Cancel or Surrender the Policy

If Marcia surrenders her policy, she is cancelling it. There are a number of reasons why Marcia may choose to surrender her policy. For example, she may start work with a new employer and receive life insurance through the company and conclude that she no longer needs the additional coverage. The employer's life insurance could also have lower premiums than Marcia's current policy.

She may also reach a certain age and decide that she no longer requires coverage. Let's assume that Marcia took out a policy when her daughter was one-year-old to cover costs if she were to die. Her daughter is now 25 and Marcia does not need to pay for day care or other caregiver costs that she would have incurred when her daughter was younger.

In order to cancel her policy, Marcia would have to submit a written request to her insurance company. If Marcia's policy has a cash value or some monetary value that it has accumulated, the insurance company could levy a surrender charge or a fee for surrendering the policy within a certain number of years after obtaining it.

Right to Transfer Ownership

The right to transfer ownership provision allows an owner to transfer ownership to another individual or to a company. If the policy has an irrevocable beneficiary, then the owner must obtain his/her written consent for the change. The owner must submit a written request to the insurance company to change ownership of the policy.

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