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Third Party Insurance Ownership: Definition & Examples

Instructor: Jason Matyus
Third party insurance is where the owner of the policy and the insured are two different entities. It involves the policy owner, the insured and the beneficiary.

Third-Party Ownership

New parents often worry about a baby's future and the unknown costs of raising a child. To help alleviate these concerns there is something called third party ownership of life insurance, where people (like parents) buy insurance that can help cover costs in the event of a tragedy. Parents can buy life insurance on their children to help cover medical bills in the event of an unforeseen illness that leads to the death of a child. The unexpected medical bills can otherwise add to the hardship the parents endure. It can also be a safety net in case the child develops an illness that makes them uninsurable later in life.

How Does It Work?

It is important to understand the components of an insurance policy. There are three main components.

The policy owner is the person that has all the rights in the policy. They can collect dividends if the policy offers them. They can name the beneficiary of the policy. They can cash out the policy for its cash value if applicable, as well as transfer ownership. They also make the payments on the policy.

The insured is the person whose death triggers the insurance company to pay the death benefit. It is important to understand that the insured can also be the policy owner, but they do not have to be the same (as in third party ownership).

The beneficiary is the person or entity identified in the policy that receives the death benefits if the insured should pass away. It is important to note that it doesn't have to be a person. It can be an estate, business, or trust.

For third party life insurance, there are two entities that have to be separate. The insurance owner and the insured are two different entities. As in our previous example, parents buying a life insurance policy on their child when he or she is born is third party insurance ownership. In general, a third party life insurance policy is where the insurance company promises the owner of the policy that the insurance company will pay the beneficiary upon the death of the insured.

Insurable Interest

In order to purchase a life insurance policy on another party, the person buying the policy and the person insured have to have an equal interest. The purchaser must be negatively affected financially by the death of the insured. When the insurance owner has a vested interest in the insured staying alive it is considered insurable interest.

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