By Carley Ellis

A family trust may have been sold as a great way to offer protection, but it really only works if you maintain it well. Personal insurance is no different.

The Good, The Bad, and The Unpaid – Why Insurance Policy Ownership Matters

In my role as an insurance adviser, I meet people at significant times in their lives.  Buying homes, growing families, or starting businesses.  Plans are set up to provide a bit of peace of mind, and to offset potential negative outcomes during these exciting times.

If the worst is to ever happen, the insurance policy is paid out.  But where does the money go?

It depends on the “policy ownership”.  Essentially, whoever owns the policy, gets the money. Ensuring the right people, get the right money, at the right time, is often most important thing to get right.

Do you want your ex-partner owning your life insurance?

It’s so important to have this set up correctly from the get-go, and to make sure it’s regularly reviewed.

What rights do policy owners have?

The policy owner is the only person who can make changes to your policy.  They can update the amounts that you’re insured for, decide when the insurance pays out, and how long the insurance lasts for.  In the event of a claim, the policy owner is the only one who can get the payment. As an example, you can own a life insurance policy on anyone you have an insurable interest in (if you’d suffer a loss financially should they pass away for example).

Should I own my own insurance policy?

This seems like a great idea.  It’s your policy right, you want to be able to make the changes, you want the money.  The only issue here is – what if you’re dead? For example, if you own your life insurance policy, and you die – the money goes to your estate.  If you don’t have a will, that means the proceeds of the insurance may be locked up until probate is received.  This can take months.

Also, if you don’t die but you’re in a coma – you can’t sign your own claim form, so how are we going to get any insurance policy paid?

Should I own my insurance policy with my partner?

If you have a partner and the insurance strategy is in place to provide them with money in the event of your demise, then joint ownership might be the best option.  It allows either partner to make changes or claim money, no matter if one of the owners is incapable of doing so.

What happens with our insurance policy if we split up?

Here’s where the importance of a regular review is highlighted.  Imagine the scenario where you pass away, and all the money is available for your ex-partner to claim.  Even if your will states that the money is to go to your children for example, the life insurance policy now belongs to the surviving policy owner – not your estate – so the will is irrelevant in this instance.

In the event of a relationship breakdown, talk to your insurance adviser to organise for the policies to be separated and policy ownership updated.

Is it normal that the bank ‘owns’ my insurance policy?

From time to time, I come across old life insurance policies that are owned by a client’s bank.  These may have been set up to cover off a mortgage debt back in the day; if the borrower died, the bank could guarantee their money would be repaid.  Often, when I come across these policies, the mortgage has been repaid or is much less than the life insurance policy is worth.  Imagine paying premiums on life insurance for all this time – only to die and find out that your bank collects the money, not your family. Ick.

Insurance is not a set-and-forget product.  It needs regular reviewing, at least every two years, to make sure it’s still doing what you want it to do.

In summary, a good insurance plan will:

  • Include all the right types of insurance (Life, Trauma, Income cover, and Medical are the main ones).
  • Be set at all the correct levels for your personal circumstances (amounts should at least enough to repay your debt due to death, disability, or medical incapacitation)
  • Be owned by the correct people who will need the money should you pass away.