The Who’s Who On Your Life Insurance Policy

Most people think of life insurance as an arrangement between them and their life insurance company only. In most cases this is true, but sometimes things can get a little more complicated than that. In this blog post we’ll look at all the potential role players in a life insurance contract, and why it’s important that you know who’s who.

Here are six parties you need to know about when taking out a life insurance policy:

1. The Insurer

The aim of a life insurance company is to exchange the risk of you passing on, and not leaving enough money for your family, for a regular payment called a premium. You select the type of cover you would like to take out, as well as the amount and the term of the policy, in exchange for a pre-determined premium (either monthly or annually). Your risk is then spread amongst all the insurer’s policyholders, and if the risk is too high, then the insurer may spread the risk among other insurers as well.

2. The Policyholder

The policyholder is the person who legally owns the life insurance policy, and usually this is the same person as the life insured.

However, in some cases the policyholder might not be the same person as the insured life. An example of this would be an employer who owns a life insurance policy on the life of one of his key employees. If the key employee passes away, the employer will be in a financial situation to procure the services of someone else.

If the policyholder isn’t the same person as the life insured, “insurable interest” needs to exist. The insurer will want to know why the policyholder has an interest in insuring someone else’s life.

Why is this important?

Fraud – If no “insurable interest” exists, the insurer will not allow the policy to be issued. If you are the policyholder and your wife is the insured life, that makes perfect sense. If you are the policyholder, and you are looking to insure your next-door neighbour’s life –  What sense would that make? Unless of course you are looking to place him in a shallow grave in your back garden, to collect a few million 🙂

3. The Life Insured

This is the person whose life is insured under the policy.

In some instances, you can have two lives insured on the same life insurance policy. An example of this would be a husband and wife, who are both insured under one policy. In the event that the stated life insured, on the policy, passes away, that triggers the claim and the life insurance proceeds will pay out.

4. The Payer

The policyholder is usually also the payer. However, anyone else can pay the policy premiums. For example, a child could be paying for their retired parent’s life insurance policy. Watch out though – if you’re paying for the policy in the expectation of receiving the proceeds, then it’s best to be the owner of the life insurance policy as well.

5. The Beneficiary

This is the person who is entitled to the proceeds of the life insurance. The beneficiary can be changed at any time by the policyholder. Note that if the policyholder is married in community of property, they need the written permission of their spouse to change the beneficiary. Minors can’t be nominated as beneficiaries, so if your intent is to leave your kids with money as an inheritance, it’s best to deal with this in a Will document and through the formation of a testamentary trust.

6. The Cedent

If you’ve ever owed money to a bank, they might have insisted on you ceding your life insurance policy to them ceding your life insurance policy as a guarantee that the outstanding amount due to them will be covered in the event that you are no longer able to pay the monthly instalments. This is known as a collateral cession.

In certain instances, you might want to cede a policy permanently to someone else. This is known as an absolute cession.

That’s it. That’s the who’s who on your life insurance policy.

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Until next time.
The Wise About Life team