Policy Ownership The application identifies who will own the policy, who will be insured, and who will be the beneficiary. Often the owner and the insured are the same person, but this is not always the case. If anybody other than the insured owns the policy it is called third party ownership and it is necessary for the insured to sign the application in addition to the applicant. Third party ownership of life insurance is common. An insurance contract is an agreement between two parties, the insurer and the insured. A third party is anyone who is neither the insurer nor the insured.

Examples of third party ownership include: •Parents In the case of juvenile insurance, a parent or legal guardian is the third party owner. •Spouses It is common for a spouse to own life insurance on the life of the other spouse. •Buy-sell Agreements Persons with business relationships often buy life insurance on one another. The owner of the policy is the person who controls the policy and is entitled to all the rights of the contract.

Another important right is that of assignment. This is the right of the policy owner to transfer all or part of the ownership in the contract to another party. There are two types of assignment: Absolute and Collateral Absolute assignment is the equivalent to a sale of the policy; it is an irrevocable transfer of all ownership rights. Collateral assignment is used quite often in securing loans from lending institutions. It is a transfer of some or all of the ownership rights on the condition

that they will revert back to the assignor when the loan is repaid. The assignment provision of a policy provides that the company will not be bound by the assignment if the company has not received written notice of it. The insurer assumes no responsibility for the validity, legality, or effect of any assignment.

Beneficiary Designation The beneficiary is who will receive the policy proceeds upon death of the insured. Insurable interest rules do not apply to beneficiaries. As long as the policy owner has an insurable interest in the insured's life, the beneficiary need not. For example, you may be named the beneficiary of a policy on the life of a distant relative with whom you have no insurable interest.

Revocable vs. Irrevocable If a beneficiary is named revocable the owner has the right to change the beneficiary without his/her consent. Because of the flexibility it provides, it is the more common designation. With an irrevocable designation, the owner loses the right to change the beneficiary or to assign the policy without the beneficiary's permission. An irrevocable beneficiary has a vested right to policy benefits.

The OWNER of a life insurance policy names the beneficiary. An irrevocable beneficiary can only be changed with written permission from the beneficiary.

Primary vs. Contingent The primary beneficiary is the first, or primary, person (or persons) to receive benefits. It can be split between several people, if desired. The contingent beneficiary will receive benefits only if the primary beneficiary is deceased at the death of the insured. If the primary and contingent beneficiaries pre-decease the insured, the final beneficiary is the insured’s estate.

**NOTE** If all beneficiaries pre-decease the insured, the final beneficiary is the insured's estate. *******************************

The most common designation is to name 1 or more individuals, if multiple people are named beneficiary Per Capita and Per Stirpes are used. Under a per capita beneficiary designation, if one of the named beneficiaries pre-deceases the insured, the remaining beneficiaries divide his/her share, in addition to receiving his/her own. Under a per stirpes (Latin for through the root) designation, the proceeds belonging to the deceased beneficiary would not go to the other beneficiaries, but to his/her heirs.

Other common beneficiary designations include: •Class Designations. Often used when several children are named beneficiary and the owner wants them to share the proceeds equally, such as "all my children," rather than naming each child individually. •Estates. If no beneficiary is named, or if all named beneficiaries have pre-deceased the insured, the final beneficiary is the insured’s estate. •Minors. A minor may be named as beneficiary if a guardian is appointed to receive the funds on his/her behalf.

Beneficiary designations continued: •Charities. It is common to name a charity as beneficiary. •Trusts. Trust accounts are often established to receive proceeds from a life insurance policy. When a trust is named as a beneficiary, the trustee may manage the assets as he/she sees fit, as long as the trustee does not personally benefit from the trust. A testamentary trust is established to receive life insurance proceeds, but is not a taxable entity until the moment of death.

**NOTE** 1) An inter-vivos trust is established while the policy owner is still living. 2) If the named beneficiary is a minor, the death benefit will be paid to the guardian and used for the benefit of the minor. *******************************

Spendthrift Clause This clause lets the policy owner choose a settlement option under which the beneficiary will receive benefits over time. It prevents the proceeds from being subject to assignment or anticipation of any claims by the beneficiary's creditors, or “subject to transfer, commutation, or encumbrance, or to any legal action taken by the creditors against the beneficiary.” It also prevents the beneficiary from receiving a lump sum distribution. The spendthrift clause is often used to protect beneficiaries from creditors (or sometimes themselves, if they are poor money managers).

Common Disaster Clause This law essentially provides that the death benefit will be paid as if the insured had outlived the beneficiary if they die simultaneously. This prevents the death benefit from passing into the estate of a beneficiary who is already deceased only to be distributed immediately from that estate, a wasteful procedure that precipitates additional legal proceedings, costs, and estate taxes. The common disaster clause states that the primary beneficiary must survive the insured by 30 days or the death benefit is automatically paid to the contingent beneficiary.

Insuring Clause This clause states the promise of the company and includes the insured's name, face amount, and when and to whom the company will make benefit payments. Consideration Clause This clause summarizes the cost of the policy, including the premium amount and frequency (mode of payment), the number of years the premium is to be paid, the grace period and explains the additional cost of any policy riders.

Free Look (right to examine) State law requires insurers to allow a policy owner to return a contract within 45 days of application or 10 days from date of delivery (20 days if replacing existing coverage) and receive a full refund of premiums paid. No reason need be given for the return. Entire Contract Clause This provision states that the policy, plus the application and all riders, attachments, waivers, notes, reports, etc. represent the entire contract and will be admissible in court.