Ownership and Assignment
Understanding ownership rights and how policies can be transferred is essential for both the exam and practical application. The policy owner controls all rights in the policy.
Ownership Rights
The policy owner (also called the policyholder) possesses all rights of ownership in the policy.
Rights of the Policy Owner
| Right | Description |
|---|---|
| Name beneficiary | Designate who receives death benefit |
| Change beneficiary | Change designation (if revocable) |
| Assign the policy | Transfer ownership to another |
| Take policy loans | Borrow against cash value |
| Surrender the policy | Cancel for cash value |
| Receive dividends | On participating policies |
| Select options | Choose dividend, settlement, nonforfeiture options |
Owner vs. Insured
The owner and insured may be different people:
| Scenario | Owner | Insured |
|---|---|---|
| Self-owned | John | John |
| Spousal ownership | Mary | John |
| Business ownership | ABC Corp | John (key employee) |
| Trust ownership | ILIT | John |
Owner vs. Premium Payer
The premium payer and owner may also differ:
- A grandparent may pay premiums on a policy owned by a parent
- A business may pay premiums on an employee-owned policy
- The owner has all rights regardless of who pays
Absolute Assignment
An absolute assignment is a complete transfer of all ownership rights from one party to another.
Characteristics
| Feature | Absolute Assignment |
|---|---|
| Rights transferred | All ownership rights |
| Permanent | Cannot be revoked |
| New owner | Assignee becomes full owner |
| Former owner | Retains no rights |
Common Uses
| Use | Description |
|---|---|
| Gift | Transfer policy to family member |
| Sale | Sell policy (life settlement) |
| Trust funding | Transfer to irrevocable trust |
| Divorce | Transfer as part of settlement |
Process
- Policy owner completes assignment form
- Insurer is notified
- Insurer records the assignment
- New owner receives all rights
- New owner may name new beneficiaries
Tax Considerations
- Transfer may trigger gift tax if for less than full value
- Transfer to ILIT may be a taxable gift
- Policy loans at transfer may create taxable income
Collateral Assignment
A collateral assignment is a partial, temporary transfer of policy rights as security for a loan.
Characteristics
| Feature | Collateral Assignment |
|---|---|
| Rights transferred | Limited—only as security for debt |
| Temporary | Ends when loan is repaid |
| Ownership | Original owner retains ownership |
| Lender's rights | Receive loan balance from death benefit |
How It Works
- Policy owner borrows money from a lender
- Policy is assigned as collateral
- If insured dies before loan repaid:
- Lender receives loan balance from death benefit
- Remainder goes to beneficiary
- When loan is repaid:
- Assignment is released
- Full rights return to owner
Example
| Item | Amount |
|---|---|
| Death benefit | $500,000 |
| Outstanding loan | $100,000 |
| Paid to lender | $100,000 |
| Paid to beneficiary | $400,000 |
Rights Under Collateral Assignment
| Right | Owner | Lender |
|---|---|---|
| Change beneficiary | Yes | No |
| Borrow against cash value | May be restricted | No |
| Surrender policy | May need consent | No |
| Receive death benefit | After loan paid | Up to loan balance |
Exam Tip: In a collateral assignment, the owner retains ownership. The lender only has the right to receive the outstanding loan balance from the death benefit.
Absolute vs. Collateral Assignment
| Feature | Absolute | Collateral |
|---|---|---|
| Rights transferred | All | Limited |
| Duration | Permanent | Until loan repaid |
| Ownership changes | Yes | No |
| Purpose | Gift, sale, trust | Loan security |
| Reversible | No | Yes |
Change of Ownership
A change of ownership transfers all rights to a new owner, similar to an absolute assignment.
Process for Changing Ownership
- Current owner completes change of ownership form
- Form submitted to insurance company
- Insurer records the change
- New owner receives confirmation
- New owner has all policy rights
When Ownership Changes Occur
| Situation | Reason |
|---|---|
| Estate planning | Transfer to trust or family member |
| Divorce | Transfer to ex-spouse as part of settlement |
| Business changes | Transfer between business entities |
| Sale | Life settlement transaction |
Tax Implications of Ownership Changes
| Consideration | Impact |
|---|---|
| Gift tax | Transfer may be a taxable gift |
| Incidents of ownership | Must give up all control for estate tax purposes |
| Three-year rule | Gifts within 3 years of death may be included in estate |
| Generation-skipping | Transfers to grandchildren may trigger GST tax |
Incidents of Ownership
Incidents of ownership are rights in a policy that, if retained, cause the death benefit to be included in the insured's taxable estate.
Examples of Incidents of Ownership
| Incident | Description |
|---|---|
| Right to change beneficiary | Can designate who receives benefit |
| Right to borrow | Can take policy loans |
| Right to surrender | Can cancel for cash value |
| Right to assign | Can transfer ownership |
| Right to revoke assignment | Power over collateral assignment |
Estate Tax Planning
To remove death benefit from taxable estate:
- Transfer all incidents of ownership
- Have no control over the policy
- Use irrevocable life insurance trust (ILIT)
- Transfer must occur more than 3 years before death
Key Takeaways
- The policy owner has all rights including naming beneficiaries, borrowing, and surrendering
- Absolute assignment transfers all ownership rights permanently
- Collateral assignment transfers limited rights as loan security
- In collateral assignment, the owner retains ownership
- Incidents of ownership include any control over the policy
- To exclude death benefit from estate, owner must give up all incidents of ownership
In a collateral assignment, the policy owner:
An absolute assignment differs from a collateral assignment in that an absolute assignment:
Incidents of ownership include:
10.3 Beneficiary Designations
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