Ownership Rights in Life Insurance Policies

It is not uncommon for business partners to own life insurance policies on each other as part of a partnership agreement. This life insurance is often Term insurance.

Ownership of a life insurance policy allows for the owner to dispose of the contract in any manner the owner sees fit EXCEPT where the beneficiary is irrevocable.However, if the beneficiary is revocable the owner can assign the policy as security for a loan, change the beneficiary, convert the policy to permanent coverage. All without the consent of the insured or the beneficiary. A twist to this control is that in Ontario, Manitoba, Alberta and BC an insured can apply to the courts to have the policy cancelled if the insured’s life or health is endangered.  

The irrevocable beneficiary designation is often used in marriage breakdowns. The spouse (often a wife) wants the security of knowing that in the event of the death of the provider of the support payments (often the husband) there will be funds available to continue to provide financial support to the family. Changes such as surrender, assignment,or conversion to permanent coverage will require the consent of the irrevocable beneficiary.

Where life insurance is corporate owned the owner and beneficiary are usually the same, the corporation

What happens when there is a less than agreeable breakdown of a business partnership and each partner happens to personally own a policy on each other and the beneficiary is revocable? Unless there is a provision in the partnership agreement requiring that upon cessation of the business relationship that a transfer of ownership must occur, the original owner can reasonably expect to continue to own the policy on the estranged business partner.

Let’s consider this situation. A Term policy was issued on a healthy individual and owned by a business partner. Some years later the partnership ceases. The insured on the policy is no longer insurable but the owner wishes to keep ownership pf the policy with the possibility of exercising the conversion rights to a permanent policy. All well and good.

Conversion is a right of ownership in most Term policy contracts. But we have encountered Term insurance policies that, when converting to permanent coverage (a contractual right under most Term policies), require the signature of the insured even when the beneficiary is revocable. A review of any Term policies should be done to clarify if such a condition exists.

The insured might now want to have ownership of the policy transferred to them. In order to gain control of the policy an insured person might argue that because the business relationship no longer exists there is no longer an insurable interest.  However, insurable interest is a test required at underwriting and for issue of a life insurance policy. Once in force It is not an ongoing requirement for coverage.

Is ownership of a policy on an individual with whom you no longer have an insurable interest legal? Yes.  Is converting a Term policy to a permanent policy on the life of someone with whom you no longer have an insurable interest ethical?

Here are a few points to ponder:

Does continuing to be the owner and beneficiary of the policy deny much needed funds to the insured’s family?  

Does the ownership of the policy reduce the ability for the insured to acquire more coverage because of an adverse change in insurability?

Is the insured unable to obtain more coverage because of the amounts of insurance already in force?

Ownership gives certain rights. How those rights are dispensed is another issue.