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What Is Policy Ownership And Why Is It Important?

The policyowner is the person or entity (such as a shareholder, a business, or a trust) that applies for and holds ownership rights and control of the insurance policy. The rights of ownership include surrender options, dividend options, policy loans, assignments, and the ability to change the named beneficiary. If you don't hold ownership to the insurance, you don't have the right to access any cash values or dividends, use the policy for collateral, or decide who gets the money from the policy on your life when you die. When you hold (or are deemed by the IRS to hold) incidents of ownership in a policy, there can be tax consequences to you or your estate (more on that later).

Possible Ownership Arrangements (And When They Make Sense)

It is generally recommended that, in business arrangements, the owner and policy beneficiary be the same person or entity to avoid unintended tax consequences such as dividend or gift taxation.

Buyer Named In Buy-Sell as Policyowner (Always a Good Arrangement)

If the buy-sell agreement is an entity purchase (stock redemption) agreement, then the buyer of the interest is the business itself. If the agreement is a cross purchase agreement, then there may be multiple buyers and sellers. Either way, it is generally a good idea for the party responsible for paying for an ownership interest under a buy-sell agreement to be the owner (and beneficiary) of the funding policy.

Seller under Buy-Sell as Policyowner (Never a Good Arrangement)

If the seller of the business interest under the buy-sell agreement is the owner of the insurance policy, there will be incidents of ownership in the policy that can result in tax consequences. When the seller under the buy-sell agreement owns the policy, the value of the policy must be included in the seller's estate, even when the estate isn't the recipient of the policy proceeds. The result is an inflation of the value of the gross estate.

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Business Entity as Policyowner (Sometimes a Good Arrangement)

  • Example(s): Buy-sell is entity purchase or stock redemption agreement. When the buy-sell agreement is an entity purchase (stock redemption) agreement, it makes sense for the business itself to own the policies (as well as being the beneficiary and premium payer). The business has both the obligation to buy an owner's interest and the obligation to come up with the money.
  • Example(s): You want policy cash values available to business. When the business owns the policies, any cash values that may accumulate are automatically company assets accessible to the business. These policy cash values could be used for emergency loans for the business. If the individual shareholders own the policies, it could be more difficult to make the cash values available to the business (although it may still be possible).

Irrevocable Trust/Trustee as Policyowner (Good Arrangement When Buy-Sell Uses a Trustee)

If your buy-sell agreement utilizes a trustee, such as in the case of a trusteed cross purchase agreement or, less commonly, with an entity purchase agreement, it makes sense for the trustee to own the policies funding the agreement.

Gift Tax and Policy Ownership

It is entirely possible (though generally not advisable) that an insurance policy could insure the life of one party, be owned by a second party, and have a third party as the beneficiary. When the owner and beneficiary are two different parties, and neither is the insured, there could be a gift tax consequence. Gift tax requirements dictate that death proceeds payable to someone other than the owner of the policy (or a trustee for the owner) constitute a gift from the policyowner to the beneficiary.

Tip: Make sure the owner and the beneficiary are the same party to avoid the gift tax consequence.



This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.


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