Understanding the ins and outs of your life insurance policy is pivotal to making sure you have the right financial protection in place. The most important details? Who’s who in your life insurance policy. Alongside determining the right amount of coverage, listing the right people in your policy ensures that the people you bought a policy to protect actually get the life insurance payout you paid for.
The insured is the person whose death would trigger a life insurance payout.
The policyholder is the person who pays the policy’s premiums.
The beneficiaries are the people that receive the life insurance money when the insured dies.
The person who needs life insurance
If you’re financially responsible for other people and your death has negative financial implications for loved ones — it’s important for you to have life insurance coverage. You would be listed as the insured on a life insurance policy, and your death would prompt the life insurance payout.
Life insurance companies require that the person who is insured on the policy actually needs that coverage. You’ll need to provide proof that your worth in assets and income matches the death benefit amount you’re asking for — meaning your family members can’t just get a $1 million death benefit payout if it doesn’t match up with how much you’d actually be providing for them in the long run. They’ll also look at the insured’s health, age, family history, and hobbies to determine how much the policy will cost.
Who is insured on the life insurance policy?
If you have kids, a spouse, parents who rely on you for care, or any other dependents, you need a life insurance policy where you are the insured. Basically: if anyone is going to be financially impacted by your death, you should get coverage.
Ready to shop for life insurance?
The person who buys life insurance
The policyholder is the person who buys the coverage — they own the life insurance policy and pay the premiums so that the coverage remains active. Only the policyholder can make changes within the policy, such as adjusting who the beneficiaries are.
While this is usually the same person as the insured, the policyholder and insured can be different people if you take out a policy on someone else. To take out a life insurance policy on someone else, you’ll need to prove insurable interest — which means that you’ll suffer financially if they die. And you’ll want to get their permission, otherwise, it’s considered life insurance fraud.
The most important distinction between the policyholder and anyone else listed in the policy is that they pay the premiums. If the policyholder fails to pay, then the policy will be canceled and there won’t be a life insurance payout.
The person who gets the life insurance payout
The person who gets the death benefit is called a beneficiary. You can list multiple beneficiaries on your life insurance policy, and even list contingent beneficiaries to get the death benefit if your primary beneficiaries cannot accept it.
Who you should name as your beneficiary
Your policy’s beneficiary should be someone you can trust to use the life insurance funds. This is generally a spouse, partner, or trusted guardian.
Listing the right person as your life insurance beneficiary ensures that the funds are used the way you wish. However, the death benefit can’t be paid out to certain beneficiaries, such as a minor child or a pet. Even with the best of intentions, listing them in your policy could mean that the funds are wrapped up in court proceedings for years — and that they won’t be able to use the proceeds when they need them most. Instead, list a beneficiary that will use the death benefit in their best interest.
Similarly, listing no one as your life insurance beneficiary isn't a good idea. Your policy’s death benefit would then be paid out to your estate, and it could then go through probate and be collected by any creditors you owe debts to, leaving little to no death benefit for your family to inherit.
Updating the policy regularly and listing the appropriate recipients as your beneficiaries is the best way to make sure the life insurance money is paid out as you intended.
The life insurance company
Choosing your insurance provider is an important part of purchasing a policy. Each insurer approaches each candidate profile differently, so the amount of coverage you can get and how much you’ll pay will vary. For instance, some life insurance companies offer better rates to people with a history of diabetes than others.
When you’re shopping around for life insurance, there are a few key factors to consider:
Making sure your coverage amount is high enough and term length is long enough to provide adequate protection
Riders for supplemental coverage, including a term conversion rider
Opportunity for rate reconsideration if your health improves or you quit smoking
Temporary coverage during the underwriting process to keep you protected
Ability to decrease coverage if your financial needs or circumstances change
Other important factors to consider are the life insurance company’s financial standing and customer reviews. We’ve done all the heavy lifting for you in our life insurance reviews and best company roundup.
Knowing the ins and outs of your policy ensures that your life insurance coverage does what it’s supposed to — pays out the death benefit to the people you love and protects their financial future.
Frequently asked questions
Who needs life insurance?
Anyone with dependents or loved ones that would be financially impacted by their death needs life insurance. The person who needs life insurance coverage is called the insured in the policy.
Who is the owner of a life insurance policy?
The person who buys life insurance coverage and pays the premiums to keep it active is the owner of the life insurance policy. This person is called — you guessed it — the policyowner.
Who gets the money from a life insurance policy?
The only people who are eligible to get the life insurance money are the beneficiaries listed in the policy. Creditors and family members who aren’t the policy’s listed beneficiaries cannot collect the death benefit unless it is paid out to your estate.