What is Third-Party Ownership in relation to insurance policies?

Third-party ownership in insurance refers to a situation where an individual or entity (the policy owner) owns an insurance policy on the life of another person (the insured). This dynamic is common in various scenarios where the person who holds the policy is different from the one whose life is covered.

For example, in the case of personal life insurance, a spouse may purchase a policy on the life of their partner. Similarly, a parent may take out an insurance policy on a child, or a business might secure a policy on a key employee. This ownership arrangement helps facilitate financial responsibilities and obligations that may arise upon the death of the insured, such as settling debts or providing for dependents.

In contrast, a policy owned by a legal guardian for a minor specifically addresses ownership which is restricted to scenarios involving minors, and a policy purchased by an employer for employee benefits generally aligns with group benefits that do not embody the classic third-party ownership concept. Lastly, a policy that covers multiple family members under one contract refers to family or group health plans, rather than the distinct arrangement of third-party ownership where the owner and insured are different individuals.