Third-party ownership of life insurance

Correct answer: A corporation buys and owns a policy on the life of its chief engineer.

Third-party ownership means the owner of the policy is someone other than the insured. A corporation owning a policy on its engineer's life is exactly that: the corporation is owner, the engineer is insured. In the other three cases the person buying the policy is also the person whose life is covered, so owner and insured are the same person.

Correct answer: The owner

The owner, also called the applicant or policyowner, is the party who applies for the contract, pays the premium, and holds the incidents of ownership. The insured is the life covered, the beneficiary is who is paid at death, and the insurer is the company issuing the contract.

Correct answer: None of the incidents of ownership; those belong to the father as owner

When the insured is not the owner, the insured holds none of the incidents of ownership. The father, as owner, holds the rights to change the beneficiary, surrender, borrow, and assign. The daughter cannot exercise any of them and cannot prevent the father from doing so.

Correct answer: A person other than the insured, with a proper insurable interest, from applying for and owning a policy covering the insured

Fla. Stat. 627.631 states that the word 'insured' shall not be construed as preventing a person other than the insured, with a proper insurable interest, from making application for and owning a policy covering the insured, or from being entitled to the benefits and rights under it. It is the Code's express statement of the third-party ownership principle.

Correct answer: Any person

Fla. Stat. 627.404(1) provides that any individual of legal capacity may procure an insurance contract on his or her own life for the benefit of any person. The insurable interest requirement applies when someone procures insurance on another person's life, not when a person insures his or her own life.

Correct answer: At the time the contract was made; it need not exist after the inception date

Fla. Stat. 627.404(1) requires the insurable interest to exist at the time the contract was made and adds expressly that the interest need not exist after the inception date of coverage. Life insurance tests insurable interest at inception, not at the time of loss.

Correct answer: The right to receive the death benefit as the insured

The incidents of ownership are the owner's contract rights: naming and changing the beneficiary, assigning the policy, borrowing against or withdrawing cash value, surrendering, and electing nonforfeiture and dividend options. The death benefit is paid to the beneficiary at the insured's death; the insured, by definition, does not receive it, and being paid a claim is not an ownership right at all.

Correct answer: The wife, as owner

The right to name and change the beneficiary is an incident of ownership. The wife is the owner, so she alone may change the beneficiary. The husband, as insured but not owner, holds no policy rights, and the current beneficiary has no power to redirect the proceeds.

Correct answer: She is closely related to him by blood and has a substantial interest engendered by love and affection.

Fla. Stat. 627.404(2)(b)2 recognises an insurable interest in the life of another person to whom the individual is closely related by blood or by law and in whom the individual has a substantial interest engendered by love and affection. A parent-child relationship is the classic example; no financial dependency or expectation of inheritance is required.

Correct answer: An expectation of substantial pecuniary advantage from her continued life and substantial pecuniary loss from her death

Fla. Stat. 627.404(2)(b)3 recognises an insurable interest where a party has an expectation of substantial pecuniary advantage through the continued life of another person and consequent substantial pecuniary loss from that person's death. That is the economic basis of key person insurance. Florida also specifically recognises a business entity's interest in key employees, subject to written consent.

Correct answer: It exists in the life of each other party to the contract, for the purpose of that contract only.

Fla. Stat. 627.404(2)(b)4 provides that an individual party to a contract for the purchase or sale of an interest in a business entity has an insurable interest in the life of each other party to the contract, for the purpose of that contract only. This is what makes cross-purchase buy-sell funding lawful, and it is limited to the buy-sell purpose.

Correct answer: When the insured is the grantor and the proceeds are primarily for the benefit of trust beneficiaries who have an insurable interest in the insured's life.

Fla. Stat. 627.404(2)(b)5 gives a trust, or its trustee, an insurable interest in the life of an insured under a policy the trust owns when the insured is the grantor (or a person closely related to the grantor, or a person in whom the grantor has an insurable interest), provided the proceeds are primarily for the benefit of trust beneficiaries who themselves have an insurable interest in the insured. This is the statutory footing for the irrevocable life insurance trust.

Correct answer: The minor for whose benefit the guardian holds the property, and anyone in whose life the minor has an insurable interest, provided the proceeds are primarily for persons with an insurable interest in the insured.

Fla. Stat. 627.404(2)(b)6 gives a guardian, trustee, or other fiduciary acting in a fiduciary capacity an insurable interest in the life of any person for whose benefit the fiduciary holds property, and in the life of any other individual in whose life that person has an insurable interest, so long as the proceeds are primarily for the benefit of persons having an insurable interest in the insured.

Correct answer: The donor must consent in writing to the charity's ownership or purchase of the insurance.

Fla. Stat. 627.404(2)(b)7 gives a charitable organization meeting the requirements of section 501(c)(3) of the Internal Revenue Code an insurable interest in the life of any person who consents in writing to the organization's ownership or purchase of that insurance. Written consent is the sole statutory condition.

Correct answer: The trustee has no insurable interest in that participant, and neither the employer nor the trustee may retaliate or take adverse action against the participant for refusing.

Fla. Stat. 627.404(2)(b)8 gives a trustee, sponsor, or custodian of a retirement or employee benefit plan an insurable interest in the life of a participant only with the written consent of the prospective insured, and expressly forbids the employer, trustee, sponsor, or custodian from retaliating or taking adverse action against a participant who does not consent.

Correct answer: Before the insurance is purchased

Fla. Stat. 627.404(2)(b)9 gives a business entity an insurable interest in its owners, directors, officers, partners, managers, and key employees or key persons if consent is obtained in writing from the key employees or persons before the insurance is purchased. The business may not retaliate against anyone who declines.

Correct answer: The mother is owner and beneficiary; the son is the insured.

The party who applies and pays premium is the owner; the person whose life is covered is the insured; the person named to receive the death benefit is the beneficiary. Here the mother is owner and beneficiary and the son is the insured. This is a standard third-party owned policy with two of the three roles filled by the same person.

Correct answer: The business

In key person insurance the business is owner, premium payer, and beneficiary on the life of an employee whose loss would hurt the business financially. The employee is the insured only, and must give written consent under Florida law before the coverage is purchased.

Correct answer: Each co-owner owns a policy on each of the other co-owners.

In a cross-purchase plan each owner personally owns and is beneficiary of a policy on each of the other owners, so that the survivors have the funds to buy the deceased owner's share. Florida's insurable interest statute supports this by giving each party to a buy-sell contract an insurable interest in the other parties, for the purpose of that contract.

Correct answer: Insurance on the life of a debtor pursuant to or in connection with a specific loan or other credit transaction

Fla. Stat. 627.677(1) defines credit life insurance as insurance on the life of a debtor pursuant to or in connection with a specific loan or other credit transaction. It comes in group, franchise, and individual forms, and in each the coverage is written in favour of the creditor, making it a form of third-party ownership.

Correct answer: So that the insured holds no incidents of ownership and the proceeds stay out of the insured's taxable estate.

An irrevocable life insurance trust owns the policy so that the insured holds none of the incidents of ownership. Because the insured owns nothing, the death benefit is kept out of the insured's taxable estate. The trade-off is that the trustee, not the insured, controls the policy.

Correct answer: The charity has an insurable interest and, as owner, holds the incidents of ownership.

Fla. Stat. 627.404(2)(b)7 gives a 501(c)(3) charity an insurable interest in the life of a person who consents in writing to its ownership or purchase of the insurance. With that consent the charity is a proper third-party owner and holds the incidents of ownership; the donor, as insured only, holds none.

Correct answer: The insurer was entitled to rely on the applicant's representations about insurable interest and incurs no legal liability beyond the policy's terms.

Fla. Stat. 627.404(3) provides that an insurer is entitled to rely on all statements, declarations, and representations made by an applicant about the insurable interest the applicant has in the insured, and incurs no legal liability, except as set forth in the policy, by reason of untrue statements relied on in good faith.

Correct answer: It remains valid; insurable interest was required only at the time the contract was made.

Fla. Stat. 627.404(1) requires insurable interest at the time the contract was made and states that it need not exist after the inception date of coverage. The husband had an insurable interest in his spouse when he bought the policy, so the later divorce does not affect the contract's validity, and ownership stays where it was.

Correct answer: Made an absolute assignment, making her son the new owner

An absolute assignment transfers all incidents of ownership to a new owner permanently. After it, the son holds every ownership right and the mother holds none. A beneficiary designation would only decide who is paid at death, and a collateral assignment would give a lender a limited, temporary interest.

Correct answer: The bank holds a collateral assignment: a limited, temporary interest in the proceeds up to the debt.

A collateral assignment pledges the policy as loan security and gives the lender only a limited, temporary interest in the proceeds. The owner remains the owner; the lender's interest ends when the debt is repaid and extends only as far as the outstanding balance. It is not an absolute assignment.

Correct answer: None; ownership stays exactly where it was.

Naming a new beneficiary changes who is paid at death but leaves ownership exactly where it was. Only an assignment changes the owner. The former beneficiary retains nothing, and the insurer never holds ownership of the policy.

Correct answer: The policy becomes an asset of the grandmother's estate.

Ownership passes with the owner, not the insured. If a third-party owner dies before the insured and no contingent owner was named, the policy is an asset of the owner's estate and is distributed under the owner's will or intestacy. That is why producers should name a contingent owner whenever owner and insured differ.

Correct answer: The death benefit is treated as a gift from the wife to the daughter, the so-called Goodman triangle.

When owner, insured, and beneficiary are three different people, the death benefit is treated as a gift from the owner to the beneficiary. This is the Goodman triangle. It is avoided by making the beneficiary the same as the owner, or the owner the same as the insured.

Correct answer: She may assign all or any part of her incidents of ownership, including the conversion privilege and the right to name a beneficiary, subject to the policy's terms.

Fla. Stat. 627.571(1) provides that nothing in the Code prohibits a person insured under a group life policy from assigning all or any part of his or her incidents of ownership, including the privilege of having an individual policy issued on conversion and the right to name a beneficiary, subject to the terms of the policy or arrangement among the insured, the group policyholder, and the insurer.

Correct answer: It is prohibited; a business entity may not retaliate or take adverse action against a key person who does not consent.

Fla. Stat. 627.404(2)(b)9 conditions a business entity's insurable interest in its officers and key persons on written consent obtained before purchase, and provides that the business may not retaliate or take adverse action against any key employee or key person who does not consent. Removing the CFO from a bonus program for refusing is adverse action.

Correct answer: Because he has no insurable interest in the neighbour, and Florida law forbids procuring insurance on another's life without one at the time the contract is made.

Fla. Stat. 627.404(1) forbids any person from procuring insurance on the life of another unless the benefits are payable to the insured, the insured's personal representatives, or a person who had an insurable interest at the time the contract was made. A casual acquaintance has no relationship by blood or law, no pecuniary expectation, and fits none of the statutory categories, so the arrangement cannot be issued.

Correct answer: The insured, the insured's personal representatives, or a person who had an insurable interest in the insured when the contract was made

Fla. Stat. 627.404(1) allows insurance on another individual's life only if the benefits are payable to the individual insured or his or her personal representatives, or to any person having, at the time the contract was made, an insurable interest in the insured. The statute names all three permissible payees.

Correct answer: Each depends on the insured's written consent.

Where the prospective owner is an institution rather than a relative, Fla. Stat. 627.404(2)(b) conditions the insurable interest on the insured's written consent: the charity needs consent to its ownership or purchase, the plan trustee needs the written consent of the participant, and the business entity needs written consent from the key person before purchase. No age cap, co-ownership, or regulatory approval is involved.

Correct answer: The policy remains valid because insurable interest is required only at inception.

Fla. Stat. 627.404(1) requires insurable interest at the time the contract was made and states that it need not exist after the inception date. The company had an insurable interest, and her written consent, when the policy was purchased; her departure does not void the contract or transfer any rights.

Correct answer: The woman signs as owner and applicant, and the brother signs the application as the insured.

In every third-party case the insured signs the application, evidencing consent to being insured, while the owner signs as applicant. Florida requires written consent expressly for institutional owners, and the insured's signature is standard practice in family cases as well. A producer never signs for a party.

Correct answer: Decline, because the loan right is an incident of ownership held by the trustee, not the insured.

Borrowing against the cash value is an incident of ownership. In a trust-owned policy the trustee, not the insured, holds every incident of ownership; the grantor as insured holds none. Allowing the grantor to exercise ownership rights would also defeat the estate-planning purpose of using an irrevocable trust.

Correct answer: Nothing; the insured holds no incidents of ownership and cannot prevent the owner from exercising them

When the insured is not the owner, the insured holds none of the incidents of ownership. The insured cannot change the beneficiary, surrender, borrow, or assign, and cannot stop the owner from doing any of those things. The insured's role is to be the life covered and to consent at application.

Correct answer: An investor group owning a policy on a retiree it has no relationship with, in exchange for a cash payment to the retiree

The trust, buy-sell, and charity arrangements each match a named category in Fla. Stat. 627.404(2)(b). An unrelated investor group has no relationship by blood or law, no expectation of pecuniary advantage from the retiree's continued life (its gain comes from the death), and fits no fiduciary, charity, plan, or business-entity category; paying the retiree does not create an insurable interest.

Correct answer: Have the wife own the policy on her own life, so owner and insured are the same person.

The gift consequence arises when owner, insured, and beneficiary are three different people. Collapsing two roles avoids it: either make the beneficiary the same as the owner, or make the owner the same as the insured. Having the wife own the policy on her own life with the son as beneficiary keeps the son as recipient and removes the third party from the ownership role.