What Is a Policyholder?

The policyholder is the owner of a life insurance contract: the person, company or trust that holds it and, within the limits of the law and the contract, makes its decisions. The owner is not necessarily the person whose life is insured, and not necessarily the person who receives the money. Those are separate roles. On a personal policy, one person can hold the first two; on a family or business policy, all three can belong to different people, and mixing them up is where costly surprises start.

Below is who is who and what each role can and cannot do. Then comes what happens to the contract when the owner dies, divorces, loses capacity or hands the policy on. Quebec's rules come from the Civil Code of Québec and differ from the rest of Canada in ways that matter, so they are marked where they apply.

Who are the parties to a life insurance policy?

Four parties stand behind an individual policy, although the application names only three of them. The fourth is the insurer, which issues the contract, collects the premiums and pays the claim. A fifth role, the successor owner, is optional.

One person can hold more than one role. On an ordinary personal policy you are both the owner and the person insured, and you name someone else, a spouse or a child, as beneficiary. That is two people, not one. The owner can also be the beneficiary while someone else is insured. A spouse can own a policy on the other spouse's life and be named on it; a company can do the same on a shareholder.

The words matter when you read documents. The Civil Code uses titulaire, assuré, bénéficiaire and titulaire subrogé, and Quebec insurers' forms follow it. The Insurance Acts of the other provinces have their own definitions. When a statute or a contract uses the word "insured", read its definitions before assuming which person it means.

What can the owner do, and what can limit those rights?

The owner is the insurer's client. Statements and notices go to the owner, and so does the right to decide. Depending on the contract, the owner can:

• Name and change the beneficiary, and a contingent beneficiary behind them (see contingent beneficiary).
• Request a policy loan against the cash value, where the contract has one.
• Surrender the contract for its net cash surrender value, or part of it where the contract allows a partial surrender.
• Transfer ownership to another person or entity, or assign the policy as security for a loan from another lender.
• Change the coverage within the contract's terms: reduce it, convert it or add a rider, some of which need new evidence of insurability.
• Apply to reinstate a lapsed policy, within the period and on the conditions the contract sets. In Quebec, article 2434 of the Civil Code starts the two-year contestability period again on reinstatement.
• Ask the insurer at any time for the current values, any loan balance and the designations on file.

Those rights have limits, and the limits come from four places. An irrevocable beneficiary must consent in writing before the owner changes the designation, or surrenders, borrows against or transfers the policy. In Quebec, article 2449 of the Civil Code makes a designation of the married or civil union spouse irrevocable unless the contract says otherwise, when it is made in a writing other than a will. So a Quebec owner can hold an irrevocable designation without having asked for one. An assignment to a lender gives that lender rights over the policy until the debt is repaid. And the contract itself sets what can be changed, when, and with what evidence.

A word on the policy loan, since only the owner can request one. A policy loan is money the insurer advances to the owner, with the policy's cash value as security. In other words, it is a debt to the insurer, secured by the policy, not a withdrawal. The owner owes the balance and the interest to the insurer, and the insurer sets the rate and may change it. An unpaid balance and its interest are deducted from the death benefit before the beneficiary is paid. If the balance grows past the value securing it, the contract can end. A loan from another lender, secured by an assignment of the policy, is a separate transaction on that lender's terms. The mechanics and the tax are on how a policy loan works.

A partial surrender is taxed on its own formula. Under subsection 148(4) of the Income Tax Act, only a proportion of the policy's adjusted cost basis (ACB) is set against the amount surrendered. So part of it can be income even when the total is below the policy's ACB. Ask the insurer for its calculation before you sign, and have your accountant check it if the amount is large.

What rights do the person insured and the beneficiary have?

Being the person insured does not make you the owner, and it gives you no control of the contract. You cannot change the beneficiary, request a loan or surrender a policy someone else owns. You are still protected. Where the owner has no recognised insurable interest in your life, the contract needs your written consent, as the next section explains. Insurers also generally ask an adult person insured to sign the application and answer health questions, so in the ordinary course you know the policy exists. Some provinces' Insurance Acts go further and let the person insured ask a court to end a contract on their life in defined circumstances; a lawyer in your province can tell you whether that route exists and what it requires.

If you are insured under a policy you do not own, the owner is the person to ask about it. The owner is the insurer's client, and the insurer's own privacy practices decide what it will tell anyone else.

A beneficiary's position depends on the kind of designation. Under a revocable designation, the owner can replace the beneficiary at any time without telling them, and the beneficiary has no say over loans or a surrender. Under an irrevocable designation, the beneficiary's written consent is needed for those decisions. Either way, the right to be paid arises at the death of the person insured, under the contract and the designation in force on that date.

Who may own a policy on someone else's life?

Anyone who wants to own a policy on another person's life needs one of two things when the contract is made: an insurable interest in that person's life, or that person's written consent. In Quebec, article 2418 of the Civil Code puts it in one sentence: in individual insurance, a contract is null if, at the time it is made, the client has no insurable interest in the life or health of the insured, unless the insured consents in writing. So the old saying that a stranger cannot insure you is only half right. A stranger cannot do it without your written consent, and your signature is what protects you.

Article 2419 then lists who has an insurable interest: in your own life and health; in your spouse; in your descendants and your spouse's descendants; in people who contribute to your support or education; in your subordinates and staff; and in anyone in whose life and health you have a pecuniary or moral interest. A parent, a brother or a sister is not named as such. They qualify when they contribute to your support or education or when you have a pecuniary or moral interest in their life, and otherwise with their written consent.

The other provinces reach the same result through their own Insurance Acts. Those statutes also recognise listed relationships and accept the written consent of the person insured. The lists are worded differently, though, so do not assume that a relationship listed in one province is listed in another. The comparison, with the underwriting side, is on financial underwriting and insurable interest.

The test applies when the contract is made. Nothing in article 2418 ends a contract because the relationship ended later. A policy validly issued on a spouse or a business partner stays in force after a separation or a partnership ends, until the owner changes it. Quebec applies the same test again when a policy is assigned: the assignment is null if the person receiving it has no interest at that time, unless the person insured consents in writing.

Separately from the law, the insurer decides whether to issue the policy and for how much. It will ask what the relationship is, why the coverage is needed and how the amount was chosen. It can decline or reduce an application that meets the legal test. The law sets a floor, and the insurer adds its own requirements. For a child, who signs differs by province and by insurer, so ask the insurer which signatures it needs before you apply.

Why would the owner and the person insured be different?

Separating the roles is a decision, not an accident, and each version has its own consequences:

• A corporation owns coverage on a shareholder or key employee. It pays the premium and is named beneficiary. The tax questions this raises are covered below and on insurance and capital for Canadian business owners.
• A spouse owns coverage on the other spouse. The policy and its cash value are then the owner's property, not the property of the person insured. Keeping the death benefit out of the estate is the job of the beneficiary designation, whoever owns the policy. Whether a creditor can reach the policy depends on the province and the designation, as set out on the designation and what a creditor can reach.
• A parent owns coverage on a child. The aim is to secure insurability at a young age, with a plan to transfer ownership later.
• A trust owns the coverage. This fits where control needs to continue after the settlor's death.

Each arrangement costs something if it is chosen for the wrong reason. Changing it later can be a disposition for tax purposes. Choose the owner before the application is signed, with the transfer rules further down in view. The wider estate picture is part of estate planning in Canada.

Can a company, partnership, trust or charity be the owner?

Yes. A corporation can own coverage on shareholders, executives or key employees, and three facts decide the tax result together: who owns the policy, who pays the premium and who is named. Say a corporation pays for coverage that benefits a shareholder personally, such as a policy the shareholder owns or one naming the shareholder's family. A taxable benefit to the shareholder can then arise. Where a private corporation is the beneficiary, the death benefit it receives can add to its capital dividend account. The credit is generally the proceeds less the policy's adjusted cost basis just before the death (subsection 89(1) of the Income Tax Act, definition of capital dividend account, paragraph (d)). Paying that amount out as a capital dividend needs an election under subsection 83(2). The corporation's accountant calculates both before anything is paid; the detail is on corporate-owned life insurance.

A partnership can own coverage that funds a buy-sell agreement. A trust can own coverage where control has to outlast one lifetime. A charity can be named as beneficiary, or can own a policy given to it, and the two routes have different tax consequences for the donor.

Each of these owners, and the way they combine, is set out side by side in Who Can Own a Life Insurance Policy in Canada: You, a Company, a Holding Company or a Trust.

In each case the ownership question comes before the product question. An accountant and a lawyer (in Quebec, a lawyer or a notary) should settle together who owns and who is named. A wrong choice tends to show only at a death, a sale or a reorganisation, when it is hardest to fix.

How many policies can one person own?

The number of contracts is not what an insurer limits. What it limits is the total coverage it will issue on one life, through financial underwriting: it looks at income, net worth, debts, the stated purpose and the coverage already in force with every insurer, including group coverage through an employer. Each new application is subject to that underwriting, which weighs all the coverage together, not only the contract applied for. Holding several policies can be deliberate, for example when obligations end at different times, and the reasoning is on how many policies you can have.

Can a minor own a policy, and what if the owner loses capacity?

The age of majority is 18 or 19, depending on the province; in Quebec it is 18. The rules on a minor's capacity to own a life insurance policy vary by province. In some provinces, the Insurance Act lets a minor of 16 or more make and deal with a life insurance contract. Below that, an adult generally owns the policy, often on the child's life. Where the plan is to hand the policy to the child later, the transfer does not happen by itself unless the contract provides for it. Ask the insurer whether it needs a separate instruction, and read the tax rules below first.

Capacity matters at every stage. An owner who can no longer manage their affairs cannot sign a change, answer a lapse notice or request a loan. A power of attorney (in Quebec, a protection mandate) lets someone deal with the policy, for example by paying premiums or answering a lapse notice. Whether your attorney or mandatary may change a beneficiary designation depends on your province and the document's wording, so ask a lawyer or a notary. Without such a document, the family may need a court process to appoint someone, which takes time while premiums keep falling due.

What are the owner's responsibilities?

Owning the contract means keeping it in force and making sure it can be found when it matters:

• Pay the premium, or make sure it is paid. On a contract with little or no cash value, a missed premium can lead to a lapse once the grace period the contract sets has run out.
• Answer the application accurately. If a material fact is misstated or left out, the insurer can seek to annul the contract, and a claim can be refused. In Quebec, article 2424 of the Civil Code bars that once the insurance has been in force for two years, unless there is fraud. The common-law provinces set a comparable limit. The full rule, with its exceptions for disability and reinstatement, is on misrepresentation on an application.
• Keep the insurer informed of address changes, so notices reach you.
• Review the beneficiary designation after a marriage, a separation, a birth or a death. It takes one form, and the insurer pays whoever is on file, not the person you had in mind.
• Tell someone the policy exists: which insurer issued it, where the contract is and who to call.

What happens to the policy if the owner dies before the person insured?

People confuse this event with the death of the person insured. When the owner and the person insured are the same person, the death benefit is paid to the beneficiary and the contract ends. When they are different people and the owner dies first, nothing is payable, because the person insured is alive. The contract itself is an asset, and it has to go somewhere.

It goes to a successor owner if the contract names one. Otherwise it goes to the owner's estate (in Quebec, the succession) and then to whoever the will or the law directs. An estate can take months to settle, and meanwhile premiums keep falling due while nobody may yet have authority to pay them or to answer a lapse notice.

Quebec names this role in the Civil Code. Under article 2445, a person who owns an individual policy on the life of a third person may designate a subrogated policyholder to replace them at death, and may name several in order. Article 2455 provides that a contract transferred to a subrogated policyholder does not form part of the previous policyholder's succession. A subrogated policyholder designation is always revocable (art. 2449).

Outside Quebec, contracts use terms such as successor owner or contingent owner. Whether your contract allows one, and on which form, is a question for the insurer. A successor owner is designed to pass the contract directly, without waiting for the estate to be settled; whether that also avoids probate fees depends on the province, so ask a lawyer.

The change of owner at death can also be a disposition for tax purposes, and the result depends on who receives the policy. The rules are in the transfer section below.

Illustrative example: one policy, two different deaths

Illustrative example. Assume you own a permanent policy with cash value on the life of your adult child. Your grandchild is the named beneficiary, the designation is revocable, and there is no policy loan. No amounts are needed to see who ends up with what.

The tax side of the last two rows depends on who ends up owning the policy. Say it passes to your child, who is the person insured. Subsection 148(8) of the Income Tax Act can then let it move at its adjusted cost basis, with no immediate gain, if its conditions are met. If it passes to someone you do not deal with at arm's length, or by operation of law, subsection 148(7) can apply instead. It can treat you as having disposed of the policy at its value, with any gain on your final return. A minor beneficiary's money follows its own rules, covered on a minor beneficiary and a beneficiary who cannot be found.

What happens to the policy in a separation or divorce?

In Quebec, a divorce changes the designation by itself. Under article 2459 of the Civil Code, four events make any designation of the spouse as beneficiary or as subrogated policyholder lapse: divorce, nullity of marriage, and the dissolution or nullity of a civil union. No form has to be filed. A separation from bed and board is different: it does not affect the spouse's rights on its own, but the court may declare them revocable or lapsed when it grants the separation, so read the judgment. A de facto couple has no marriage to dissolve, so nothing lapses when they part.

In the common-law provinces, a divorce does not by itself revoke a designation, so a former spouse can remain the named beneficiary until the owner signs a new one. The contrast between the two systems, with the cases, is set out on divorce and the designation nobody changed. A lawyer in your province confirms how it applies to your contract, particularly if you have moved between provinces while the contract was in force.

Ownership is a separate question everywhere. A policy one spouse owns on the other's life stays owned by that spouse after the separation. It also stays valid, because insurable interest is tested when the contract is made. A separation agreement or a court order can also require coverage to stay in place for a former spouse or a child; in that case the owner should not change the designation without legal advice.

In Quebec, the contract itself is not part of the family patrimony. Depending on the matrimonial regime, though, its surrender value can enter the partition when the regime is dissolved; see family patrimony and the beneficiary designation. After any separation, ask the insurer in writing who is recorded as owner, beneficiary and successor owner.

What does an irrevocable designation take away from the owner?

An ordinary designation is revocable: the owner can change it at any time without telling the beneficiary. An irrevocable designation cannot be changed without the beneficiary's written consent. While it stands, the owner generally cannot surrender the contract, request a policy loan, assign it or transfer ownership either. Each of those would reduce what the beneficiary is entitled to.

People accept one for real reasons. A separation agreement can require it, so that coverage supporting a child or a former spouse cannot be quietly removed. In Quebec it can arise by default under article 2449, as described above, when a married or civil union spouse is named and nothing more is written.

The practical consequence appears when the owner wants to use the cash value. An owner who finds an irrevocable designation in the way needs the beneficiary's signature, and that can be hard to obtain at exactly the moment it is needed. The insurer can tell you which kind of designation is on file; ask before you plan around the value.

What are the tax rules when ownership changes?

A transfer of ownership is a disposition of the policy under the Income Tax Act. Income is measured against the policy's adjusted cost basis: only the part of the proceeds above the ACB is income (subsection 148(1)). What counts as the proceeds depends on who the new owner is, and four subsections of section 148 do most of the work. Our reading of them, from the text on Justice Laws, is summarised below; it is a reading, not a ruling, and your accountant applies the rules to your facts.

Three points sit around the table. A transfer between a corporation and its shareholder can also raise the shareholder benefit question, and that is where expensive errors sit. Federal rules apply everywhere, and Quebec residents also file with Revenu Québec. And a rollover is not an exemption: it postpones the gain, which the new owner takes over along with the ACB.

The practical rule is simple. Ask the accountant before the transfer, not after, because moving the policy back is itself another disposition.

When should ownership be reviewed?

Ownership is not fixed for the life of the contract. Each of these events is a good reason to check it:

• A separation, a divorce, a marriage or a new civil union.
• A corporate reorganisation, such as a new holding company, a share exchange or an amalgamation. The contract does not follow the change unless someone moves it. The owner on file may no longer be the company you meant.
• A shareholder leaving or joining. The coverage was set up for a structure that has since changed.
• A child reaching the age at which you planned to transfer the policy.
• A move abroad. It can raise tax questions in both countries.
• The death of a beneficiary or of a successor owner.

What should an owner check and keep on file?

Six questions, all answerable from the contract and one call to the insurer:

1. Who owns the policy according to the insurer's records? Confirm it rather than assume it, particularly on older policies.
2. Who is the person insured?
3. Who is the beneficiary, and who is the contingent beneficiary?
4. Is a successor owner named, and is it still the right person?
5. Is any designation irrevocable, and is the policy assigned to a lender?
6. Where is the contract, and who else knows it exists?

Keep four things together: the contract or the insurer's policy summary; a note of who owns, who is insured and who is named, including contingent and successor designations; the last annual statement; and a note of where all of it is, given to someone who would need to find it. A contract nobody can locate is a contract nobody claims.

Ask for the answers in writing whenever something is changing: a separation, a transfer, a loan or a new designation. The insurer's record decides what happens, not what anyone remembers signing years ago. A written confirmation also gives you a record if an error surfaces later.

Who answers which ownership question?

Structuring ownership well depends on facts about you: who you are protecting, whether a company is involved, and what your estate is meant to do. If you want a licensed advisor to go through the owner, beneficiary and successor details on your contract with you, the first conversation is free. The firm is paid by insurer commission if a policy is later bought through it. The mechanics of the contracts these roles attach to are in policy basics.