What is third-party ownership in life insurance?

Third-party ownership in life insurance refers to situations where the person who owns the policy is not the individual covered by the policy. This arrangement is significant in various contexts, such as when a business purchases a life insurance policy on a key employee to provide financial protection against the loss of that employee. The business, as the policyholder, pays the premiums and is the beneficiary, ensuring that it can cover any financial ramifications associated with the employee's death, such as loss of expertise or the cost of finding a replacement.

This concept contrasts with other scenarios, such as individuals owning multiple policies for personal reasons or transferring policies between individuals, which do not fit the definition of third-party ownership. By focusing on the relationship between the owner and the insured, the significance of risk management and financial planning in business contexts becomes more apparent.