One of the most common reasons for problems with ownership transfer is failure to follow the life insurance company’s specific procedures. Each insurer has detailed requirements for transferring ownership, including completing and notarizing the appropriate forms. If a policyholder attempts to transfer ownership but does not properly execute the paperwork, the insurer may still consider the original owner as the legal policyholder. In such cases, if the original owner dies and a claim is filed, the insurance company may deny the claim on the grounds that the policy’s legal ownership was unclear or not properly transferred. Life insurance ownership transfer can have significant legal implications, especially if done incorrectly. One major issue is when an ownership transfer is disputed among family members, business partners, or creditors. For instance, if a business owner transfers a policy to a co-owner as part of a buy-sell agreement but fails to notify the insurance company or update records properly, the insurer may not honor the claim due to conflicting ownership details. Another legal pitfall occurs when policy transfers violate insurable interest laws. Insurable interest refers to the requirement that the policy owner must have a legitimate financial interest in the insured’s life at the time of policy initiation. If an ownership transfer occurs without maintaining an insurable interest, insurers may refuse to pay claims on the grounds that the policy became a wagering contract on human life, which is prohibited in many jurisdictions.
Tax complications may arise when a policy is transferred improperly. Under the "transfer-for-value" rule, if a policy is transferred for any valuable consideration beyond specific exemptions, the death benefit may become partially or fully taxable. This not only reduces the intended financial benefit but can also lead to disputes and further complications that delay or deny claim payments. Several common mistakes in ownership transfers can lead to denied life insurance claims. One such mistake is failing to update beneficiary designations following an ownership transfer. When ownership changes hands, beneficiaries must be reviewed and updated accordingly. If discrepancies exist between ownership records and beneficiary designations, insurance companies may delay or deny claim payments while investigating the rightful recipient. Another critical mistake is failing to consider trust structures properly. Many policyholders transfer ownership of their policies to a trust for estate planning reasons, but improper trust setup can lead to problems. If the trust is not correctly designated as the owner and beneficiary, the insurer may question its validity, leading to denied claims. Furthermore, if trust documents are outdated or conflict with the policy’s provisions, beneficiaries may face legal battles to access the death benefit.
A particularly devastating error is incomplete documentation. Life insurance companies require precise documentation of ownership transfers, and any missing signatures, incorrect forms, or unverified changes can render the transfer invalid. In cases where the original policyholder is deceased and the ownership transfer was never finalized, the claim may be rejected outright. To avoid life insurance claim denials due to ownership transfer problems, policyholders must take proactive measures to ensure their policies are properly structured. First and foremost, it is essential to work closely with legal and financial professionals when transferring ownership. Estate attorneys, tax advisors, and financial planners can help navigate the complexities of ownership transfers and ensure all legal and tax requirements are met. Additionally, policyholders should regularly review their policies to ensure ownership records, beneficiary designations, and trust documents align with their intentions. Periodic reviews help identify discrepancies before they become problematic. Furthermore, when making ownership transfers, policyholders should always confirm that the life insurance company has processed the change correctly and obtain written confirmation of the update.
If you have a denied life insurance claim, our life insurance law firm is here to help