What does Third Party Ownership in life insurance entail?

Third Party Ownership in life insurance refers to a situation where an individual or entity (the third party) owns the life insurance policy on another person's life, and it is essential that the third party has an insurable interest in the insured's life.

Insurable interest means that the third party would suffer a financial loss or hardship if the insured were to pass away. For example, a business partner may own a life insurance policy on the life of another partner to protect the company's financial interests. This requirement helps to prevent moral hazard and ensures that the purchase of life insurance is rooted in a legitimate financial stake in the life of the insured.

The other options misrepresent the principles of life insurance. A policy can indeed be owned by someone other than the insured, as long as the owner has insurable interest. Transfer of ownership is permissible, contrary to the option that states policies cannot be transferred to another owner. Additionally, while the insured is often the one who pays the premiums, it is not a strict requirement. The policy owner, which can be the third party, has the right to pay the premiums.