In the vast majority of cases, the insured owns the policy that insures his/her life. However, there are instances where it is advantageous for someone other than the insured to own the policy. To understand those situations when third party ownership is appropriate, it is first necessary to understand the rights of the owner.
The rights in a life insurance policy are vested in the owner of the policy. Those include the right to name or change a beneficiary, take a loan, change the dividend option, assign the policy, surrender the policy or give the policy to someone else, that is, make someone else the owner (provided they accept ownership). In short, it is the owner, not the insured that has all rights in the policy. In addition, the owner is also responsible for any taxes levied on the policy.
While the insured cannot be the beneficiary of a policy insuring his/her life, a third party owner can be the beneficiary. For example, a wife can own a policy on her husband and also be the beneficiary. However, adverse tax consequences can arise if the owner, insured, and beneficiary are three different people (see the Goodman case).
The most common instances when the owner differs from the insured are when 1) a parent owns a policy on a child, 2) an employer owns a policy on an employee, 3) business partners own policies on each other for buy-sell purposes, and 4) the policy is owned by a trust, usually for estate planning purposes.
In the first three instances above, although there is third party ownership at the time of application, ownership is often transferred to the insured at some point. The American Taxpayer Relief Act of 2012 has increased the estate tax exemption, thus reducing the need to have a trust own a life insurance policy. It certainly won’t eliminate it though as many states, including New Jersey, have not adjusted their estate tax tables, thus subjecting estates to taxes at a much lower threshold than at the federal level.
So owning your own life insurance policy is desirable, as it conveys to you those rights enumerates in the second paragraph. However, there could be those infrequent instances where giving up the ownership has more long term benefits, and accordingly, should be strongly considered.