Guidelines for Who Should Own Your Life Insurance Policy
If you are buying a life insurance policy one of the most important decisions you can make is deciding who should own the policy.
When choosing an owner of your life insurance you may want to ask yourself the following questions:
1. Who is being insured?
2. Who will be paying the premiums?
3. Who do you trust to oversee the life insurance policy?
If the insured person is a minor under age 18, then you may want a parent or legal guardian to be the owner of the policy.
You can be the owner of your own life insurance.
If the life insurance policy is paid for by someone other than the person insured by the policy do you want that person to own the policy.
The owner of a life insurance policy has the right to change who will get the money when the insured dies. So, you want the owner to agree with your wishes as to who will receive the proceeds from the life insurance.
The owner of the policy is the person who can change the beneficiary, borrow from the policy, change the payment type, reduce the amount of life insurance, or cancel the policy.
If you have a large estate, you may want to consider having another person or a trust own your policy for tax purposes. You should discuss this with your spouse, tax professional, and your investment advisor.
Generally, you will want to be the owner of your own life insurance policy.
Two of the three parties of a life insurance policy (owner, insured, and beneficiary) must be the same person (or entity) so you do not violate the Goodman Triangle (a tax issue may arise when you have 3 different parties to a life insurance policy).
As most insured’s want to have control over their life insurance policy, they will choose to be the owner and insured of the policy.
The Goodman Triangle can cause unexpected gift tax liability in any situation where a life insurance policy is owned by one person on another person’s life and the policy names a third person (who is not the owner’s spouse) as the beneficiary of the life insurance.
If you are purchasing a life insurance plan for estate planning purposes, you may consider using an Irrevocable Life Insurance Trust (ILIT) and placing the life insurance policy in the trust. When you do this, the ILIT would be the beneficiary and owner of your life insurance.
If you have questions about ownership of your life insurance policy you can ask your life insurance agent or contact your life insurance company.
In addition, you can review the section of the life insurance policy regarding ownership rights under life insurance.
Ownership Rights Under Life Insurance
An insured has the right to exercise all privileges and receive all benefits of the policy except when restricted by the right of an irrevocable beneficiary or an assignee of record.
A life insurance policy owner can transfer ownership of the policy by making an absolute assignment (rights transferred to another individual without any conditions) or a collateral assignment (policy is security for a loan), transfer ownership by endorsement, change the plan of insurance (apply the cash value of present policy to purchase another type of policy with the original policy’s date), reinstate the policy, select an optional mode of settlement, make a policy loan, select the dividend option (if it is a participating policy), or select the non-forfeiture benefit option.
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