Transferring Life Insurance: A Comprehensive Guide To Policy Assignment

There are several ways to transfer a life insurance policy, depending on the specific circumstances and the type of policy involved. Common methods include absolute assignment, change of beneficiary, sale or gift, trust, and corporation or business. Absolute assignment involves transferring all rights and ownership of a policy from yourself to someone else or a legal entity, while a change of beneficiary allows the policyholder to change the beneficiary designation, redirecting the benefits to someone else upon their death. A life insurance policy can also be sold or gifted to another individual or entity, or transferred to a trust, where the trust becomes the new policy owner. In some cases, a policy may be owned by a corporation or business entity for purposes like key person insurance or executive benefits. It is important to understand the various methods and their implications before transferring a life insurance policy.

Absolute assignment

To proceed with an absolute assignment, the policy owner must notify their insurer, who will provide the necessary ownership forms. The insurer's permission is not required for the transfer to take place.

Change of beneficiary

Changing the beneficiary of your life insurance policy is a straightforward process, but it's important to understand the implications and your options. Here's a detailed guide on changing the beneficiary of your life insurance policy:

Who Can Change the Beneficiary?

Only the policyholder or the person who has taken out the life insurance policy can change the beneficiary. The policyholder has the right to decide who the beneficiary is and can make changes at any time, depending on the terms of the policy. It's important to note that the policyholder should also be able to name a contingent beneficiary, who will receive the payout if the primary beneficiary is deceased or unable to receive the funds.

In most cases, the policyholder can change the beneficiary without approval. However, there are certain instances when approval may be required:

• Power of Attorney: If the policyholder has granted someone power of attorney, a legal document that allows someone else to make financial, legal, or medical decisions on their behalf, then approval is needed.
• Community Property State: If the policyholder lives in a community property state and bought the policy after marriage, they will need spousal approval if they plan to name someone other than their spouse as the beneficiary.
• Irrevocable Beneficiary: If an irrevocable beneficiary has been named, which is rare, their approval may be needed to remove them from the policy.

To change the beneficiary of your life insurance policy, follow these steps:

• Contact Your Insurance Company: Get in touch with your insurance provider to understand their specific process for changing beneficiaries.
• Fill Out a Change Form: You will typically need to complete a change of beneficiary form, which may be submitted online, on paper, or over the phone. Provide the necessary information, including the policyholder's name, new beneficiary's name, and the reason for the change.
• Include Relevant Information: The form will ask for personal details about the new beneficiary, such as their social security number. You may also specify how the death benefit will be split among beneficiaries and whether someone is a primary or contingent beneficiary.
• Inform the New Beneficiary: Ensure that you communicate the change to the new beneficiary and provide them with information on where to find the coverage documents if they need to file a claim.

It is essential to keep your life insurance beneficiaries up to date to ensure that the death benefit payout goes to the intended recipient. Review your policy regularly and consider making adjustments after significant life events, such as marriage, divorce, or the birth or adoption of a child. Updating your beneficiaries helps avoid disputes and ensures your wishes are honoured.

Sale or gift

There are a few ways to transfer a life insurance policy as a sale or gift. Here are the key methods:

• Absolute assignment: This involves the policy owner transferring all rights and ownership of the policy to another person or a legal entity. It is an irrevocable decision, and the new owner gains complete control of the policy. The insured person will remain insured, but the new owner can update coverage or designate new beneficiaries.
• Collateral assignment: This allows the policy owner to use their life insurance policy as collateral to obtain a loan. The policy is temporarily transferred to the lender, and ownership is regained once the loan is repaid or specific criteria are met.
• Designating a beneficiary: The policy owner can name a person or organisation as the beneficiary of their policy. In the event of the owner's death, the beneficiary will receive the death benefit, typically as a lump-sum payment. The owner retains control of the policy during their lifetime and can make changes if they wish.
• Transferring ownership: The policy owner can transfer ownership of the policy to the intended recipient. The recipient then becomes the owner of the policy and can make changes, such as naming beneficiaries. The previous owner may continue to pay premiums to keep the policy active, but they should ensure the recipient does not inadvertently become responsible for these payments.
• Purchasing a new policy: Instead of transferring an existing policy, a new policy can be purchased as a gift for the recipient. This option is suitable for young relatives who may not otherwise have life insurance. It guarantees their insurability and provides peace of mind.

When transferring or purchasing a life insurance policy, it is important to provide proof of insurable interest and obtain the recipient's consent, along with their personal information. A medical exam may also be required.

Tax implications

It is important to consider the tax implications of transferring or gifting a life insurance policy. Policy ownership transfers may be considered donations, and transferring ownership to a charity could result in a charitable contribution deduction. Consult with tax professionals and the Internal Revenue Service (IRS) for specific guidance.

Irrevocable life insurance trust (ILIT)

An Irrevocable Life Insurance Trust (ILIT) is a type of trust that holds one or more life insurance policies and provides certain advantages. It is a legal arrangement that seeks to minimize an individual's current tax burden and the impact of taxes on their estate.

ILITs are funded during an individual's lifetime with one or more life insurance policies. They are irrevocable, meaning that once created, the trust generally cannot be changed or revoked; the terms of the trust agreement are set in stone. The insured cannot change or undo the trust after its creation, allowing the premiums from the life insurance policy to avoid estate taxes.

The benefits of an ILIT include tax advantages, asset protection, and government benefit protection. By removing taxable assets from an individual's current portfolio, an ILIT may help lower their current tax burden. It also helps to avoid estate taxes and other expenses after death, preventing the need to sell high-value assets. Additionally, ILITs allow individuals to leverage the annual gift tax exclusion by using gifts to pay premiums on the life insurance in the trust.

ILITs also provide asset protection by protecting insurance benefits from divorce, creditors, and legal action against the insured and their beneficiaries. They can also be used to protect an inheritance for a minor child, a loved one with special needs, or an adult child who lacks the maturity or financial savvy to handle a large sum of money.

The main downside of an ILIT is that establishing this type of trust requires the grantor to completely give up all rights to the property in the trust, including who the trust beneficiaries are and the circumstances under which they receive the assets. Additionally, setting up and maintaining an ILIT may incur professional fees and require filing a gift tax return.

Corporation or business

Corporations or businesses can be beneficiaries of life insurance policies. This is a common strategy for business loan acquisition, estate planning, and business succession planning. Here are some key points to consider when transferring life insurance policies as a corporation or business:

Understanding the Basics

Firstly, it's important to understand the different parties involved in a life insurance policy and their respective rights and responsibilities. The policy owner is typically the person who controls the policy, pays the premiums, and can make changes or cancel the policy. The insured person is the individual whose life is covered by the policy, and the beneficiaries are those who receive the benefits from the policy upon the insured's death. In some cases, the owner and the insured person may be the same individual.

Methods of Transferring Policy Ownership

There are several methods to transfer ownership of a life insurance policy, each with its own implications:

• Absolute Assignment: This involves transferring all rights and ownership of the policy to another individual or legal entity. This type of transfer is irrevocable, and the new owner gains complete control over the policy.
• Collateral Assignment: This allows the policy to be used as collateral to obtain a loan. The policy owner can use the life insurance policy as security instead of property or other assets. Once the loan is repaid, the original owner regains control of the policy.
• Irrevocable Life Insurance Trust (ILIT): This type of trust owns a life insurance policy as its primary asset. ILITs are often used to reduce or avoid estate taxes when leaving a sizable taxable estate to beneficiaries. While this can shield the entire death benefit from federal estate and generation-skipping transfer tax, careful consideration is necessary to avoid adverse tax consequences.

Safe-Harbor Exceptions to the Transfer-for-Value Rule

When transferring a life insurance policy, it's important to be aware of the transfer-for-value rule, which can result in the loss of advantageous tax treatment. However, there are several safe-harbor exceptions to this rule:

• Transfer to anyone whose basis is determined by reference to the original transferor's basis.
• Transfer to the insured, their spouse, or ex-spouse (in the case of divorce).
• Transfer to a partner of the insured.
• Transfer to a partnership in which the insured is a partner.
• Transfer to a corporation in which the insured is a shareholder or officer.

Additional Considerations

When transferring life insurance policies as a corporation or business, it's crucial to consult with legal and financial professionals to ensure compliance with regulations and to minimize potential tax burdens. Additionally, consider the following:

• Policy Features and Customization: Compare the coverage, riders, and features of the current policy with the new one to ensure it meets the corporation's current and future financial needs.
• Premiums, Costs, and Affordability: Evaluate the financial implications of the transfer by comparing premiums, costs, and long-term affordability.
• Policy Underwriting and Eligibility: Understand the new insurer's underwriting process, eligibility requirements, and their impact on terms and premiums.
• Policy Continuity and Renewal: Ensure a seamless transition to avoid coverage gaps and review the renewal process, including grace periods and reinstatement options.
• Surrender Charges and Policy Loans: Be aware of any surrender charges for early termination and consider the handling of any outstanding policy loans during the transfer.
• Policy Performance and Bonuses: Review the performance of the existing policy, including bonus declarations, and compare it with the new policy's opportunities.

In conclusion, transferring life insurance policies as a corporation or business requires careful consideration of the different methods of ownership transfer, compliance with regulations, and a thorough understanding of the implications for all parties involved.

Frequently asked questions