Gift Of Life Insurance: A Loving Legacy

Life insurance is typically purchased by the policyholder, but it can also be given as a gift. This can be done by purchasing a policy for yourself and adding the giftee as a beneficiary, or by buying a policy for both yourself and the giftee, known as a second-to-die policy. Alternatively, you can purchase life insurance with the giftee as the policyholder, which requires their personal details and health information, as well as a validation process to prove insurable interest. Gifting life insurance offers peace of mind, financial protection, and the potential for low rates and a financial safety net. It can also protect a business or provide for the next generation.

Gifting your own life insurance

Ways to Gift Your Own Life Insurance

There are two primary ways to gift your own life insurance:

• Designating the Recipient as a Beneficiary: You can name your intended recipient as a beneficiary of your policy while remaining the owner. This allows you to retain control of the policy and make changes if needed. The beneficiary will receive the death benefit, usually as a lump-sum payment, upon your death.
• Transferring Ownership of Your Policy: You can transfer ownership of your policy to the recipient, making them the owner. They will receive the death benefit and can also make policy changes, name beneficiaries, etc. You may be able to continue paying premiums to keep the policy active after transferring ownership.

Advantages and Disadvantages

Both methods have their advantages and disadvantages. By designating the recipient as a beneficiary, you retain control of the policy and can make changes at a later date. On the other hand, transferring ownership gives the recipient full control of the policy but may require them to pay premiums to keep it active.

Tax Implications

Maintaining Activity

To ensure the life insurance policy remains active, either you or the recipient will need to continue paying insurance premiums. Neglecting premium payments may result in the policy lapsing.

Consent and Information Requirements

When gifting your own life insurance, ensure you have the recipient's consent and necessary personal information, such as their full name, date of birth, and Social Security number. In some cases, a medical exam and other information may be required.

Buying a new policy as a gift

Buying a new life insurance policy as a gift for someone else is a great option, especially for a young relative who may not otherwise have life insurance. Here are some reasons why you might consider buying a new policy for your intended recipient:

Guarantee of Insurability

Some illnesses and other life events can render an individual ineligible to qualify for life insurance. If you purchase a life insurance policy for a loved one now, you can guarantee that they will be insured. If they maintain the policy, they will continue to be insured before anything happens that may render them ineligible. You may also have the option of securing additional peace of mind by purchasing a guaranteed insurability rider, which stipulates that life insurance coverage may be amended without the need for a second medical exam in the future.

Protection Against the Unknown

While it is difficult to think about, the tragic situation of a loved one dying is a possibility. Life insurance policies present a crucial way to provide financial support if this scenario occurs. You don't know how your recipient's health will progress over time, so buying them a life insurance policy helps to ensure security if the worst should happen.

Potential for Other Payments

Some life insurance policies can provide financial support in situations other than the death of the policyholder. For example, certain life insurance policies also include a cash value component that may be used to supplement retirement income.

How to Buy a New Policy as a Gift

If you've decided to purchase a new life insurance policy for someone else, there are several steps that you'll need to take:

• Shop around for life insurance policies to find the one that best meets your needs and budget.
• Before purchasing the policy, you will first need to demonstrate that you have an insurable interest in the recipient, meaning financial loss or hardship should the insured person pass away. This process varies depending on the policy and provider.
• Gather the necessary information from your intended recipient to purchase the policy, including their full name, date of birth, address, Social Security number, and similar data.
• Obtain the recipient's consent. If you are purchasing the policy on behalf of an adult, you'll need their consent directly. If you're purchasing the policy for a minor, you'll need the consent of their parent or guardian.
• If necessary per the policy and provider's guidelines, the recipient may need to receive a medical exam. They may need to complete a medical questionnaire listing all their previous surgeries, health conditions, current and past prescriptions, and more.
• Complete the registration and purchasing process to buy the policy through the provider.
• Maintain payments of the premiums to ensure that the policy stays active.

If your recipient is a child, you may be able to purchase a child rider to add the child to your existing insurance policy. When the child becomes an adult, you can arrange to transfer the policy ownership to them. This process can potentially bypass some of the steps above.

Tax implications of gifting life insurance

Gifting life insurance to a loved one is a thoughtful way to provide financial security in the event of your death. While it may not be the most glamorous of presents, it is a valuable gift that can maintain financial security for your loved ones if the worst happens.

There are a few ways to give life insurance as a gift, each with its own tax implications. Here are the key points to consider:

Designating a Beneficiary

One way to gift life insurance is to designate your loved one as a beneficiary of your existing policy. In this scenario, you remain the owner of the policy and can make changes, such as naming a different beneficiary, at any time. The beneficiary will receive the death benefit upon your death, typically as a lump-sum payment. This option allows you flexibility, but it may not provide the same tax benefits as other gifting methods.

Transferring Ownership

Another option is to transfer ownership of your policy to your loved one. This means they become the owner of the policy and can make changes, such as naming beneficiaries. They will receive the death benefit if you pass away while the policy is active.

Transferring ownership may be considered a donation, and if the recipient is a charity, it may constitute a charitable contribution, which can have tax benefits. However, if the recipient is not a charity, there may be gift taxes involved. According to the Internal Revenue Service (IRS), if you give over $17,000 in 2023 to a single person (other than your spouse), you need to file a gift tax form.

Additionally, if the policy has a cash value, the transfer of ownership may trigger gift taxes based on the taxable value of the gift. The gift is generally approximated at the cash value of the policy. It's important to consult with tax professionals and the IRS for specific guidance.

Buying a New Policy

You can also give life insurance as a gift by purchasing a new policy for your loved one. This option is suitable for young relatives who may not otherwise have life insurance. When buying a new policy, you will need to demonstrate an insurable interest, meaning financial loss or hardship if the insured person passes away. You will also need the recipient's consent and their personal information, such as their full name, date of birth, and Social Security number.

If you are gifting a term life insurance policy, you will need to set up automatic premium deductions from your bank account or send a check for the premium amount to the insured. Remember to file a form with the IRS showing the total gift amount. If you exceed the annual gift amount limit, you can request that it be deducted from the lifetime gift maximum.

Three-Year Rule

It's important to be aware of the three-year rule when gifting life insurance. According to the IRS, if you transfer ownership of a life insurance policy within three years of your death, the full amount of the proceeds will be included in your estate and taxed accordingly. This rule applies to both ownership transfers and the establishment of an irrevocable life insurance trust (ILIT).

Irrevocable Life Insurance Trust (ILIT)

Another way to gift life insurance and avoid taxes is to create an ILIT. With this option, you transfer ownership of the policy to the trust, and the trust becomes the owner and beneficiary. You cannot be the trustee of the trust, and you must give up all rights to revoke the trust or make changes to the policy. The proceeds from the policy are then excluded from your taxable estate.

Business-Owned Policies

If you are considering gifting life insurance in a business context, there are a few additional tax implications to keep in mind. If a business owns a life insurance policy with personal beneficiaries, the death benefit may be treated as taxable compensation for the employee or as a dividend for a shareholder. This means the beneficiary would owe income taxes on the death benefit as a distribution from the business.

One solution to avoid this issue is to set up an endorsement split-dollar arrangement, where the business owns the policy but allows the employee to name a personal beneficiary. Alternatively, an executive bonus plan can be used, where the business pays the premiums for a policy personally owned by the employee, and the payments are treated as additional taxable compensation.

In conclusion, while gifting life insurance can be a generous gesture, it's important to be aware of the potential tax implications. By understanding the rules around gift taxes, ownership transfers, and business-owned policies, you can make informed decisions and maximize the benefits of your gift.

The benefits of gifting life insurance

Gifting life insurance may not be the most glamorous of presents, but it can be a valuable gift that provides financial security for your loved ones if the worst happens. Here are some of the benefits of gifting life insurance:

Financial Protection

By purchasing life insurance for a child or grandchild, you provide coverage that protects them financially now and in the future. They will be covered now, regardless of any potential health changes that may prevent them from qualifying for protection later in life. This allows them to live their lives to the fullest and maintain a policy. Premium rates may never be lower for young people, so locking in a rate early can provide an opportunity for savings over their lifetime.

Opportunities for the Future

The life insurance death benefit can be used for any purpose. A beneficiary can choose to cover college tuition payments and graduate debt-free, pay off their mortgage early to reduce financial strain, or spend it however they wish.

A Lesson in Financial Responsibility

Life insurance can help solidify your children's or grandchildren's financial education and show them how to plan for the unexpected.

Peace of Mind for Dependents

If the recipient of your gift has a spouse, children, business associates, or others who rely on their income, the gift of life insurance could help them set worries aside. They will find comfort in knowing that no matter what happens to them, their loved ones will have financial protection.

Leaving a Financial Legacy

As long as you continue to pay the policy premiums, the life insurance policy you purchase for yourself or a loved one is creating a financial legacy for your family. It is a sure way to help children or grandchildren get ahead in life and support them even if you won't be there to celebrate certain milestones.

How to buy life insurance for someone else

Gifting life insurance is a thoughtful way to show your loved ones you care about their financial security. While it may not be the most glamorous of presents, it can be a valuable gift and a way to maintain financial security if the worst happens.

Understand the Basics of Life Insurance

Before purchasing life insurance for someone else, it is essential to understand how it works. Life insurance is designed to provide financial protection for loved ones after the policyholder's passing. The policyholder pays regular premiums to ensure their chosen beneficiary receives a death benefit or predetermined cash payout upon their death.

There are two main types of life insurance: whole life insurance and term life insurance. Whole life insurance covers the policyholder for their entire life and often includes a cash value component that can be borrowed against or withdrawn. On the other hand, term life insurance only covers the policyholder for a specific term, such as 10, 20, or 30 years, and is generally more affordable.

Prove Insurable Interest

To buy life insurance for someone else, you must prove that you have an insurable interest in them. This means demonstrating that their death would result in financial loss or hardship for you. The insurance company will investigate your relationship with the insured person and may require proof of financial dependency or a caregiver relationship.

Insurable interest is generally easier to establish with certain relationships, such as between spouses, parents and children, business partners, or siblings who provide care or financial support.

Obtain the Necessary Information

When purchasing life insurance for someone else, you will need to provide their personal information, including their full name, date of birth, Social Security number, and address. This information is required to initiate the application process and ensure the accuracy of the policy.

Get the Recipient's Consent

It is crucial to obtain the consent of the person for whom you are buying life insurance. They must be aware of the decision and agree to cooperate throughout the application process. This includes participating in interviews, answering application questions, and possibly undergoing a medical exam. Without their consent, you will not be able to take out a policy on their behalf.

Shop Around for Policies

Before purchasing life insurance, it is advisable to compare policies from different carriers to find the best price and terms that meet your needs and budget. The same type of coverage can vary in price between carriers, especially if the insured person has pre-existing health conditions.

Complete the Application and Purchasing Process

Once you have selected a suitable policy, work with the insurance provider to complete the registration and purchasing process. This may involve providing additional information, consent forms, and medical exam results. Ensure that you maintain regular premium payments to keep the policy active.

Maintain the Policy

After purchasing the life insurance policy, remember that it is essential to continue making premium payments to ensure that the policy remains active. By doing so, you will provide long-term financial protection for your loved ones.

Remember, while giving life insurance as a gift may not be conventional, it is a thoughtful way to show your loved ones you care about their future financial well-being.

Frequently asked questions