Danger Zones

Improper Policy Ownership

During the month of May, we are taking time to explore potential danger zones when considering existing life insurance policies.  The amount of coverage that is needed should not be the only concern of a life insurance agent.  There are many other aspects to consider when implementing a life insurance policy.  For example, improper policy ownership can create problems for the policy’s beneficiaries when the death benefit is paid out.

Although it might take some extra time to contemplate the appropriate owner for a life insurance policy, it is time well spent.  This important role affects the policy for the duration of its existence and at its ultimate disbursement.  Better to implement the policy slowly and correctly than to quickly and messily create future problems. 

As demonstrated in the graphic below, the policy owner is an important role to consider for every life insurance policy. 

In Example 1, the insured is the policy owner.  The death benefit would be considered as part of the insured’s estate and would incur any applicable estate taxes.  Additionally, the death benefit would be taxable to the adult child as beneficiary since they did not pay the premiums into the policy.

In Example 2, the spouse of the insured is the policy owner.  While the death benefit is clear of the insured’s estate, it would again be taxable to the adult child as beneficiary for the reason stated above.

In Example 3, the adult child of the insured is the policy owner.  The death benefit is clear of the insured’s estate and is not taxable to the adult child as beneficiary since they paid the premiums into the policy.  The same can be said of Example 4, except an insurance trust is used as the policy owner and beneficiary.

If the policy owner of any existing coverage is improperly appointed, there are steps to take to change the ownership of a policy.  A life insurance agent should be able to walk anyone through these steps or to complete a policy audit to make sure a policy is implemented properly.

Contact us with any questions or opportunities to help you or your clients achieve their goals.  This is what we enjoy doing for only a select number of families, businesses, and charitable institutions each year, and we look forward to hearing from you. 

This material is intended for informational purposes only and should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney, tax advisor or plan provider.