Ownership of Termn Life Policy

[cavan]

I've got a large term-life policy. I've made my sister and brother-in-law the sole beneficiaries. We're all in our fifties.

My income has decreased over the years and, rather than let the policy lapse, my sister and brother-in-law have agreed to pay the annual premium. As far as the insurer is concerned, I'm paying the premium; I've not told them that the beneficiaries are re-imbursing me every year.

My brother-in-law is concerned that he and my sister will suffer adverse tax consequences due to my continued ownership of the policy while he and my sister are beneficiaries and has asked that I make them joint owners of the policy.

My understanding of the situation is the exact opposite, i.e., that, in their capacity as beneficiaries, they would pay no income taxes on any death benefit paid; however, if they also became joint owners, there might very well be adverse tax consequences.

Beyond that, I'm not sure that the insurance company would agree that my sister and brother-in-law have an insurable interest in my life. Is the sibling relationship sufficient? I have no misgivings re my brother-in-law's sincerity; I simply think he's misinformed and I'd like a definitive, professional evaluation of the matter. Thanks.

 

[ALawyer]

The issue is not so much income tax but the estate tax.

If you have any "incidents of ownership" in the policy, as you now do, the policy's face value (actually the amount that will evetually be paid, including from any accidental death rider, the so called "double indemnity") would be part of your estate. On your death the policy proceeds plus all your other assets, such as any 401k,IRA, your home less mortgage, plus investments, etc. would be aggregated for estate tax purposes. And if it exceeds $675,000 the estate tax would start at 37%. By transferring it as a gift, that does away with the problem in most cases.

As for the life insurance company, don't worry. When you took out the policy you had an "insurable interest" in your own life. You did not take the policy out to defraud the insurance company or to sell to others. If the insurable interest exists at the time the policy was issued, that's enough.

Your policy can be gifted or assigned. If your health is severely impaired, it can even be sold to a viatical company. (However there are too many viatical brokers and companies who rip off policyowners and their families, so BEWARE.)