As we are approaching the end of Life Insurance Awareness Month, we hope that you have a clearer understanding of how life insurance can fit in your financial plan. In this final series, we are going to talk about an important yet overlooked concept, which is how life insurance should be titled.


Looking back at our first series on life insurance, there are four main parties to a life insurance policy; the insurer, owner, insured, and beneficiary. A mistake that can be made when titling your life insurance policy is by making the insured, the owner, and the beneficiary different people. This concept is often called the “unholy trinity” of life insurance and, if anything, should be avoided just based on its’ name!


The reason why you should not have the insured, the owner, and the beneficiary as different people is because once the insured passes away, the owner will have made a taxable gift of the entire policy amount to the beneficiary. Let’s look at a couple of examples:


Sarah uses her own separate funds to purchase a $100,000 life insurance policy on her husband Jake’s life, naming their daughter Ashley as the beneficiary. On Jake’s death, Sarah will have made a $100,000 gift to Ashley.


Another scenario we will look at is if Sarah and Jake lived in a community property state and Jake purchased and owned the policy until his death paying the premiums entirely with community funds, and Ashley is the named beneficiary. At Jake’s death, Sarah would have made a $50,000 gift to Ashley, even though she wasn’t a named party to the life insurance policy!


A more complex strategy to consider is to use an Irrevocable Life Insurance Trust, otherwise known as an ILIT. An ILIT is set up for the trust to own the life insurance policy. You as the “grantor” would not own nor have control over the policy, but you would fund the premiums. The purpose of removing yourself as the owner of the ILIT is to remove the proceeds of the life insurance from your gross estate. In addition, by strategically using an ILIT, the proceeds of the life insurance policy can be distributed to the trust beneficiaries gift tax free.


Feel free to reach out to us if you have any questions regarding life insurance in your financial plan, because everyone’s situation is different. This information is not intended to be a substitute for specific individualized advice, and we suggest you discuss your specific situation with a qualified financial advisor.

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