Usually, if you have a life insurance policy you’re also the owner. The owner of a policy is the only person who can change the beneficiaries, cancel the policy, or adjust the death benefit amount. But there are certain circumstances where transferring your policy makes sense.
You might want to transfer ownership of your life insurance policy to another person or legal entity for tax purposes, to save money, or to relieve the administrative burden of managing a policy.
Here’s what you need to consider before transferring ownership of your policy and how to do it.
Life insurance terms you should know
Beneficiaries: The people you name on your life insurance policy to receive the lump sum of money — also known as the death benefit — when you die.
Cash value: The portion of a permanent life insurance policy’s monetary value that grows tax-deferred over the life of the policy.
Death benefit: The amount of money the life insurance company will pay your beneficiaries when you die.
Face amount: The dollar amount, or death benefit, your beneficiaries receive if you die while your life insurance policy is active.
Insured: The person who is covered by the insurance policy.
Policy: The legal document that includes the terms and conditions of your life insurance contract.
Policyholder: The person who owns an insurance policy. Usually, this is the same person as the insured.
Permanent life insurance: A type of life insurance that lasts for the rest of your life and usually includes a cash value account.
Premium: The amount you pay your insurance company to keep your coverage active. Premiums are typically paid monthly or annually.
Riders: Add-ons to a life insurance policy that provide more robust coverage, sometimes for an extra cost.
Term life insurance: A life insurance policy that lasts for a set number of years before it expires. If you die before the term is up, your beneficiaries receive a death benefit.
Underwriting: The process where an insurance company evaluates the risk of insuring you and determines your final rate.
When does it make sense to transfer a life insurance policy?
Transferring life insurance can be a good choice for someone who no longer wishes to manage their policy, no longer needs the money, or wants to shelter their loved ones from additional taxes.
But transferring a policy has advantages and disadvantages.
Pros
You can give the policy to someone else to manage. The person you transfer the policy to can take on responsibilities like making payments and keeping your beneficiaries up to date, relieving you of the administrative responsibilities associated with owning a policy.
You could make a small profit from the transfer if you sell your policy.
You won’t have to continue making premium payments, as the new owner will likely also become the payor of the policy.
Cons
You won’t be entitled to any policy benefits after the transfer. Any financial perks from your policy — including the death benefit and the cash value account — will belong to someone else.
You won’t be able to decide who’ll benefit from the policy. The new owner will have the right to change the beneficiaries without your consent.
You might have a hard time finding a buyer if you choose to sell your policy — and it can be a time-consuming process.
Learn more about how life insurance works
Things to consider before transferring a life insurance policy
Consider that you’ll be giving up control of your life insurance and you won’t have the power to take ownership back. This means you won’t be able to change your beneficiaries, cancel the policy, or adjust the death benefit amount. Instead, you’ll give these rights to another person or entity.
Don’t transfer your policy until you’re certain that you’re willing to give control up and you’re satisfied with whoever you’d transfer ownership to.
You’ll also want to make sure you know the answers to these questions before you transfer your policy.
How much life insurance will you transfer? Make sure you know how much your policy is worth, the amount of any cash value if it’s a permanent life insurance policy, and how much the premiums are.
Will the transfer be subject to estate tax? Per the IRS, you can gift about $13.6 million in assets before being subject to estate taxes. [1] If the cash value of the policy you transfer doesn’t push your total giving over this threshold, you won’t be subject to estate tax.
Who will make future payments on the policy? Usually the owner and the payor of a life insurance policy are the same person. If you transfer ownership, you’ll probably also transfer payment responsibilities to the same person.
Learn more about how to understand your life insurance policy
Types of life insurance policies that can be transferred
If you have an individual life insurance policy, you can transfer ownership of it. This applies to both term life insurance policies and permanent life insurance policies. However, the reasons for transferring are usually different for each.
Term life insurance: One of the most common situations where people transfer a term life insurance policy is when an aging individual transfers ownership to an adult child to manage.
Permanent life insurance: Transferring this type of policy is usually best for high-net-worth individuals seeking to minimize the estate taxes that’ll be assessed when you die.
Learn more about term vs. permanent life insurance
Types of life insurance policies that can’t be transferred
You can’t transfer a group life insurance policy. Most group life policies are provided by your employer. Technically, your employer owns the group policy, so you wouldn’t be able to transfer ownership because you’re the insured, but not the owner.
IRS rules to consider when transferring a life insurance policy
The IRS has regulations that accompany the transfer of a life insurance policy. These regulations are designed to ensure that you’re only transferring a policy if you really want to, rather than to make a quick profit.
The three-year rule
The three-year rule is in effect when you transfer a policy for tax purposes.
If you transfer a policy and then die less than three years later, you’ll have to report it as part of your estate. [2] The benefit received from your policy will count toward your estate total and will be taxed that way. This is to prevent people who are expected to die very soon from transferring their policy only to save money.
Incidents of ownership
When you transfer a life insurance policy, you’ll give the incidents of ownership away. [3] This means that you won’t have any of the benefits of owning the life insurance policy, like being able to change beneficiaries. If you don’t give up the incidents of ownership and continue to try and exercise ownership over the policy, the IRS will consider the policy still belongs to you and you’ll be subject to estate tax.
How to transfer a life insurance policy to an individual
Transferring your life insurance policy to another person is a fairly simple process, especially if you’re transferring a term life insurance policy.
If you have a permanent life insurance policy with a cash value component, transferring your policy can be a bit more complicated and have tax implications for both you and the person to whom you’re transferring the policy.
Regardless of who you’re transferring your policy to, there are a few general steps you’ll follow in every transfer.
Decide who you want to transfer your policy to. This is usually a spouse or other close family member. This person will likely also take over paying for the policy. This should be someone you trust, as they’ll be able to update your beneficiaries, adjust the death benefit amount, or even cancel the policy without your consent.
File paperwork with the insurer. To start the transfer, you’ll need to officially notify your insurer of the transfer. Both you and the new owner will need to consent to the change and acknowledge the implications. Part of this step is also to confirm who the payor will be and if there are any tax implications.
You’re done! You won’t be responsible for managing the insurance, but you also won’t have any right to make changes to the policy.
How to transfer a life insurance policy to an irrevocable trust
If you want to transfer ownership of a policy to your spouse or adult child, they might be better off if you transfer ownership to a trust. This can help protect them from estate taxes, but still allow them to receive the policy’s payout when you die. Transferring ownership of your policy to an irrevocable life insurance trust (ILIT) can be an effective strategy to ensure that your loved ones receive the maximum financial benefit of your policy.
If you choose to transfer your life insurance policy to an ILIT, there are a few additional steps you’ll need to take.
Set up an irrevocable trust. You’ll also need to fund it so it can pay the policy’s premiums on your behalf.
Name a trustee. The trustee is the third party who’ll manage the trust. This should be someone you trust to carry out your wishes.
Complete the transfer paperwork with your insurer. This step officially transfers ownership of your policy to the trust. Once completed, your policy will be owned by the trust, not you.
Because ILITs can’t be changed after you establish them, they’re best for people with complex estate planning needs. If you’re considering adding an ILIT to your financial plan, you can meet with a financial advisor to review your personal situation.
How to transfer a life insurance policy to a corporation
If you transfer a life insurance policy to a business, you’re probably selling it. Selling a policy can be a good move for some people, but make sure you understand all the implications before doing so. In addition to giving up control of the policy and losing any cash value associated with it, you’ll also be subject to income tax on any profit you make from the sale.
Consult with a broker. This is a complex business transaction. Working with a broker will help you find someone to buy your policy who can compare different offers. Your broker will ensure you’re getting the best deal and the transaction happens legally.
Find a buyer. This is the most challenging part. It’s notoriously difficult to find a buyer for a life insurance policy, so you can’t always plan on selling a policy in a timely manner.
Sell your policy. Your broker can help you manage the sale and ensure the ownership transfers from you to the corporation that purchases your policy. They’ll then be able to claim the death benefit when you die and use the cash value account while you’re alive.
How to transfer a life insurance policy to a charity
You can transfer a life insurance policy to a charity of your choosing, but the same considerations apply. If you’re transferring a term life insurance policy, the charity won’t receive any payment until you pass away — and if you outlive the policy, they’ll receive nothing.
If you transfer a permanent policy to a charity, they’ll receive a payment when you die. They’ll also have the opportunity to borrow against any cash value that’s associated with your policy.
The steps to transfer a policy to a charity are similar to transferring to an irrevocable trust.
Choose the charity you want to transfer your policy to carefully. Remember this is a permanent change. The charity you choose will receive your death benefit when you die. If you change your mind later, you won’t be able to take back control of the policy or make any changes to it.
File paperwork with the insurer. To start the transfer, you’ll need to officially notify your insurer of the transfer. Both you and the charity will need to consent to the change. Part of this step is also to confirm who the payor will be and if there are any tax implications. If you’re transferring your policy to a charity, you may consider keeping yourself as the payor on the policy.
You’re done! The policy will belong to the charity you’ve chosen.
The bottom line
Transferring a life insurance policy isn’t something that most people need to do, but can be beneficial in certain circumstances. If you no longer want the responsibility of managing your policy or have concerns about how estate taxes will impact your loved ones, a transfer is worth considering.
If you have questions or want to explore how transferring your life insurance policy to can be advantageous to you, speak with a licensed advisor at Policygenius who can offer you unbiased advice.
