Should you transfer life insurance to your children?

Financial protection translates to security for many parents, and knowing their children will always be taken care of financially can help provide peace of mind. Should the unexpected happen and you’re no longer able to provide for them, there’s a lot to consider when figuring out the best way to ensure they’re supported. Life insurance is a common solution to this problem and although it can give you financial peace of mind, it can also leave a large tax bill for your family. If you know you’re going to be subject to federal estate tax after you die, transferring your life insurance policy to someone else can help alleviate some of those tax costs. 

Things to Consider

There are a few things to consider when making the decision to transfer your life insurance policy: 

  • What is the amount of the life insurance policy being transferred?
  • Will any portion be subject to gift tax?
  • How will future payments be made?

How to Transfer Your Life Insurance Policy

There are two options when it comes to transferring a life insurance policy: 

  1. Transfer ownership of your policy to any other adult, including the policy beneficiary 
  2. Create an irrevocable life insurance trust and transfer ownership to it

Transferring ownership is generally a straight-forward process that’s as simple as signing the appropriate assignment of rights documents. If you transfer your policy and the cash value exceeds the annual exclusion limit, it’s considered a taxable gift. Once that policy is transferred, you no longer have control over the beneficiaries or coverage limit and the new owner is now responsible for the premium payments.

If you place your life insurance policy in a trust, a trustee takes control of the plan and makes sure premiums are paid and your money is distributed according to your wishes after you’re gone. A life insurance trust is a good option for those who want to avoid the risk of having the policy controlled by another person or party. Plus, the trust can be set up in a way that guarantees the policy premiums are paid on time, while you’re still alive. 

When deciding on whether to transfer ownership of your life insurance policy, tax implications are a key factor to consider. For example, if you decide to transfer your policy and die within three years of the transfer date, the policy will be considered part of your entire estate and subject to federal taxation.

It’s important to weigh all of the pros and cons of transferring your life insurance policy. At SelectQuote, we can help you weigh your life insurance options and find the peace of mind that comes with securing a life insurance policy that’s right for you.

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