Life Insurance: Who should actually own the policy?
If your life is being insured, then you are “the insured.” The person or trust
that receives the money when you die is the “beneficiary.” And the person or
trust that pays the premiums is considered the “policy owner.” Misuse of these
designations has the potential to create some problems. For example:
Estate taxes: The face value proceeds of the policy are considered an asset of
the policy owner when you die. Thus, if you are the owner of your own policy,
the money will be considered part of your estate -- and added to the value of
your home, retirement plan, etc. -- to determine your estate tax liability. The
solution, if you’re worried about exceeding the estate tax limitations -- $1
million this year – is to create an irrevocable trust to own the policy, and
gift enough money to the trust each year so the trustees can pay the premiums.
Divorce: A court may order life insurance to be kept in force, but no one can
guarantee the insured will pay the premiums. The solution is that the spouse
should be the owner of the policy on his/her ex’s life. That way you can be sure
the policy remains in force!
Children as beneficiaries: You may want your minor children to be the
beneficiaries of your life insurance proceeds, to pay for school or camp or
lessons. But minor children cannot be legal beneficiaries, and so the courts
will step in. The solution is to create a trust to manage the funds on behalf of
your children, name the trustees, and leave instructions as to how the money is
to be spent on their behalf.
In conclusion, you should buy life insurance for its own sake
and do your investing elsewhere. By the time your 30-year level term policy
ends, your children will be through college, and you’ll have built up enough
cash in retirement accounts to cover your needs. Especially for young families
on a tight budget, term insurance is best. But here is a checklist
of things to consider in comparing term policies:
Is it guaranteed renewable every year, as long as you pay the premiums? (You
don’t want a policy that requires an annual physical exam.)
Is the premium guaranteed -- or just “predicted” to stay level for the promised
20 or 30 years?
Are you dealing with a strong, highly rated insurance company that can back up
its promises?
Make sure you’ve examined all these issues before comparing prices.
Related Link:
FAQs on insurance
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Table of Contents for Life Insurance
Anyone with money to burn
will always find himself surrounded by
people with matches.
-- Joe Ryan
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