Life Insurance Policy

Life Insurance Policy

by Richard C. Wilson & Family Offices Group Association Team

Family Office Definition: Life Insurance Policy

Life Insurance Policy definition:  Life insurance policies are a contract with an insurance company to pay a benefit upon the death of the policy owner. Beneficiaries receive policy benefits outside of probate. Life insurance proceeds are tax-free for beneficiaries (not subject to income taxes).  The policy is typically included in the taxable estate of the deceased, unless ownership is ownership is irrevocably transferred to another. Any legal right to change beneficiaries, cancel the policy, or use the policy as collateral represents incidents of ownership and causes the policy to be included in the taxable estate . When the deceased person’s estate is named as a beneficiary, the death benefit is included in the taxable estate and subject to probate.  When policies are irrevocably gifted in order to be removed from the taxable estate, the new owner must take over the premiums. However, annual gift exclusion amounts can be used to provide for premiums.  Policies that are gifted or transferred within three years of death revert back to the taxable estate of the deceased, even if it was an irrevocable transfer of ownership (see the three-year rule definition).

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