How to Give Life Insurance as a Gift – Investopedia
While it may not be the most glamorous of presents, life insurance can be a valuable gift and a way to maintain financial security if the worst happens. In most cases, individuals take out life insurance policies with the expectation that an insurer will pay a sum of money known as a death benefit to beneficiaries in the event that the insured individual dies while under coverage. But there are actually a variety of ways that you can offer life insurance to a loved one as a gift.
One of the most straightforward ways to gift life insurance—both for you and for the recipient—is to designate that recipient as a beneficiary of your own life insurance policy. You can do this in two primary ways, both of which have advantages and disadvantages to consider. In each case, your recipient will most likely receive the death benefit of your policy as a tax-free payment, making the process as easy as possible for them. You may also be able to name either a person or an organization such as a charity as your beneficiary.
If you wish, you can name your intended recipient as a beneficiary of your life insurance while remaining the owner of the insurance policy. In this scenario, the beneficiary will receive the death benefit upon your death, typically as a lump-sum payment. However, you will retain control of the policy while you are living. This means that you can name a different beneficiary at a later date if you change your mind, or that you can decide to name multiple beneficiaries if you would like to split up the benefit payout.
A somewhat more involved option is to transfer the ownership of your policy to your recipient. This means that the recipient not only receives the death benefit of your policy in the event that you pass away, but that this person is also the owner of the policy itself. They can make policy changes, name beneficiaries, and so on.
It is possible in many cases to transfer ownership of your policy but continue to pay premiums on that policy yourself in order to keep it active. However, you should check with your insurance provider to make sure that you don’t inadvertently sign your intended recipient up to make payments on an insurance policy that they receive as a gift.
One potential benefit of gifting the ownership of your life insurance policy is that you may be able to achieve a tax benefit through the process. Policy ownership transfers may be considered donations, and if your recipient is a charity, it may constitute a charitable contribution. And it may also be possible to deduct the premiums you pay and to claim a deduction for the value of the policy. Be sure to check with the Internal Revenue Service (IRS) and tax professionals for guidance surrounding your specific situation.
Another common way to give the gift of life insurance is to purchase a new policy for someone else. This is an excellent option for a young relative who may not otherwise have life insurance. Some of the reasons to consider buying a new policy for your intended recipient include:
If you've decided to purchase a life insurance policy for someone else, there are several steps you'll likely need to complete:
If your recipient is a child, you may be able to purchase a child rider to add the child to your existing insurance policy. When the child becomes an adult, you can arrange to transfer the policy ownership to him or her. This process can potentially bypass some of the steps above.
Yes. It is possible to give life insurance by making your recipient the beneficiary or owner of your own life insurance policy, or by buying that person a new policy.
Life insurance is designed to provide financial stability during incredibly difficult times. By making the gift of a life insurance policy, you are setting up your loved ones for success in the worst of times. Giving a child a life insurance policy guarantees that the child won't run into eligibility issues down the line.
You'll need to be able to prove insurable interest relating to the party in question. You'll also need to have personal information for your recipient, including date of birth, full name, and Social Security Number. If you're setting up a new policy, you'll need that person's consent (or the consent of a parent or guardian in the case of a minor), and the recipient will also likely need to complete a medical exam.
Although people commonly buy their own life insurance policies, it is possible to give life insurance as a gift. You can either designate the gift recipient as the owner or beneficiary of an existing life insurance policy, or you can establish a new policy for them. You will need to demonstrate an insurable interest in the person covered and ensure that the policy remains active by continuing to pay the premiums. While it may seem like an unlikely gift, giving life insurance can help set up your loved ones for financial success under the difficult scenario of a death in the family.
Internal Revenue Service. "Life Insurance & Disability Insurance Proceeds," Select "Do I report proceeds paid under a life insurance contract as taxable income?"
Internal Revenue Service. "Frequently Asked Questions on Estate Taxes," Select "What is included in the Estate?"
Internal Revenue Service. "Charitable Contribution Deductions."
Fidelity Life Association. "Are Life Insurance Premiums Tax Deductible?"
Paradigm Life. "What Is The Guaranteed Insurability Rider?"
National Association of Insurance Commissioners. "Life Insurance."
National Association of Insurance Commissioners. "Life Insurance," Select "FAQ and Questions" Tab, Select "Who can take out a policy on my life?"
Legal & General America. "Children's Life Insurance Rider."
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