Should You Transfer Life Insurance to Your Children?

Financial protection translates to security for many parents and knowing their children will be taken care of financially can help provide peace of mind. From the minute your child enters the world, they become your first priority and concern above all else. This won’t change as you consider how to best provide for them, should the unthinkable happen. Did you know you can transfer your life insurance policy to your children?  While this option is not for everyone, you may be in one of the unique situations where this can better help you and your children.

For example, if your estate is worth more than $5.59 million, you may consider transferring ownership of your life insurance policy as a means of lowering estate taxes.  You can avoid federal taxation on the life insurance proceeds by transferring ownership to your adult children, or another, trusted beneficiary. Other reasons people transfer ownership of policies include an inability to continue paying the monthly premiums, or a contentious divorce.

Transferring ownership of your life insurance policy to another adult can have its drawbacks. One of significance is that once ownership has been transferred, you can’t change your mind or alter the policy in the future. For example, if you transfer your policy to a best friend and then have a falling out, you can’t get your policy back. Life insurance transfers tend to work best when you transfer ownership to an adult child whom you have a good, trusting relationship.

Lastly, before transferring your life insurance policy, you’ll want to keep in mind and remember the importance of staying current with premium payments, taxes, and other financial responsibilities. Even if your children are now adults, ask yourself, are they in the right mindset to take this on? Do they have the capacity to be proactive and do what is required of them?

Before you learn how to transfer life insurance, you’ll first want to consider if it’s the correct action to take.

Discussing Family Financials

Depending on your family dynamic, talking about money or a divorce can be an uncomfortable conversation, but a necessary one to make your wishes known as you get older. Initiating open communication among your children and solidifying intentions in writing as to why you want to transfer ownership will help alleviate misunderstandings or unnecessary financial family disputes down the road.  

There’s some questions you will want to ask yourself initially as well. What is the amount of the life insurance policy being transferred? Will any portion be subject to a gift tax? How will future payments be made? How will this differ than those included in your estate plans? These are all questions and parts of the process you will want to iron out before moving forward.

Because of the sensitive nature of these discussions, the first step for example, might be to verbally discuss your transfer of ownership intentions with your family, while initiating the actual transfer plan at another time. Consider what is best for you and your family with regards to communication and responsibility.

How to Transfer Your Life Insurance

The first way you can transfer your life insurance policy is by signing the appropriate document, an assignment of rights, that transfers ownership. By doing so, it is now the new owner who is held responsible for making the premium payments. If the cash value of your life insurance policy exceeds $13,000 at the time of transfer, a gift tax will be assessed for this amount to the child or children you have transferred the policy to and will not be included as part of your estate.

You can also transfer ownership of a life insurance policy through a life insurance trust. People usually choose this option if they want to avoid the risk having the life insurance 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 to your children or not, one of the key factors to consider is the tax implications. 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.

Weigh the pros and cons of a transfer of life insurance to your children, adding them as a beneficiary, or setting up a trust. Then, decide what will work best with regards to your assets and caring for your family financially as much as you can. No one size fits all as every life and every situation is unique  and you should always consult a life insurance expert first before making a final decision.

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