What are "Incidents of Ownership," and how do they impact your life insurance?

In regards to life insurance policies, if an insured has any control over a policy then that person is deemed to have incidents of ownership.

In general terms life insurance gets paid out to beneficiaries income tax free. However, if you owned the policy or had any control over the policy, then at your death the proceeds of the life insurance policy would be included in your estate and be subject to estate taxes. This effectively voids the income tax free planning you were looking to achieve.

Basically, if an insured has any rights or privileges in a life insurance policy or even has access to the policy’s cash value, then he or she is considered to have incidents of ownership on that policy. The Internal Revenue Service says that if a person has ANY rights (incidents of ownership) in a life insurance policy, the proceeds of that policy will be included in his or her estate for estate tax purposes.

The lesson here is that, as an insured, you should never retain ANY rights in the policy, not even the right to change the named beneficiaries of the policy, because that is enough to qualify you as having incidents of ownership.

Comments

[Ken Puck]

What if the spouse is made both owner and beneficiary -- and dies before the insured?

Who owns the policy? (Presumably, the spouse's estate.)

Who can then change the beneficiary? (Presumably the estate's executor.)

Seems fraught. Can you clarify and pass along any suggestions?

Thank you.

[Bacon Wilson Law]

Ken, we cannot respond to individual legal inquiries on this blog. Please email or call attorney Darling directly for assistance. 413.781.0560 [email protected]