Protecting Your Kids Outside Your Nest
Through childhood, parents take every chance they get to ensure their kids’ safety. When kids are young, parents brush their teeth and put them in car seats. As kids get older, parents make them wear helmets and pads when riding a bike, and apply sunscreen on the beach. As teenagers, kids get curfews, and parents worry about the people they’re hanging out with. Another way parents can take care of their children, even after they’re grown, is by transferring life insurance to them.
Life Insurance and Financial Protection
For parents, time doesn’t stop. Their kids will (hopefully) move out one day, and parents will have less control over their children’s protection. But even though you can’t be sure your kids are physically safe, you can help ensure they are financially safe. You can help them save, open investment accounts for them, teach them how to balance their checkbooks, and in some cases use one more trick to help ensure their financial health even after you’re gone: transferring your life insurance policy into their names.
If you have a large estate, your beneficiaries will likely pay high estate taxes upon your death. Everything you own will be counted toward your estate, and thus, taxed. If you have a life insurance policy, its value is considered part of your estate. However, you can avoid some estate taxes on it by transferring your life insurance policy to your children.
Changing Life Insurance Ownership
Let’s say that Greg bought an insurance policy that covered his life at a value of $500,000, and his son, Dixon, is named as the beneficiary. Greg bought this policy when Dixon was born. 30 years later, knowing that he’s getting older, Greg transfers this life insurance policy so that it is in Dixon’s name. Upon Greg’s death, Dixon receives the proceeds from this insurance without tax, because it is no longer a part of Greg’s taxable estate.
Transferring ownership of a life insurance policy to your child is easy. You need to complete a change-of-ownership form, which can be provided by your insurance company. When you change ownership, the policy still covers you, but the new owner now holds the policy.
However, there are some limitations. For the purposes of calculating the total value of an estate, the IRS has a three-year rule (as of 2015). If the transfer of ownership took place within three years preceding death of the original owner, the transfer is void. The proceeds from the insurance policy are counted into the estate. If, for instance, Greg had died immediately after the transfer, Dixon would have paid estate taxes on the full $500,000 policy — a considerable sum.
So why don’t parents simply purchase their life insurance in their children’s names to begin with? Because your child must be at least 18 years old to receive the transfer. And despite the ease of transferring the policy ownership, once it is transferred, you cannot transfer it back. Before making such a permanent decision, parents should consult financial advisors and talk honestly with their children about whether it is the right thing to do.
Your kids are the most important people in your life, so their financial health is imperative. By transferring life insurance, you’re able to take care of your children even after they’re grown. HealthMarkets Insurance Agency knows the ins and outs of our policies, and we want to help you find the plan for your needs. We’ve sold more than 2 million insurance policies, and our licensed agents are ready to help you. Contact a HealthMarkets Agent and get a plan today!