Life insurance: Selecting the owner of your policy


When choosing a life insurance product, time needs to be spent on the intricacies of how those death benefits pass to the intended heirs, and how your estate is impacted, prior to making the purchase.

What are the best options when selecting the owner of a life insurance policy?

Many physicians recognize the benefits of an overall financial plan to meet their long-term objectives such as retirement planning, education planning, and investment planning. However, planning for the unexpected, via life insurance, is certainly less pleasant, and also quite difficult. Understandably, no one likes to contemplate their own demise, and there are so many other important issues that seem to take precedence over the life insurance decision-making process.

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Whatever the reason, delaying this important part of the planning process can result in expensive and unintended tragic consequences. When planning for survivor income needs, you will need to consider the ongoing income needs of your survivors, as well as any immediate lump-sum needs. Once you have defined the qualitative and quantitative need for life insurance, you can begin to determine which specific product in the life insurance marketplace best meets your objectives.

The work, however, does not end there. Time also needs to be spent on the intricacies of how those death benefits pass to the intended heirs, and how your estate is impacted, prior to making the purchase.

Prior to purchasing a life insurance policy, give careful consideration to who the owner of the policy should be. While insurance proceeds aren’t subject to income taxes, the proceeds can be subject to estate taxes. The four most common ways to own a life insurance policy include:

By the insured. If you own the policy, the insurance proceeds will be considered part of your taxable estate and may be subject to estate taxes if your estate is large enough.

By the insured’s spouse. The insurance proceeds won’t be included in your taxable estate if your spouse both owns the policy and is the beneficiary of the policy, unless you inherit the policy under the terms of your spouse’s will. However, if someone else is named as beneficiary, such as a child, the proceeds will be considered a gift and may be subject to gift taxes.

By a person other than the insured’s spouse. In this situation, the insurance proceeds won’t be included in your taxable estate. However, in 2015 keep in mind that if you want to pay the insurance premiums, premiums in excess of $14,000 (unchanged from 2014) may be considered taxable gifts. In situations where you have two or more beneficiaries, you will have to gift the money for the premiums to the beneficiaries in order to qualify for the gift tax exclusion.

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Minor children can’t own insurance policies in most states, so you may have to set up a custodial account if the owners are minors. Care must be taken if you are transferring an existing policy. This is considered a gift, which may trigger gift taxes if the cash value is in excess of $14,000. Also, if you die within 3 years of transferring a policy, the proceeds will still be included in your taxable estate.

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By a trust. When a trust owns the policy, the proceeds are not considered part of your taxable estate if the trust is irrevocable and you are not the beneficiary, meaning that you can’t change the terms or terminate the trust. The same tax rules apply to trusts as those applicable to a person other than your spouse, but you often can structure more flexibility into a trust arrangement.

While it may seem easiest to simply own the policy and have a spouse be the beneficiary, as you can see, other options may be more favorable. Spend some time with your financial planner to determine the most efficient way to structure your life insurance policies. Only in this manner will your insurance plan be properly coordinated with your overall financial plan in an effort to minimize or reduce estate taxation.


I am in line to inherit from a relative, but would prefer the funds go to other family members instead. Is that possible?

You will need to use a disclaimer, which must meet certain requirements:

  • The disclaimer must be in writing and be irrevocable.

  • You must disclaim the gift within a certain amount of time-generally 9 months after the date of death or taxable transfer.

  • You must take action before you receive any benefits from the gift.

  • You must not have already benefited from the inheritance.

Under the law, you cannot direct or control who specifically receives the gift you’re refusing. But unless an alternate beneficiary is named in the will, the assets are generally treated as if you had also died. In other words, they pass to the decedent’s next-in-line beneficiary.

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