Deciding to Own or Have Someone Else Own Your Life Insurance Policy

As long as you are over 18, it is generally advisable to own your own life insurance policy. By doing so, you retain control over the policy, including the beneficiary and any cash value it may have. If you do not own the policy, control over the beneficiary, cash value, and the ability to ensure the policy remains active may be lost.

Understanding the Estate Tax Threshold

If owning your policy would put the value of your estate above the estate-tax threshold for the year in which you die, it starts to become a relevant consideration. For the year 2021, the threshold was $11.7 million for singles and $23.4 million for married individuals. However, for the vast majority of people in the United States, owning your own policy makes the most sense, as it offers control and allows you to name the beneficiary.

Scenarios Where Others Should Own the Policy

While owning your own life insurance policy is the standard recommendation, there are specific scenarios where it might make more sense for someone else, such as a parent, grandparent, or trust, to own the policy. Here are three key situations to consider:

1. Children

As a minor, you cannot own property or contract, which means you must have a legal guardian or a trustee to own the policy. Parents or grandparents are common guardians. Most companies have safeguards in place to prevent over-insurance and will often transfer ownership to the child upon reaching the age of 18 or 21.

2. Recipients or Likely Recipients of State Aid

Individuals who are recipients or likely recipients of state aid, such as Medicaid, need to be careful with their assets. While life insurance policies should have named beneficiaries, there are cases where the insurance may not bypass the estate, especially if there is cash value. Additionally, any assets or cash value in a life insurance policy can affect Medicaid eligibility.

3. Estate Planning Purposes

For high-net-worth individuals, life insurance may be used as a tool for estate planning, specifically for paying estate taxes and providing liquidity to the estate at death. In these cases, the policy might be owned by a trust or another entity instead of the insured. This is less of a concern for the average person.

These scenarios are exceptions and not the norm. It is always best to consult with a professional to ensure that your policy is set up to meet your specific needs.

What You Decide

By owning your own life insurance policy, you have the final say in how the funds are distributed upon your death. If you choose to sell the policy, the funds will go to the purchaser.

It is essential to understand the implications of life insurance ownership, particularly in relation to estate planning, beneficiary control, and the potential for estate taxes. Consulting with a professional is recommended to navigate these complex issues effectively.