Can You Change the Owner of a Life Insurance Policy?

Life insurance policies are a financial asset and a tool for future planning. Understanding who controls this asset is important for its effective use. It is possible to change the owner of a life insurance policy, a process that involves various considerations. This ability to transfer ownership allows for flexibility in managing financial affairs over time. While the reasons for changing ownership can vary, the possibility of such a transfer is key to life insurance management.

Understanding Life Insurance Policy Ownership

Policy ownership defines the individual or entity holding control over a life insurance contract. This owner possesses specific rights, including the ability to name or change beneficiaries, surrender the policy for its cash value, take out policy loans, and assign ownership to another party. The policy owner is distinct from the insured, who is the person whose life is covered by the policy, and the beneficiary, who is designated to receive the death benefit upon the insured’s passing. While these roles can sometimes overlap, they often involve different individuals or entities.

For instance, an individual might purchase a policy on their own life, making them both the owner and the insured. A parent could own a policy on their child’s life, or a business might own a policy on a key employee’s life. The insurance contract is an agreement between the policy owner and the insurance company, granting the owner authority over aspects like coverage amounts, policy riders, and termination.

Eligible policy owners extend beyond individuals. Trusts, such as Irrevocable Life Insurance Trusts (ILITs), can serve as owners, often established for estate planning purposes to remove the policy proceeds from the insured’s taxable estate. Businesses may own policies on executives or partners, while charitable organizations can also be designated as owners. The choice of owner depends on the specific financial and estate planning objectives.

The concept of “incidents of ownership” is relevant in defining control. These rights allow a person to influence the policy’s economic benefits, such as changing beneficiaries, surrendering or canceling the policy, assigning it, or borrowing against its cash value. Even if not exercised, their existence can have tax implications, particularly for estate tax purposes. Understanding these distinctions is important before ownership transfer.

The Process of Changing Policy Ownership

Changing the ownership of a life insurance policy involves specific steps to ensure the transfer is legally recognized and properly recorded by the insurance company. The initial phase focuses on gathering all necessary information and obtaining the correct forms.

Required Information for Transfer

The existing policy number is required, alongside:
The full legal name of both the current and proposed new owner.
Current contact information for both owners.
Social Security Number or Tax ID of both owners.
The relationship between the current and new owners.
The effective date of the transfer.

This ensures accurate identification of all parties.

Obtaining and Submitting Forms

The official “Change of Ownership” or “Absolute Assignment” form is typically obtained directly from the insurance carrier, either through their website or by contacting customer service. This form captures all data required for a valid transfer. Accuracy and completeness are important to avoid delays or rejections.

Once information is compiled and the form completed, submit the request to the insurance company. Submission methods vary, including mailing the original signed form, using an online portal, or faxing documents. Confirm the preferred method and retain copies of all submitted documents.

Processing and Approval

After submission, the insurance company will review the transfer request. Processing time ranges from a few days to several weeks, depending on the request’s complexity and the insurer’s procedures. The company will typically issue a confirmation receipt and may request clarification or additional documentation. Upon approval, the new owner assumes full control over the policy, including responsibility for future premium payments.

Tax Implications of Policy Ownership Changes

Changing the owner of a life insurance policy can trigger several tax consequences, primarily concerning gift tax, estate tax, and income tax.

Gift Tax Considerations

One area is the potential for gift tax. When a policy with cash value is transferred for less than its fair market value, the Internal Revenue Service (IRS) may consider it a taxable gift. For 2025, individuals can gift up to $19,000 per recipient annually without incurring gift tax or affecting their lifetime exemption. Any amount exceeding this annual exclusion contributes to the donor’s lifetime gift tax exemption, which is $13.99 million per individual for 2025, or $27.98 million for married couples. The donor is responsible for filing IRS Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return, to report gifts exceeding the annual exclusion.

Estate Tax Considerations

Estate tax implications are also a consideration. If the insured retains any “incidents of ownership” over the policy at their death, the death benefit proceeds may be included in their taxable estate. This can happen even if the insured is not the owner but possesses rights like changing beneficiaries or borrowing against the policy. A rule known as the “three-year rule” dictates that if a policy’s ownership is transferred by the insured within three years of their death, the death benefit will still be included in their taxable estate for federal estate tax purposes, regardless of who owns it at the time of death.

Income Tax Considerations

Income tax can also arise in specific scenarios. If a policy is sold for more than its cost basis—total premiums paid less untaxed distributions—the gain may be subject to income tax. Another income tax consideration is the “transfer-for-value rule,” found in Internal Revenue Code Section 101. This rule states that if a life insurance policy is transferred for valuable consideration (e.g., sold), the death benefit, which is income tax-free to the beneficiary, may become partially or fully taxable. The taxable portion would be the amount exceeding the consideration paid for the policy plus any subsequent premiums paid by the new owner. While exceptions exist, such as transfers to the insured or certain business partners, understanding its potential impact is important. Consulting with a qualified tax professional is advisable for personalized guidance.