Can You Transfer Life Insurance? How the Process Works

Life insurance policies provide financial protection, offering peace of mind to policyholders and their beneficiaries. While initially set up with specific ownership and beneficiary designations, circumstances can change, leading individuals to consider transferring their policies. Transferring a life insurance policy involves shifting control and rights from one party to another. This action can be undertaken for various reasons, including estate planning or managing financial needs.

Methods of Transferring Ownership

Transferring ownership of a life insurance policy involves several distinct methods. One common approach is an absolute assignment, which permanently transfers all rights and control of the policy from the original policyholder, known as the assignor, to a new individual or entity, the assignee. Completing an absolute assignment typically requires a specific form, often titled an “Absolute Assignment Form” or “Change of Ownership Form,” provided by the insurance company.

To complete an absolute assignment form, policyholders provide:
The policy number
Full legal names of current and new owners
Addresses
Social Security Numbers or Taxpayer Identification Numbers
If the new owner is a trust, the trust’s name, date, and trustee names
If a business, the name and title of authorized officer(s)
Relationship between current and new owners
Whether the transfer is a gift or for value received

Both current and new policyowners must sign and date the form; notarization may be required.

Gifting a policy is a type of absolute assignment where no value is exchanged. When gifted, the transfer is irrevocable, meaning the original owner relinquishes all future control. This distinction is important for tax purposes, as gifts generally do not trigger the “transfer-for-value” rule, which can otherwise make death benefits taxable.

The sale of a life insurance policy to a third party is another method, often called a life settlement. If the insured is terminally or chronically ill, it’s a viatical settlement. These transactions allow policyholders to receive a cash payment for their policy, providing liquidity for various needs. Life settlement applications require comprehensive details about the policy, the insured’s medical records, and financial information. This includes the insured’s age, gender, health history, policy number, face amount, policy type, and any outstanding policy loans.

Tax Considerations for Policy Transfers

Transferring a life insurance policy can have significant tax implications for both the transferor and the transferee, depending on the nature of the transfer. When a policy is gifted, federal gift tax rules may apply if its value exceeds the annual gift tax exclusion. For 2025, this exclusion allows an individual to gift up to $19,000 per recipient without incurring federal gift tax. If the policy’s value surpasses this threshold, the excess amount would count against the donor’s lifetime gift tax exemption, which is a much larger amount.

For life settlements, where a policy is sold for cash, proceeds are generally subject to income tax. Taxation follows a three-tier structure:
Proceeds up to total premiums paid (cost basis) are tax-free.
Proceeds exceeding cost basis but below cash surrender value are taxed as ordinary income.
Remaining proceeds above cash surrender value are taxed as long-term capital gains.

An exception exists for viatical settlements: proceeds received by a terminally ill individual (certified prognosis of 24 months or less to live) are generally tax-free. Chronically ill individuals may also receive tax-free proceeds under specific conditions.

Transferring policy ownership can also be a strategy for estate tax planning through an Irrevocable Life Insurance Trust (ILIT). An ILIT is designed to own a life insurance policy, removing its death benefit from the insured’s taxable estate. This can help reduce potential federal estate tax liabilities, especially for larger estates. For an existing policy transferred into an ILIT, the death benefit may be excluded from the estate only if the transferor survives for at least three years after the transfer date. If a new policy is purchased directly by the ILIT, the three-year rule does not apply.

The “transfer-for-value rule” in Internal Revenue Code Section 101 states that if a life insurance policy is transferred for “valuable consideration,” the portion of the death benefit exceeding the consideration paid and subsequent premiums paid by the new owner becomes taxable income. This can significantly reduce the tax-free nature of the death benefit. However, several exceptions exist where the death benefit retains its tax-free status:
Transfers to the insured
A partner of the insured
A partnership in which the insured is a partner
A corporation in which the insured is a shareholder or officer
Transfers where the new owner’s tax basis is determined by the transferor’s basis, such as a gift.

Updating Beneficiary Designations

Updating beneficiary designations is separate from transferring policy ownership. Changing a beneficiary specifies who receives the death benefit, but it does not alter who controls the policy. The policy owner retains all policy rights, such as the ability to surrender it or take out loans, regardless of the beneficiary.

Life insurance policies allow for primary and contingent beneficiaries. A primary beneficiary is the first in line to receive the death benefit. Contingent beneficiaries are backups who receive the benefit if primary beneficiaries are deceased, cannot be located, or are unable to accept the proceeds. Naming both types helps ensure the death benefit is distributed according to the policyholder’s wishes and avoids probate delays.

Beneficiaries can be revocable or irrevocable. A revocable beneficiary can be changed by the policyholder at any time without their consent. This offers flexibility, allowing policyholders to adjust designations as life circumstances evolve. Most beneficiaries are revocable by default. An irrevocable beneficiary cannot be changed or removed without their express written consent. This designation provides a guaranteed right to the death benefit for the irrevocable beneficiary, and their consent is required for any policy changes affecting their rights. While offering security to the beneficiary, this option significantly limits the policyholder’s future flexibility.

To update a beneficiary, policyholders contact their insurance company and request a change of beneficiary form. This form requires:
Full legal name
Relationship to the insured
Current address
Social Security Number or Taxpayer Identification Number for each new beneficiary

If multiple beneficiaries are named, the form asks for the percentage of the death benefit each is to receive. The completed form must be submitted to the insurance company via mail, online portal, or fax. It is important to ensure all information is accurate and complete to avoid delays in processing.

Executing the Transfer

Once all necessary forms for an ownership transfer are prepared and signed, submit them to the insurance company. Submission methods vary by insurer but commonly include mailing original documents, using an online portal for electronic submission, or sending via fax. Policyholders should confirm the preferred submission method with their insurance provider to ensure proper delivery and processing.

After submission, the insurance company reviews the documentation for completeness and accuracy. This review typically takes a few days to several weeks; more complex transfers, like life settlements, can take four to five months. During this period, the insurer may contact the policyholder or new owner if any clarification or additional information is needed. The transfer becomes official only after the insurance company approves and records the change.

Following processing, the insurance company issues new policy documents reflecting the change in ownership. The new policyowner receives these updated documents as official confirmation. Policyholders can also verify the transfer’s completion by checking their online account or contacting customer service. This final verification step ensures the ownership change has been properly recorded and the policy is under the control of the intended party.