How to Transfer a Life Insurance Policy

A life insurance policy transfer involves changing who controls or benefits from the policy. This process modifies the original contract to reassign rights and responsibilities.

Understanding Policy Transfer Scenarios

Individuals consider transferring a life insurance policy for various personal or financial reasons. Estate planning often requires transfers; for example, policies may be moved into an irrevocable life insurance trust (ILIT) to manage estate taxes. Divorce settlements can also involve transferring policies between former spouses.

Gifting a policy to a family member or a charitable organization is another scenario, contributing to a loved one’s financial security or supporting a cause. For businesses, policy transfers are relevant in succession planning for key-person policies, ensuring business continuity. Managing policies no longer needed due to changed financial obligations can also lead to transfer.

Different Methods of Policy Transfer

Several methods exist for transferring a life insurance policy, each with different implications. Changing the legal owner, a change of ownership or absolute assignment, transfers all rights and control, including cash value access, to another individual or entity. The new owner assumes responsibility for policy decisions, such such as premium payments and beneficiary designations.

Another method is changing the designated recipient of the death benefit, a change of beneficiary. This dictates who receives the policy’s payout upon the insured’s death. Beneficiaries can be primary (first in line) or contingent (receiving benefits if the primary cannot), and they can be revocable (changeable by the owner) or irrevocable (requiring consent for changes).

A collateral assignment is a temporary transfer where the policy is pledged as loan security. The policyholder maintains ownership, but the lender gains a claim to a portion of the death benefit or its cash value until the loan is repaid. This ensures the lender can recover the outstanding loan from the death benefit if the borrower dies or defaults.

Gathering Information and Forms for Transfer

Before initiating a policy transfer, specific information and documentation must be gathered. This includes the policy number, type, current owner’s details, and current beneficiaries. For the new owner or beneficiary, full legal names, addresses, Social Security Numbers or Taxpayer Identification Numbers (TINs), and relationship to the insured are necessary.

Insurance companies require specific forms for each transfer type, such as a Change of Ownership, Beneficiary Designation, or Assignment form. These forms are obtained directly from the insurance carrier, through their website, customer service, or an agent. Accurately completing all fields on these forms with the gathered details is important to prevent delays.

Supporting documentation may be required, depending on the transfer’s nature. For instance, transferring a policy to a trust requires a copy of the trust document. Other situations, such as divorce-related transfers, may require a divorce decree and identification verification.

Executing the Policy Transfer

After gathering information and completing forms, submit documents to the insurance company. Submission methods vary by insurer, including mailing original signed forms, uploading scanned documents online, or submitting via fax or an authorized agent. Policyholders should follow the insurer’s specific instructions.

Upon receipt, the insurance company reviews documents for completeness and accuracy. This ensures all requirements are met and the transfer can be processed. The insurer may contact the policyholder for clarification or missing information.

Once approved and processed, the policyholder receives confirmation from the insurance company. This notification might come as a new policy statement, endorsement, or confirmation letter, indicating successful completion. The timeline varies, ranging from a few days to several weeks, depending on the transfer’s complexity and insurer’s processing times.

Tax Implications of Life Insurance Transfers

Transferring a life insurance policy carries various tax implications, depending on the transfer’s nature. A gift tax may be triggered if a policy’s ownership is transferred to an individual or trust for less than fair market value. The annual gift tax exclusion for 2025 is $19,000 per recipient, meaning gifts up to this amount do not count against an individual’s lifetime exemption or require reporting. If the policy’s value exceeds this annual exclusion, the excess reduces the donor’s lifetime gift tax exemption ($13.99 million per individual in 2025).

Income tax implications can arise under the “transfer for value” rule (IRC Section 101(a)(2)). If a policy is transferred for valuable consideration, the death benefit may become partially or fully taxable as ordinary income. This rule prevents tax-free windfalls when policies are bought and sold, with exceptions for transfers to the insured, a partner of the insured, or a corporation where the insured is a shareholder or officer. When a policy is sold or surrendered, the policyholder’s basis (premiums paid) is relevant for determining any taxable gain.

Estate tax considerations are important, especially when transferring policies to an Irrevocable Life Insurance Trust (ILIT). An ILIT can remove policy proceeds from the insured’s taxable estate, potentially reducing estate tax liability. For this to be effective, transferring an existing policy to an ILIT must occur outside the three-year look-back period before the insured’s death. If the insured dies within three years of transferring an existing policy, the death benefit may still be included in their taxable estate. Given the complexity of these tax rules, consulting a tax professional or financial advisor is advisable for personalized guidance.