When Should Someone Else Own My Life Insurance?
The life insurance industry is highly regulated and the process of approving an application is very thorough, so you do not have to worry about someone out there owning a life insurance policy on you without your knowledge.
There have been cases in history when nefarious individuals have convinced others to let them buy life insurance on them and then that person mysteriously dies not soon after. One of the most infamous of these insurance fraud artists was H.H. Holmes – but the life insurance industry has come a long way since the late 1800s.
You need insurable interest to buy life insurance on someone else.
Having insurable interest in someone means that if they were to die, it would affect you financially.
Back in the day, H.H. Holmes persuaded many individuals to let him own life insurance on them even though they were essentially strangers.
He convinced these people by offering them money to do so and making the deal sound too good to pass up. “I’ll give you $6,000 now, if you let me own life insurance on you. I will even pay the premiums as long as you make me the beneficiary so I make money after you die.”
This deal would never pass inspection today.
While it is common to own your own life insurance policy, there are certain cases in which it makes sense for someone else to own it. Let’s go over a few of these examples.
Owning Life Insurance on Your Spouse
Spouses have obvious insurable interest in one another. If one dies, the other is likely to struggle maintaining their same standard of living.
If you have had two incomes going toward mortgage payments, bills, and child care, having one income become suddenly non-existent would take its toll almost immediately.
Many married couples own life insurance on each other versus owning their own policy. Maybe one spouse realizes the importance of life insurance while the other just doesn’t share the same opinion or feels they don’t have time to get life insurance. The spouse who knows its value may take control, fill out the application, and just tell their spouse where to sign on the dotted line.
While we hope couples have discussions about finances often and can agree on the importance of life insurance, not every couple sees eye-to-eye on certain topics.
Read more: How do I get my spouse to buy life insurance?
Owning Life Insurance on Your Significant Other
If you aren’t married, you can still buy life insurance on one another as long as you can prove insurable interest. For example, if you and your partner live together, a copy of the lease with your names on it is an easy way to show insurable interest.
Because unmarried couples don’t have the unlimited marital deduction to take advantage of, owning life insurance on each other may be ideal for tax reasons.
The unlimited marital deduction allows spouses to transfer an unlimited amount of money to one another, including at death, without penalty or tax. In other words, you can own millions of dollars of life insurance on yourself and the proceeds will not be included in your taxable estate as long as your spouse is the beneficiary. Unmarried couples don’t have this option.
If you are the owner of your own life insurance policy and the beneficiary is anyone besides a spouse, it becomes part of your taxable estate when you die. Owning your life insurance policy could put you past the tax exemption threshold which would mean federal, state, and inheritance estate taxes could apply.
For example, the current individual federal estate tax exemption limit is $11.7 million. And in Minnesota, the 2022 individual state estate tax exemption is $3 million. Any estates with greater value are subject to hefty estate taxes.
(Chances are these limits won’t affect the majority of us but it’s still good information to know.)
If your total estate is nearing the exemption limits, a life insurance policy can easily put you over the edge. Owning millions of dollars of life insurance on yourself isn’t unheard of. But if someone else owns that million-dollar policy instead, you’re good to go.
To avoid your estate getting hit with taxes, have someone else own your life insurance policies.
Owning Life Insurance on Your Children
Parents will own life insurance on their children for two main reasons: having the financial flexibility to take off work and provide a proper burial and funeral should the unthinkable occur, and to lock in their child’s future insurability.
A child rider on the parent’s own policy is one option. You can learn more about how this works in our blog post Everything You Want to Know About Child Riders.
Another option is to buy a permanent life insurance policy on them in which you can one day even transfer ownership to them. You can learn more about how this works in the post Buying Life Insurance on Your Children.
