Tax Benefits for Transferring Your Life Insurance Policy
Most business owners have life insurance, which may be owned, and paid for, by either their company or themselves personally. If they own it, tax benefits may be available by transferring the ownership of the policy to their company. At the same time, there is little or no reduction in the after-tax death benefits for the family.
Why sell the policy to your company? The first benefit is it takes lass pre-tax income to pay the premiums, which lowers your cost. A second benefit is the ability to strip funds equal to the fair market value of the policy form the company on a non-taxable basis.
How is the fair market value calculated? An actuary calculates the fair market value of the policy based on the current health of the insured(s) and the features of the policy. The policy's death benefit, cash value and premiums required to maintain coverage are all considered. The process is similar to how the premiums were determined in the first place, and also how commuted values of a pension income are calculated.
Not all policies have a fair market value that exceeds its cash value. Generally, any policy has a value where the insured would now be rated or declined for new insurance. If the insured remains healthy and able to obtain new insurance without a rating, then the terms of the policy dictate whether or not it has a value. Term-to-100 or universal life policies with a level insurance costs will have a value. Such value will be higher the older the policy. Regular term insurance does not have a value unless the health of the insured has changed.
Who should consider the transfer? The potential tax benefits exist for anyone who owns a private company and also owns an existing life insurance policy (or their trust, spouse, parent or child owns a policy).