Assignment Definition
The Dictionary of Insurance Terms and Definitions
Ownership of life insurance policies can actually be transferred. The transfer of ownership is called assignment.
Allowing life insurance to be used as a transferrable asset enhances its usefulness:
Collateral assignment and life insurance settlements
You can offer your life insurance policy as collateral for a loan from a third party or you can sell your policy in a viatical settlement or senior settlement. Generally, cash value policies are more desirable as transferrable assets because the buyer does not need to wait until the death of insured to make use of the money; the buyer can cash in the policy and walk away with the policy's accumulated cash value at any time (just as you can while you are the owner). Because term life insurance policies do not carry cash value, accepting collateral assignment or settlements on them doesn't make good sense.
Tax protection
Another benefit of transferring ownership of a life insurance policy is that by removing a policy from your ownership, you protect it from being taxed as part of your estate. If you like, you can buy a policy and manage it for several years, then transfer ownership to your children. However, in order to prevent the life insurance proceeds from being included in your estate, you must do two things:
- Rid yourself of all incidents of ownership, including the payment of premiums. If you like, you can make a gift of funds to your children and let them pay the premiums. If this gift is less than $13,000 per year ($26,000 if it is from both you and your spouse; $52,000 if from both you and your spouse and to a child and his/her spouse) it will not be exposed to the federal gift tax.
- Make the transfer at least three years before the death of the insured. When the insured dies, life insurance proceeds are taxed as though in the estate of anyone who held incidents of ownership during the previous three years.
