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Should someone else own my life insurance policy?

The life insurance industry is highly regulated and the process for approving an application is very thorough, so you don’t have to worry about someone out there owning a life insurance policy on you without your knowledge.

There have been cases in history where nefarious individuals have convinced others to let them buy life insurance on them and then that person mysteriously dies not long after. One of the most notorious of these insurance fraud artists was HH Holmes – but the life insurance industry has come a long way since the late 19th century.

You need insurable interest to buy life insurance on someone else.

Having an insurable interest in someone means that if they were to die, it would affect you financially.

Back in the day, HH Holmes persuaded many individuals to let him own life insurance on them even though they were basically strangers.

He convinced these people by offering them money to do it and making the deal sound too good to pass up. “I̵

7;ll give you $6,000 now if you let me own life insurance on you. I’ll even pay the premiums as long as you make me the beneficiary so I’ll make money after you die.”

This business would never pass inspection today.

Although it is common to own your own life insurance policy, there are some cases where it makes sense for someone else to own it. Let’s go through some of these examples.

Own life insurance on your spouse

Spouses have an obvious insurable interest in each other. If one dies, the other will likely struggle to maintain the same standard of living.

If you’ve had two incomes that go toward mortgage payments, bills and childcare, an income that suddenly becomes non-existent would take its toll almost immediately.

Many married couples own life insurance on each other versus owning their own policy. Perhaps one spouse recognizes the importance of life insurance while the other simply doesn’t share the same opinion or feels they don’t have the time to get life insurance. The spouse who knows its value can 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 all couples see eye to eye on certain topics.

Read more: How do I get my spouse to buy life insurance?

Own life insurance on your significant other

If you are not married, you can still buy life insurance on each other as long as you can prove insurable interest. For example, if you and your partner live together, a copy of the tenancy agreement with your names is an easy way to show insurable interest.

Since unmarried couples do not have the unlimited marital deduction to take advantage of, it may be ideal to own life insurance on each other for tax purposes.

The unlimited marital deduction allows spouses to transfer an unlimited amount of money to each other, even upon 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 do not have this option.

If you own your own life insurance and the beneficiary is someone other than a spouse, it becomes part of your taxable estate when you die. Owning your life insurance can put you over the tax-exempt threshold, which would mean federal, state and inheritance taxes could apply.

For example, the current individual federal estate tax exemption limit is $11.7 million. And in Minnesota, the tax exemption for individual state properties in 2022 is $3 million. All higher value properties are subject to hefty property taxes.

(These limits probably won’t affect most of us, but it’s still good to know.)

If your total assets approach the exclusion limits, life insurance can easily put you over the edge. Owning millions of dollars of life insurance on yourself is not uncommon. But if someone else owns that million dollar policy instead, you’re good to go.

To avoid your estate being hit by taxes, let someone else own your life insurance policies.

Owning life insurance on your children

Parents will own life insurance for their children for two main reasons: to have the financial flexibility to take off work and provide a proper funeral and burial should the unthinkable occur, and to lock in their child’s future insurability.

A child rider on the parent’s own policy is an 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 permanent life insurance on them where 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.

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