Common Life Insurance Planning Mistakes

Brody, Lawrence
February 1996
Journal of Financial Planning;Feb1996, Vol. 9 Issue 1, p24
Academic Journal
The article presents information on some common mistakes, made in planning the acquisition and funding of a Life Insurance policy. The solution here is to always designate a successor individual owner any time a policy is owned by someone other than the insured. However, if the insured is the designated successor owner, the policy death proceeds are includible in his or her estate for federal estate tax purposes, if he or she dies owning the policy or transfers the policy within three years of death. Without a named successor owner, at the death of the owner of the policy, policy ownership will automatically revert to the owner's probate estate. Once in probate, the policy and its cash values are subject to the claims of both the creditors of the owner's estate and the statutory claims of his or her spouse. For the two-party corporate Life Insurance problem, one possible solution can be to document the arrangement as a bonus life insurance plan, with the insured as the owner and his or her beneficiary named as the beneficiary of the policy death proceeds. A second solution is to use a split-dollar arrangement in which the insured is the owner and his or her personal beneficiary is the beneficiary of the policy proceeds.


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