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Most people own their life insurance. This makes them the owner and insured, the most common way to own life insurance. But in cases of high net-worth individuals, this could be a mistake. Owning your life insurance policy makes your proceeds taxable if your estate is worth over $11.7 million.

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If you aren’t the owner, your proceeds don’t become taxable upon death. It’s a simple matter of who owns the policy.

But what if you already bought your life insurance and are the owner? Is changing the ownership of life policy possible?

It may be possible, but there are certain stipulations you must consider first.

Here’s what you must know.

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Can you Transfer Ownership of a Life Insurance Policy?

Most people assume once they buy life insurance, that’s it; they can’t change it. There are certain aspects you can change, though, when you’re the owner.

Owners of life insurance can transfer ownership of the whole life insurance policy. They can also change who receives the funds (the beneficiaries). If you don’t own the policy, you can’t make these changes, even if you are the insured (the person whose death the insurance company relies on).

Owners also have a few other rights, including:

  • The right to change some policy provisions
  • The right to take a loan against the life insurance
  • The right to name/change beneficiaries and how they receive the funds

Sometimes it makes sense to transfer ownership of a life insurance policy, though, and it’s possible. Most insurance companies allow it, but it requires careful thought and paperwork.

What’s the Procedure?

Before changing a life insurance policy ownership, you must make one big decision.

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Who will you transfer it to?

You have two major options:

Another person

You can transfer the policy to another adult. The adult you transfer ownership to must have a financial interest in you. For example, if you transfer the policy to your adult child, he/she has a financial interest in you. It doesn’t always have to be a relative, though. If you own a business, your business partner can own a life insurance policy on you.

Irrevocable Trust

An irrevocable trust can’t be changed, so ensure you are happy with the life insurance terms, amount, and beneficiaries before placing it in the trust. Once in the trust, the insurance isn’t part of your estate; instead, it’s part of a separate entity. The trust pays the premiums and distributes the funds according to your wishes upon death.

What Happens to the Life Insurance Policy when you Change Ownership?

You probably worry about what would happen to your life insurance policy if you change ownership.

Here’s the good news.

Nothing changes. Your beneficiaries, premiums, and coverage amount remain the same. As long as the new owner keeps up with the premium payments, your insurance remains the same.

But, there are some things the new owner can do.

Since you’re no longer the owner, the new owner can change the beneficiaries or life insurance (if the company allows it). Any changes requiring a new application would require your signature, though.

Before you change ownership, ensure it’s to someone you trust completely.

Reasons to Change Ownership of a Life Insurance Policy

You may wonder why anyone would consider changing a life insurance policy owner. There are a few good reasons.

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Estate tax planning

Estate tax planning is the most common reason people transfer ownership of their life insurance. Transferring ownership can eliminate this tax if your life insurance proceeds push you over the taxable estate threshold.

If you worry about how much you’ll leave your beneficiaries or how much of your estate Uncle Sam will take, transferring your life insurance to another person or a trust eliminates it from your estate.

Be careful, though. Uncle Sam has a strict rule. If you transfer ownership and die within 3 years, the policy is still a part of your taxable estate.

Business ownership

If you own a business with someone else, transferring a life insurance policy to your partner versus your spouse makes sense. When your partner holds the policy (and is often the beneficiary, too), there are no taxes on the proceeds because it’s not a part of your estate.

If you owned the policy, leaving the proceeds to your business partner becomes part of your estate. Suppose your estate is worth more than the limit. In that case, it decreases the amount of money your partner receives, and it may make it difficult for your partner to buy half of the business from your spouse or other beneficiaries.

Unable to make payments

Even if you have the money to pay the life insurance but cannot manage your bills, it makes sense to transfer ownership. You are still the insured, but you give someone else the responsibility of paying the premium to keep your policy active.

You can still pay the premiums with your money but remove the responsibility of physically making them. The best way to do this is to open an unrestricted bank account with the account owner. This gives him/her easy access to the funds to pay the insurance without the IRS thinking you fraudulently transferred ownership. If they suspect fraud, the policy becomes a part of your estate and is taxable.

What are the Tax Consequences?

If you’re transferring life insurance ownership to avoid estate taxation, the earlier you transfer the policy, the better.

tax consequences

Here’s why.

If you transfer your life insurance policy and die within three years of doing so, the IRS considers it a part of your estate even though you aren’t the owner. If you’re worried about your health and/or think three years is stretching it, transferring your policy now and not delaying is important.

Also, if you have any shred of ownership in the policy or ‘say so’, it can trigger estate taxes. For example, if you can still change beneficiaries or borrow from the policy, it’s a part of your estate.

To avoid taxation, you must separate yourself from the policy, being only the insured and having no ownership rights.

But there’s more.

You should also worry about gift taxes. If you ‘gift’ the policy to a beneficiary, they’ll pay gift taxes if the benefit exceeds $15,000. This only occurs if the policy has a cash value exceeding $15,000.

If it does, the new owner will owe taxes on the gift. But there’s good news.

Gift taxes are much less than estate taxes, and the recipient won’t owe the taxes until you pass away and they execute the life insurance policy.

Final Thoughts

Do it early if you’re thinking about changing a life insurance policy ownership to someone else or a trust.

The IRS’s three-year rule makes it hard to avoid estate taxes at the last minute. With a 3-year lookback, it’s important to transfer ownership as early as possible.

Remember, when you transfer ownership, you lose all rights to change the policy, including changing beneficiaries or how the funds are paid out. Make sure you transfer the policy to someone you trust completely and who will handle the policy as you would have.

If you’re doing it for tax purposes, make sure you don’t have any incidental rights to the policy, or you won’t avoid the taxation you were trying to avoid. This applies to federal and state taxes if your state charges taxes on inheritance money.


Meet Aaron H., a senior life insurance agent from California with 15+ years of experience. With a major in finance, excellent analytical and communication skills, and a passion for helping clients find personalized solutions, Aaron is a trusted advisor in the industry. He stays up-to-date on the latest trends and developments by attending webinars and workshops, reading industry blogs, and writing informative blog posts on this website. Aaron also has a keen understanding of SEO and online marketing, which he uses to help his clients reach a wider audience and get the coverage they need. He cherishes spending quality time with his wife, two children, and elder parents.