Life Insurance policy: Taxable?

[Mike007]

Been in the industry for awhile but never thought about this issue until a recent discussion with 2 other insurance agents about a case I have. I don't know the answer to this.

The case:

The insured: Peter J. (Dad)

The owner: David J. who pays and own this policy. (Son)

Beneficiary: David J. (Son)

When/if upon the death of the insured, Peter. David gets the Death Benefit since he's the policy owner and policy beneficiary.

Me: I always assume that the Death Benefit pay out will be Tax Free since David is the owner and beneficiary.

Two Agents I know disagree with me: They said that I am wrong. They said that the Death Benefit is Taxable because since the insured is not the owner, it creates an investment type situation were the death benefits becomes taxable.

Who is correct?

 

[rousemark]

Been in the industry for awhile but never thought about this issue until a recent discussion with 2 other insurance agents about a case I have. I don't know the answer to this.

The case:

The insured: Peter J. (Dad)

The owner: David J. who pays and own this policy. (Son)

Beneficiary: David J. (Son)

When/if upon the death of the insured, Peter. David gets the Death Benefit since he's the policy owner and policy beneficiary.

Me: I always assume that the Death Benefit pay out will be Tax Free since David is the owner and beneficiary.

Two Agents I know disagree with me: They said that I am wrong. They said that the Death Benefit is Taxable because since the insured is not the owner, it creates an investment type situation were the death benefits becomes taxable.

Who is correct?

You are.

 

[WinoBlues]

Bet them beers. Then google Goodman Triangle.

 

[Tahoe Ray]

You are.

 

[DHK]

Per VSA:

Section D -- Gift Taxation TaxFAQs

FAQ12/D/5 When does a gift of life insurance proceeds occur?

When one party owns a life insurance policy on the life of a second party and a third party is named beneficiary (e.g., a wife owns a policy on her husband's life and their children are named as beneficiary), the owner is deemed to have made a gift equal to the value of the policy proceeds at the insured's death (Goodman v. Comm., 156 F.2d 218 (2d Cir. 1946); Rev. Rul. 77-48, 1977-1 CB 292; Est. of Lillian Goldstone v. Comm., 78 TC 1143 (1982); Rev. Rul. 81-166, 1981-1 CB 477).

Furthermore, when the owner and deceased insured were spouses, the proceeds will not be considered a split gift between spouses (Rev. Rul. 73-207, 1973-1 CB 409). This means that, in the earlier example, the wife will be deemed to have made a gift to her children equal to the entire policy proceeds at her husband's death.

A son owning a policy on his father doesn't involve a 3rd party (the 3rd side of a triangle).

 

[DHK]

As long as there is insurable interest (as opposed to buying a policy as an investment - such as buying a policy for life settlement purposes)... it is free of income taxation. Since the son is the owner, it's his property, he receives it also estate tax free.

If the son passes before the father, then the policy would be property of his estate - or by named successor owner - and THEY would then get the proceeds when the father passes.

 

[pfg1]

Who is correct?

You are correct.

Bet them beers. Then google Goodman Triangle.

That could create an issue in some cases, but not here.

 

[Allen Trent]

Then google Goodman Triangle.

Something went seriously wrong with the Google. the pictures & video(s) I saw didnt appear to have anything to do with life insurance. I kept clicking & clicking to see if the next one was gonna be the insurance one, but none were about insurance. Wasted nearly 4 hours trying to study my trade.

 

[DHK]

Something went seriously wrong with the Google. the pictures & video(s) I saw didnt appear to have anything to do with life insurance. I kept clicking & clicking to see if the next one was gonna be the insurance one, but none were about insurance. Wasted nearly 4 hours trying to study my trade.

Should've used Bing instead.

Goodman Triangle - Whole Vs Term Life

 

[Allen Trent]

Should've used Bing instead.

Goodman Triangle - Whole Vs Term Life

Google wasnt intuitive enough to direct me when I googled Good Man Threesome to the Goodman Triangle.

Details appear to matter in these matters