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By Zina Kumok
/ CBS News
A life insurance policy ensures that the dependents of the policyholder are financially protected if that person passes away. It does this by paying out a predetermined sum to the beneficiaries of the policy. It also can be used for cash, depending on the policy type chosen.
While life insurance coverage is typically purchased by the policyholder, it can also be given as a gift.
If you’re in the market for life insurance – either for yourself or as a gift for someone else – start by getting a free online price quote now so you know exactly what to expect.
Here’s what you should know about gifting a life insurance policy during the holidays.
When you have life insurance, you can designate your spouse, partner or children as beneficiaries. If you pass away while the policy is active, your beneficiaries will receive the payout.
If you’re not sure whether to buy life insurance, think about any family members who rely on your income. If you have children who are still minors or if you are the primary breadwinner, a life insurance policy may be crucial for your family’s long-term financial stability.
There are two main types of life insurance: whole and term. Whole life insurance policies are supposed to cover you for your entire life. Premiums often cost hundreds of dollars a month, but whole life policies usually come with a cash value that will increase over time. You can withdraw or borrow against this cash value, so some policyholders use it as a backup emergency fund.
Term life insurance policies only last for a pre-set amount of time, usually from 10 to 30 years. These policies are much more affordable than whole life and can cost between $20 and $50 a month for a healthy young adult. Term life premiums stay the same for the entire term.
Once the term expires, your coverage will end. If you want to maintain coverage, you will have to sign up for a new policy.
You can get a free life insurance price estimate online right now.
The way you give a life insurance policy as a gift will depend on the policy type you want to give.
If you have an existing whole life insurance policy, you can transfer it to someone else and make them the owner. When the transfer is complete, that person will then have access to both the policy and the built-up cash value. They can withdraw from that cash value for any reason.
You can also keep making payments on the policy during that time, so the new owner doesn’t have to worry about it.
If you want to buy term life coverage for someone else, the only way to do that is to have them open a new policy while you pay the premiums. There is no way to open a term policy on someone else’s behalf as a surprise.
Applying for a term life policy may mean completing a medical questionnaire listing all your previous surgeries, health conditions, current and past prescriptions and more. You must also complete a personal questionnaire describing your hobbies. Some insurance companies may also require a medical exam to verify your health status.
To give term life insurance, you can set it up so premiums will be automatically deducted from your bank account. You can also send a check for that amount to the insured. Just note, if you pay for policy premiums for someone else, you should file a form with the IRS showing the total gift amount. If you exceed the annual gift amount limit of $17,000 per person in 2023, you can request that the amount be deducted from the lifetime gift maximum of $12.92 million.
You won’t get any tax benefits by buying a term life policy for someone. However, if you’re paying for a policy that the other person could not otherwise afford, you’ll be gifting something priceless – peace of mind.
If you transfer a whole policy to someone else, that policy will then be excluded from the total estate value. The policy must have been transferred for at least three years for the exclusion to apply. This strategy will primarily benefit high-net-worth individuals who are worried about estate taxes.
Have more questions? Review your life insurance options here or use the table below to start comparing providers.
First published on December 1, 2022 / 11:22 AM
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