The Background:
I thought it would be fitting at this juncture to describe the four players in any Life Insurance policy as often there is some confusion. First let me give you a brief description of any actual case. Mrs. Rose R is a client who had recently become a widow. She and her husband Vic R. were clients of many years but when they first became clients already had their Life Insurance program in place. However, not seeing their agent in many years they came to me for help when Vic recently passed away.
The Client Review Meeting:
“So Bob, Rose said, now that Vic has passed, how can I change the beneficiaries on my policy”? I told Rose that we need to call the company and ask for their form and to have an original death certificate to accompany the form. When I called the company, with Rose present and with her approval, I asked for the specifics of the plan. They informed me that there were three different people on this policy, one as the Owner, one as the Insured and one as the beneficiary. I had to inform Rose that to name a new beneficiary the OWNER would have to submit the form and sign it. Her daughter was the Owner of the policy. Rose immediately questioned. “But why does my daughter have to do anything with this it is MY policy? I then had to review with Rose the four components of a Life Insurance policy. It’s important for you here now to understand them as they do relate to a Buy-Sell.
The Owner:
This is the individual that actually controls the policy. This person or trust gets to decide how premiums are to be paid, how the cash value or dividend, if any, are to be handled and who will be the beneficiary. There are many valid reasons for doing such a plan. The most important is that you want the proceeds of the policy out of the INSUREDS’ estate for federal and or New York State Estate Taxes.
The Insured:
This obviously is the focal point of any Life policy. The health status and financial statements on this person is where the review is done to determine the insurance interest and premiums due. It goes without saying that the demise of the Insured is when the proceeds, tax-free, kick in.
The Beneficiary:
It could be on individual or several individuals on a Life policy. It could even be a charitable organization or a trust. The person or entity that receives the cash from the policy owe no federal or state taxes. This is the big key and value on any Life policy. It should be mentioned that the Owner, if different from the beneficiary, has no right the proceeds of a policy. Of course the Owner can also be the beneficiary if the Insured so agrees.
The Payer:
Last but not least is the individual who remits the cash to the life insurance company to keep the policy in force. The money can come from the Insured but if that’s the case then it’s important to factor Gift Taxes.