Third-Party Policy ownership
for test
-STOLI Stranger originated life insurance. --life insurance purchased on another person by a complete stranger (does conflict the insurable interest but they get around bc the strange has approached someebody and invited them to buy a life insurance policy. Promise of money to be made in transaction. So the stranger buys a life insurance policy, sells it to the investor(whoms buying the policy) and walks away with some cash) --once policy issued you dont need an insurable interest --this type is frowned upon in our society and illegal in some states
Third-party ownership
A life insurance policy, when the insured and policy owner are not the same person -the insured has no rights under the policy -most common for business purposes to insurer the life of a valuable employee. if they died the company would suffer a significant financial lost. -not common for personal use but could be used to keep the death benefit out of probate so policy proceeds are not subject to state taxes. -All rights in the policy are held by the policyowner, including the right to name the beneficiary.
Estate Planning
A primary reason for third-party ownership of a life insurance policy in the personal insurance market is to prevent the policy's death benefit from being included in the insured's federal gross estate. When ownership of a third-party life insurance policy is used for this purpose, the policyowner of the life insurance policy is usually -an irrevocable life insurance trust (ILIT) created by the insured or -an adult child of the insured. Death benefits payable upon the insured's death under a policy owned by a third person are not normally included in the insured's gross estate. Thus, they would not be subject to federal estate taxes. However, the death benefits must not be payable to the insured's estate for this to occur. -Bring-Back Rule To avoid inclusion in the insured's estate, it is best to set up the third-party ownership when the policy is issued. If an existing policy is transferred to a third-party owner after it is issued, it is important to do so at least three years before the insured's death. If the insured dies within three years after the transfer, then the policy death benefits are included in the insured's estate for tax purposes. (This situation is called the bring-back rule.)
Key employee life insurance
When a business applies for, owns, and is the beneficiary of the policy covering the life of a key employee
Bring back rule
When an insured transfer his or her life insuance policyto a third party and dies within 3 yrs after transfer, at which time the policy death benefits are included in the insured's estate for tax purposes.
key Points
-There must be an insurable interest between the applicant and the proposed insured for third-party ownership to be valid when a life insurance policy is issued. However, after a policy is issued a third-party ownership arrangement can be set up (by transferring ownership to another party) without regard for insurable interest. -A primary reason for third-party ownership of a life insurance policy in the personal insurance market is to prevent the policy's death benefit from being included in the insured's federal gross estate. -Life insurance used to meet business insurance needs is normally owned by the business rather than the insured.
Quiz
Question 1 The primary reason for using third-party ownership in personal life insurance for estate planning purposes is to *remove the value of the life insurance proceeds from the insured's estate. reduce the tax rate used in calculating the estate tax. transfer the estate tax liability from the owner to the beneficiary. convert the life insurance proceeds from an estate taxable asset to an income taxable asset. Done correctly, third-party ownership of life insurance removes the value of the life insurance proceeds from the insured's estate. Question 2 In a third-party life insurance contract, the parties to the contract are the the owner, the insured and the beneficiary. the insurance company, the owner and the beneficiary. the insured, the beneficiary and the insurance company. *the owner, the insured and the insurance company. The two parties in a standard two-party insurance contract are the owner and the insurance company. In a third-party contract, the owner and the insured are different people. Question 3 Robert is purchasing a life insurance policy, which he wants to keep out of his taxable gross estate. Which of the following arrangements would help him meet that goal? Robert could transfer ownership of his life insurance to a third-party owner any time before his death. The death benefits must be paid to Robert's estate. *A third party (such as an irrevocable trust) can apply for and own the policy from the beginning. Robert must transfer ownership to a third-party irrevocable trust within three years before his death. If the insured transfers the life insurance policy to a third party and then dies within three years after the transfer, the policy death benefits are included in the insured's estate for tax purposes. Question 4 Under the standard bring-back rule, assets transferred out of a decedent's estate will be valued in the estate if the transfer occurred within how many years before death? 5 years 4 years *3 years 7 years Assets that the original owner transferred are included in the gross value of the estate if the transfer occurred within the three years before his or her death. Question 1 In personal insurance, what is the disadvantage to third-party ownership? The beneficiary holds rights to the policy's cash values The policyowner has no right to name the beneficiary The insured has access to the policy's cash values *The insured has no right to name the beneficiary. The insured has no right to name the beneficiary. Question 2 All the following statements regarding stranger-owned life insurance (STOLI) are correct EXCEPT *The insured retains the right to designate the policy's beneficiary. STOLI and investor-owned life insurance (IOLI) are the same thing. STOLI is financed through premium loans during the first several years, until it is transferred from the insured to the investors. STOLI is an arrangement in which investors convince an individual to purchase a life insurance policy on himself which is transferred to the investor in exchange for a sum of money. Premium financing is arranged by the investor to assure the applicant that he or she will not have to pay anything to purchase the policy Question 3 All of the following statements about key person life insurance are correct, EXCEPT: Life insurance used as key person life is normally owned by the business rather than the insured. Key person, or key employee, life insurance is an example of third-party ownership. *Upon the insured employee's death, the surviving family receives the policy's death benefit. The business applies for, owns, and is the beneficiary of the policy covering the life of a key employee Upon the insured employee's death, the business receives the policy's death benefit. Question 4 Who normally owns life insurance used to meet business insurance needs? *the business the employees the business jointly with the insured the insured The business alone-not jointly with an insured individual-usually owns life insurance used to meet business insurance needs.
Stranger- or Investor-Owned Life Insurance (STOLI and IOLI)
Third-party ownership has made it possible for a questionable investment practice to have emerged: stranger-owned life insurance, or STOLI. Also known as investor-owned life insurance, or IOLI, it is an arrangement in which an investor or investor group convinces a consumer—usually someone between the ages of 65 and 80—to take out an insurance policy on his or her life in exchange for an eventual lump-sum payment. The investor arranges for premium financing—a loan—to pay for the policy for the first few years. (This period usually coincides with the policy's contestable period, typically two years.) At the end of this period, the policyowner assigns the policy to the investor under a life settlement. The investor pays the insured a lump-sum payment to compensate for transferring the policy to the investor. The investor, as the new owner of the policy, names the investor or group of investors as the new beneficiaries and collects the policy's proceeds at the insured's death. Since policy ownership can be changed without the need for continued insurable interest, this practice is legal in the strictest sense. However, the STOLI investor has no interest in the continued life and well-being of the insured; in fact, the STOLI arranger benefits only by the death of the insured. For this reason, a STOLI agreement is nothing more than a wager on someone's life. Accordingly, it has generated considerable controversy with regulators, industry leaders, and legislators, and it is broadly discouraged in most jurisdictions. Many states have declared such arrangements fraudulent and illegal. State law and the courts have held that STOLI arrangements run counter to public policy and have supported life insurers that have refused to pay out death proceeds from policies that were determined to be subjects of STOLI transactions. Life insurance companies have begun to include questions in their applications that seek to determine if it may involve a STOLI arrangement. In an effort to deter and stop the practice of stranger-originated life insurance, industry organizations such as the National Association of Insurance Commissioners have advanced model legislation to eradicate the practice.
Third-Party Ownership in the Business Insurance Market
Third-party ownership of life insurance policies is far more common in the business market than in the personal market. Life insurance used to meet business insurance needs is normally owned by the business rather than the insured. A typical business use of life insurance is known as key person, or key employee life insurance. In this scenario, the business applies for, owns, and is the beneficiary of the policy covering the life of a key employee. Upon the insured employee's death, the business receives the policy's death benefit. This benefit is intended to compensate the business for the loss of its key employee through death.