
Transferring ownership of a life insurance policy to a child can be a great way to support their financial future. You can transfer the policy to a child by adding them as a beneficiary and then assigning the policy to them.
This process is often referred to as a "transfer of ownership" or "change of ownership." It's a relatively straightforward process that can be completed by submitting a change of ownership form to the insurance company.
By transferring ownership of a life insurance policy to a child, you can help them avoid paying taxes on the policy's proceeds. For example, if you pass away and the policy's proceeds are paid to your child, they won't have to pay taxes on the money.
Transfer of Policy
A transfer of policy on the life of a child can be a valuable opportunity for parents.
This can be done by transferring ownership to the child as an adult, allowing them to take control of the policy.

Parents can also transfer a policy on the life of one child to another child of the same parent.
A grandparent can purchase a policy on the life of a grandchild and later transfer title to the grandparent's child, the life-insured's parent.
Naming the child as the contingent owner of the policy will allow them to receive it on the death of the parent/grandparent.
The transfer of a life insurance policy to a guardian for a minor child or grandchild is eligible for a rollover, as long as the relevant provincial legislation does not deem the guardian to be the owner of the policy.
This means that the property still belongs to the minor or mentally incapacitated person.
Tax Implications
Transferring ownership of a life insurance policy to a child can have tax implications. If you give a permanent life insurance policy to your child, the IRS may regard the transaction as a gift, which could trigger a gift tax. The amount of gift tax will be far less than the amount of estate tax that would be due if your policy remained in your name.

The fair market value of the policy determines the gift tax, not its cash value. To find the present fair market value, ask your insurance company. The 2025 gift tax rules state that a gift tax will be assessed if you transfer a policy with a fair market value of more than $19,000 to your child.
Transferring ownership to a guardian for a minor child or incapacitated child may not be taxable, as long as the guardian is only acting on behalf of the child and not owning the property. This means you can transfer the policy without triggering a gift tax or estate tax, providing peace of mind for your child's future.
Avoiding Taxes in Policy
You can avoid federal estate tax on life insurance proceeds by transferring ownership of your policy to another person or entity. This can be done by transferring ownership to any other adult, including the policy beneficiary.

Creating an irrevocable life insurance trust and transferring ownership to it is another option, but be aware that some group policies don't allow transfer of ownership.
Transferring ownership to a child or another child of the policyholder is also possible, with the transfer being deemed to have occurred at the adjusted cost base of the policy.
Gift Tax When
Transferring a life insurance policy can trigger a gift tax, but it's not always the case. If you give a permanent life insurance policy to another person, the IRS considers it a gift, and you may be subject to gift tax.
The amount of gift tax will be far less than the estate tax if your policy remains in your name and estate. The policy proceeds are always more than the policy's value while you're alive.
If you transfer a policy with a fair market value of more than $19,000 to another person, gift taxes will be assessed under 2025 gift tax rules. However, the gift tax won't have to be paid until your death and only if your estate exceeds the federal gift and estate tax exemption.
The fair market value of a policy isn't necessarily the same as its cash value. You should ask your insurance company to find out the present fair market value of an insurance policy for gift tax purposes.
Transferring a policy to a child can be a tax-free gift, but there are some exceptions. The Income Tax Act allows a policyholder to transfer their interest in a life insurance policy to their child or another child of the policyholder.
In some cases, transferring a policy to a trust of which the child is a beneficiary may not be eligible for the rollover, making the transfer taxable as income to the transferor.
IRS Rules and Regulations
To transfer ownership of a life insurance policy to your child, you need to understand the IRS rules and regulations. The IRS has a three-year rule that states if you give away a life insurance policy within three years of your death, the full amount of the proceeds will be included in your estate for federal estate tax purposes.
Gifts of life insurance policies made within three years of death are disallowed for federal estate tax purposes. This means you should give the policy away as soon as possible to reduce estate taxes.
The IRS also considers a deceased person who kept any "incidents of ownership" of a transferred life insurance policy still the owner. Incidents of ownership refer to significant power over the transferred insurance policy.
If you have the legal right to change or name beneficiaries of the policy, borrow against it, pledge any cash reserve, or cash it in, the proceeds will be included in your taxable estate. This includes selecting a payment option for the beneficiary.
Here are some examples of incidents of ownership:
- Change or name beneficiaries of the policy
- Borrow against the policy, pledge any cash reserve it has, or cash it in
- Surrender, convert, or cancel the policy
- Select a payment option
Any action by the deceased person that shows significant control over the policy could be considered an incident of ownership.
Policy Transfer Process
To transfer ownership of a life insurance policy to a child, you'll need to go through the policy transfer process. This can be done while the parent or grandparent is alive and can sign the necessary forms.
You can transfer a policy on the life of one child to another, such as a grandparent purchasing a policy on the life of a grandchild and later transferring title to the grandparent's child, the life-insured's parent.
The transfer process allows you to ensure control of the policy remains with you until the child is mature enough to take over. This can be a valuable opportunity for parents who purchase a policy on their young child and later transfer ownership to the child as an adult.
You can't simply roll over the policy from your estate to the child, but naming the child as the contingent owner of the policy will allow them to receive it on your death.
Frequently Asked Questions
Why should people be careful about transferring ownership of a life insurance policy?
People should be careful about transferring ownership of a life insurance policy to avoid triggering the "transfer for value" rule, which can make policy proceeds taxable to beneficiaries. Improper transfer can have serious tax implications, making it essential to understand the rules and consequences.
What are the tax consequences of gifting a life insurance policy?
Gifting a life insurance policy within three years of death can have significant tax consequences, including disallowance for federal estate tax purposes and potentially state estate tax purposes as well
What is the 3 year rule for life insurance transfers?
The 3-year rule for life insurance transfers states that if you transfer a policy to an ILIT and pass away within 3 years, the policy proceeds may be included in your estate. This rule can impact estate planning and tax implications, so it's essential to understand its details.
Sources
- https://www.cadesky.com/publications/transfer-of-life-insurance-to-a-child/
- https://www.advisor.ca/insurance/life/tax-consequences-of-transferring-life-insurance/
- https://www.nolo.com/legal-encyclopedia/transfer-life-insurance-decrease-estate-tax-29585.html
- https://www.lifeinsuranceattorney.com/blog/2022/august/the-right-way-to-transfer-a-life-insurance-polic/
- https://www.investopedia.com/life-insurance-gift-6746196
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