When you assign your life insurance, you are handing over ownership of the policy to a third party. When you hand over ownership of your policy, you will lose the benefits associated with policy ownership such as control over the cash values of the policy, if any, and the right to surrender the policy. You will also, however, not be responsible for premium payments due on the policy.
The significance of assigning a life insurance policy to a third party is that you are not responsible for the policy as a policy holder. When you lose control over the policy, the third party assumes all rights and responsibilities of the policy. This includes making premium payments, controlling the cash values of the policy, if any, and filing the death claim.
A common misconception is that when you assign your life insurance, that you may still have some rights to the policy proceeds or be able to revert control or the ownership of the policy later on back to you if you are the insured person named on the policy. Generally, this is not the case. The policy owner has full control and ownership over the policy. If you are not the policy owner or the beneficiary, you have no rights to the proceeds and no way to revert ownership back to you unless the policy owner dies and there are no other contingent or joint policy owners on the policy.
A court can sometimes force the assignment of a life insurance policy to a third party. For example, the court might assign a policy over to a spouse as a result of your spouse being entitled to 50 per cent of all of the martial assets if you did not sign a prenuptial agreement.
Assignment of a life insurance policy to an irrevocable life insurance trust is normally done with the help of a lawyer. An irrevocable life insurance trust is a trust agreement (a legal document) that takes ownership of the policy away from you and puts it into the trust. This removes the life insurance policy from your estate. It also removes it from your control. You can no longer access the cash values, change beneficiaries or surrender the policy. However, in exchange for giving up control over the policy, the life insurance death benefit will not be included in your estate tax calculation. This is considered an advanced form of estate planning.
When you assign your life insurance policy, you may do it for financial gain. This is done in the case of an assignment to a viatical settlement company. This type of arrangement assigns the policy to investors who purchase your policy for a dollar amount that is more than the cash value of the policy but less than the death benefit. The reason for assigning the policy is normally because you do not perceive a need for the life insurance policy anymore. The viatical settlement company gives you an alternative to surrendering the policy to the insurance company for the cash value of the policy. In this way, you profit from your life insurance policy more than if you had kept the policy.
If you have the choice as to whether you assign your policy to a third party, consider that owning a life insurance policy has both consequences and benefits. Many times, the benefits of a policy will outweigh the responsibilities. For example, you may have to pay the premiums as a policy owner. However, you also have the right to access the cash value of the policy any time you need money. On the other hand, there may be times when you might prefer selling the policy over retaining the policy--as in the case of selling your policy to a viatical company or you have an advanced estate planning need. You also need to be aware of any tax implications from assigning your policy. For example, selling your policy to a viatical settlement company can make you liable for capital gains taxes if the transaction results in a gain (if the amount of money you receive from the assignment is more than the premiums you've paid into the policy).
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- "Ernst & Young's Personal Financial Planning Guide, 5th ed."; Martin Nissenbaum, Barbara J. Raasch and Charles L. Ratner; 2004
- "Practicing Financial Planning for Professionals, practitioner's 10th ed."; Sid Mittra, Anandi P. Sahu and Robert A Crane; 2007
- "Life & Health Insurance, License Exam Manual, 6th ed."; Dearborn Financial; 2004
- Sec.gov: Viatical Settlements
- Lawyers.com: Irrevocable Life Insurance Trust