Does Term Life Insurance Vary From One State To Another In The United States Of America?

When an individual sits to plan for his future or that of his family and children, there shouldn’t be any reason to look at his insurance policies. Though this is the commencing sentence of this article, it may seem a little more than confusing to a lot of the readers without a doubt. Well we say so because most of the times it is a term life insurance policy that people buy and this is a policy which is taken for a particular and stipulated period of time. Moreover, there is only a single pay out in this policy and that is paid out only if the insured person expires within the period of the insurance coverage.

Term Life Insurance is considered to be an immensely significant insurance for the young population who often has families, children and even mortgages to take care of. Term insurance is a lot more affordable when compared to the whole life insurances because the later is exactly what it sounds and hence is priced in a similar way as well. The whole life insurance actually extends for an entire life time of the insured individual whereas the coverage in the term life insurance lasts only for a particular term in our life. This term generally varies from 10 years to 30 years in variables. The premium that is paid for this particular policy is on the basis of the probability of the insured person and the chances of him dying within the period of the insurance.

When considering buying a term insurance there are a number of factors that the customers need to consider in the first place. Of the primary factors in this context is how the terms of this insurance policy varies from one state to another within the US. Most of the rules and regulations in case of life insurance are formulated by the federal government. However, there may be a few differences lying here are there and it is necessary to have an ideas of them. A couple of years back a person would call up his or her insurance agent in order to gain a quote for their term insurance. But as shopping policies online has gathered a lot of popularity in the present era when people have become a lot more cautious about the ways in which they can safeguard their properties. But even when one settles for a policy online it is absolutely necessary to ensure that the company is licensed suitably withi
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n a particular US state, preferably your state.

Most of the differences that lay between the term insurance policies of different US states is a mere matter of a minus or a plus in the period of the coverage. Meaning, a company in a particular state may have a certain amount of time to settle a policy prior to paying the interest. For term insurance most of states need a minimum processing period of 1 month after the completion of the paperwork. On the other hand some of the states may have a two months time period before an insurance carrier is entitled to penalty.

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The term life insurance plan is the convertible term insurance. The policy holder can change his term insurance policy into the annual renewable, renewable, level premium or decreasing term insurance plan. As the risk involved in this policy is more, the cost of this policy is also on the higher side. For more information visit us at www.usinsuranceonline.com/life-insurance/policy-types/term-life-insurance.php

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Under Internal Revenue Code Section 2035, if the insured gifts a life insurance policy to a third party (such as an irrevocable life insurance trust, or “ILIT”) within three years of his or her death, then the policy proceeds will be included in the insured’s estate for estate tax purposes. The only safe way to avoid this result is to have the ILIT apply for and own the policy from the outset (even if done with the insured’s gifted funds). Even momentary ownership of the policy by the insured within three years of his or her death will require inclusion of the full policy proceeds in the insured’s estate.

New Policies

What options are available for a new policy where the ILIT has not yet been created? Some states recognize oral trusts, which would later be memorialized. Thus, in those states if might be possible to have the oral trust as the initial owner and beneficiary of the policy. But, the risk with this approach is that the trust is not truly irrevocable so long as it is merely oral.

Another possibility is for a child or spouse of the insured to purchase the policy and then gift it to the ILIT once created. This approach has several potential problems. First, the donor (child or spouse) is making a gift to the ILIT with the attendant gift tax consequences. Second, if the child or spouse is a beneficiary of the ILIT, at least some portion of the ILIT will be included in his/her estate for estate tax purposes under IRC Section 2036 (transfers with a retained interest). Finally, the transaction might be ignored by the IRS under the step transaction doctrine. In other words, if the purchase of the policy by the child or spouse and the subsequent transfer of the policy to the ILIT are determined to be integrated, interdependent and focused toward a particular result, then under the step transaction doctrine, the two steps would be collapsed together. As such, the insured would be treated as having made the gift to the ILIT. This might be the case if the insured provided the funds for the child or spouse to purchase the policy or if the two transactions were close in time.

Another often-used technique is to apply for the insurance in the insured’s name and then withdraw the first application and replace it with an application showing the ILIT as the initial owner. So long as the first application was not accompanied by any consideration, it would not be a binding contract and the insured would not be treated as having any incidents of ownership over the policy. Without any incidents of ownership vesting in the insured, the three-year rule would not apply.

Existing Policies

How can the three-year rule be avoided for an existing life insurance policy? The three-year rule of IRC Section 2035 only applies to gratuitous transfers. It does not apply to a bona fide sale of a life insurance policy for full and adequate consideration. IRC Section 2035(b). Thus, the insured could sell the policy to his/her ILIT.

But, under IRC Section 101(a)(2), the sale of a policy triggers the transfer-for-value rule. Under that rule, a “non-exempt” transferee will have to report a portion of the death proceeds as taxable income when the insured dies. The portion includible as taxable income is the face amount of the policy less any consideration paid (purchase price and subsequent premiums).

However, in Rev. Rul. 2007-13, the IRS ruled that a sale of a life insurance policy to a “grantor” trust, of which the insured is treated as the owner for federal income tax purposes, will either not be treated as a “transfer for valuable consideration” or, if so treated, will be deemed to be a transfer of the policy to the insured – one of the exempt transferees under the transfer-for-value rule. Thus, if the ILIT is designed as a grantor trust (as most are), the insured’s sale of the policy to the ILIT (for full value) avoids both the three-year rule and the transfer-for-value rule.

The sale of the policy is not as likely to be respected as a bona fide sale if the insured makes a gift to the ILIT shortly before the sale in order to fund the purchase. Therefore, it may be preferable to have the ILIT purchase the policy for a promissory note. The ILIT will most likely need annual gifts from the insured with which to make the interest payments. Since the ILIT will be a grantor trust, no income tax consequences should result from the interest payments to the insured.

In using this technique, care must be taken in valuing the policy. The ILIT must pay full and adequate consideration to avoid the transfer-for-value rule. Otherwise, a part gift – part sale occurs, thereby triggering the three-year rule. For an insured in good health, the value of the policy is its interpolated terminal reserve value plus any unearned premiums. But for an insured in poor health, you may need to look at the life settlement market to determine the policy’s full value.

THIS ARTICLE MAY NOT BE USED FOR PENALTY PROTECTION.

About The Author

Julius Giarmarco, J.D., LL.M, is an estate planning attorney and chairs the Trusts and Estates Practice Group of Giarmarco, Mullins & Horton, P.C., in Troy, Michigan.

For more articles on estate and business succession planning, please visit the author’s website and click on “Advisor Resources”.