A life insurance policy can involve about ten roles, including the applicant, the insured, the premium payer, the trustee, and the servicing agent. On LIFE Pod Ep 95, James and Carlo Viqueira focused on the three main ones: the owner, the insured, and the beneficiary. If you need a refresher, Owner, Insured, Beneficiary: Why the Three Roles Matter lays them out.
The owner holds the contract rights, which means the power to act on the policy. The owner can take loans and withdrawals, assign the policy as collateral for an outside line of credit, change the beneficiaries, change rider elections, change the address, or surrender the policy. The owner also controls the information. The insured and the beneficiaries have no right to it, so they can't call the insurance company and ask how much cash value or death benefit there is. If you're building a policy to use as your own line of credit, Carlo said the owner will generally be you, or an entity you control.
A business adds another layer. On key person coverage, which insures an employee the business depends on, the business will usually own the policy. Other times an employer pays for a cash value policy that the employee owns, which some people call golden handcuffs. The goal decides the setup. People usually think of the death benefit as tax free, and it usually is, because the premiums were paid with after-tax dollars. If a business pays the premiums with pre-tax dollars, the death benefit is likely taxable. James pointed out that a business may accept that, since the money comes back as income later, but it's something to plan for.
Estate tax is the next reason to think about ownership. The estate tax exemption is the amount your estate can be worth before estate tax applies. If you own a policy on your own life and you die, the death benefit counts toward your estate, even when someone else is the beneficiary. An irrevocable life insurance trust, or ILIT, can own the policy and be its beneficiary, which takes that value out of your estate. The cost is control. You can't be the trustee of your own irrevocable trust, because that would leave the policy in your estate. James owns 13 policies right now, and his plan is to move a policy into an irrevocable trust once he's done using its cash value, then let it wait there to pay a death benefit. He'll keep the policies he's actively borrowing against in his own name. This setup carries real complexity and a professional cost, so it mainly fits people whose estates may pass the exemption.
The Goodman triangle happens when the owner, the insured, and the beneficiary are three different people or entities. James called it a tax bomb in the making. Carlo's example: a grandparent owns a policy on their child and names a grandchild as the beneficiary. When the child dies, the IRS treats the death benefit as a gift from the grandparent to the grandchild, and a gift that large can be taxed. The rule to remember is that two of the three roles need to be the same person or entity. With a trust, that usually means the trust is both owner and beneficiary.
There are ways around it. A grandparent who wants to help could give money each year under the annual gift tax exemption, and the child could own the policy and use the gift to pay the premium. A grandchild under 18 can't own a policy, so a trust may step in there. Keep in mind what the grandparent gives up. If the child becomes the owner, the child can do whatever they want with the policy and its cash value. If keeping control matters, that's when the trust comes in. Changing the owner on an existing policy has rules of its own, and how transferring ownership can make the death benefit taxable covers one of them.
Ownership isn't a one-time decision either. James listed the events that call for another look: a marriage, a divorce, a birth, a death, a change in business ownership, a new trustee, a policy assignment, or a revised estate plan. If you hold several policies, it's easy to miss one, so go through each of them.
James is a licensed insurance broker, not a CPA, an attorney, or a registered advisor. If a trust is involved, work with a trust attorney in your state, because mistakes on a large death benefit can be expensive. Pull the owner, insured, and beneficiary names from each of your policies today and check that at least two of the three match.