Things You Need to Know About Your Life Insurance Policy

Shawn M Johnson, ChFC®, CLU®, CLTC
Vice President, Business Development
CA Insurance Lic. # 0M88197

It’s important to review your life insurance periodically. You should consider your coverage amounts and coverage types, and understand the ownership and beneficiary characteristics of both your personal and business policies. For those of you who may need a refresher, there are typically three parties to the life insurance policy: the insured, the owner, and the beneficiary.

Personal Coverage.

Personal coverage is typically set up to benefit a loved one. The primary purposes of personal life insurance are to replace your income or to provide a legacy. Typically, these policies are owned by you, so you’re both the owner and the insured. The beneficiary may be a loved one, or it could be a trust. As the owner, you can change beneficiaries as needed, and it’s important to contact your insurance advisor to update any beneficiary designations in the event your situation changes.

For U.S. citizens, life insurance policy death benefit proceeds are typically received income tax-free. However, when you’re the owner of your policy, the policy’s death benefit may be included in your estate from an estate tax perspective. With potential changes in estate tax laws, you may want to pay special attention to this and review or update your life insurance portfolio with a licensed advisor and review with an accountant and attorney.

Your policy can also be owned by an irrevocable life insurance trust (ILIT). In this arrangement the ILIT generally becomes both the owner and the beneficiary of the policy. In most instances when your policy is owned by an ILIT you lose control of the policy and it becomes difficult to make changes in the future. The policy’s death benefit, however, may be excluded from your estate for estate tax purposes. If you have an existing policy and would like to transfer ownership to the ILIT, be aware there’s a period of time that must pass before the policy is considered fully owned by the ILIT. This is called a lookback period. Other options to exclude the policy from your estate may be to have your adult children or a charity own the policy, depending on your desires for the benefit’s use. Consult your accountant and attorney.

Business Uses of Life Insurance.

There are two main uses for life insurance in your professional practice. They are to help secure lending or to fund a buy-sell agreement. If a bank requires life insurance to approve lending, they may ask for a collateral assignment of a policy. This does not involve a change in ownership or a change in beneficiary. The policy would typically be set up as a personal policy, as usual with your named beneficiary. You then sign documents indicating that you are collaterally assigning the policy to the lender. The way this works is if you were to pass away, the bank gets the balance of what’s owed to them from the death benefits. The remainder of the proceeds go to your beneficiary.

There are three types of life insurance arrangements for a buy-sell agreement. They are a cross purchase plan, entity purchase or stock redemption plan, and trustee cross purchase plan.

In a cross-purchase plan each business owner is the owner and the beneficiary of a policy, insuring the life of each of the other owners.

In an entity purchase or stock redemption plan the entity is the owner and beneficiary of a policy insuring each owner.

Lastly, there’s something called a trustee cross purchase plan, in which a trustee is set up to be the owner and beneficiary of a policy insuring each owner.

We suggest you consult the attorney who created your business entity for advice on an appropriate plan for your practice. In addition, anytime you change ownership of a policy, be sure to consult an accountant and a licensed insurance advisor to discuss potential transfer-for-value rules that may be in place at that time.

Life insurance can be a versatile tool and should be implemented knowledgeably by insurance advisors who understand your specific personal and professional needs.

About Treloar & Heisel

Treloar & Heisel is a financial services provider to dental and medical professionals across the country. Our insurance and wealth management divisions assist thousands of clients from residency through retirement. We strive to deliver the highest level of service with custom-tailored advice and a strong national network. For more information, visit us at

Treloar & Heisel and Treloar & Heisel Property and Casualty are divisions of Treloar & Heisel, Inc. Insurance products are offered through Treloar & Heisel, Inc. This content is intended for general informational purposes only and should not be construed as advice. Treloar & Heisel, Inc. does not offer tax or legal advice. Please consult with a professional concerning these topics. 21-171