When you were a kid, did your parents buy life insurance on your life? Are they still paying your premium? Does that mean you’re the owner?
Our team reviewed the Financial Consumer Agency of Canada’s life insurance guide, FSRA’s guide to life insurance policy types, section 148 of Canada’s Income Tax Act, and Finance Canada’s explanatory notes for life insurance policy transfers.
Can You Take Over Life Insurance Bought By Your Parents?
You can’t simply assume control of a policy. Your parent must agree to make you owner and the insurer must agree to change ownership after receiving proper documents.
Before deciding whether to keep the policy, find out if you’re insured or the policy’s owner. If your parent owns it, you can’t make changes or cancel the policy. Next, make sure you have a recent policy statement and ask for an in-force illustration. Finally, the policy’s owner should understand the transfer’s tax consequences and you should understand future premiums before transferring.
| Role | What that person can usually do |
|---|---|
| Policy owner | Exercise contract rights, subject to an irrevocable beneficiary, assignment or other restriction. |
| Life insured | Just because a person is the insured does not mean that person has ownership rights in the policy. However, the person’s death triggers the death benefit. |
| Beneficiary | Receive the death benefit if the designation is effective when the insured dies. |
| Premium payer | That person may make payments. Payment alone does not transfer ownership or beneficiary rights. |
| Assignee or lender | Hold rights granted as collateral, which can restrict a transfer, loan, surrender or beneficiary change. |
Get These Documents Before Deciding
- Have the entire life insurance contract, including any riders, amendments, beneficiary change forms and assignments.
- Obtain an in-force illustration including guaranteed and non-guaranteed benefits and costs and several hypothetical dividend or return options.
- Have the insurer provide the adjusted cost basis for the contract and the taxable gain in writing, including how it was calculated.
- Obtain a copy of the most recent policy statement verifying policy owner, insured, beneficiaries, premium, whether it is in-force and any policy loans.
- Determine the current cash surrender value, taking into account surrender charges and policy loans, not merely account or cash values.
- Determine if there is an irrevocable beneficiary or any assignments, including collateral.
- Determine any available nonforfeiture options, such as extended term or reduced paid-up insurance.
Read More: See How to Read and Access Life Insurance Cash Value
Should You Keep, Change Or Surrender The Policy?
Use the below table as a guide. Keep in mind that continuing or surrendering the policy may not be your only options. The choices you have depend on the terms of your specific policy. Not all options listed below are features of all policies.
| Option | What it changes | What to verify first |
|---|---|---|
| Transfer ownership and continue as illustrated | You take control and the future payment duty. | Tax result, guarantees, loan, beneficiary and affordability. |
| Leave the parent as owner while you pay | Parent still retains contract authority. | Who can change the beneficiary or surrender, and what happens if the parent dies. |
| Reduced paid-up insurance | If offered, this option stops scheduled premiums. The amount of death protection decreases to the lower paid-up death benefit. | Guaranteed amount; lost riders; any tax result. |
| Extended term or another non-forfeiture choice | Contract value is used to continue a stated amount of term coverage for a period. | Expiry date and whether any cash value remains. |
| Use dividends or values toward premiums | Using dividends or policy values may reduce out-of-pocket costs. | Whether the result is guaranteed and what happens if dividends or returns fall. |
| Policy loan or withdrawal | Provides cash without ending the entire policy. | Interest, tax, lapse risk and the reduction to cash value or death benefit. |
| Full surrender | Ends coverage and pays the net surrender value. | Taxable gain, surrender charge, loan repayment and replacement coverage. |
How Does An Ownership Transfer Work?
Note that even transfers within a family need to be reported to the insurance company, and verbal agreements do not count. Until the transfer has been recorded at the insurance company, all contractual rights connected to the policy are retained by the policy’s current owner.
Ask the insurance company for an ownership-transfer or absolute-assignment form. Check to see if other signatures are required to effect a policy transfer. Check for transfer restrictions: an irrevocable beneficiary? A collateral assignment? Policy loans? Owned by a trust? Owned by a business?
Check adjusted cost basis, fair market value when applicable and tax issues. Complete identity, tax-residency and other forms as requested. Make sure both parties understand and sign these forms. Keep a copy of your written confirmation of the date the transfer takes place.
Check premium-payment account, beneficiary, new policy-owner, mailing-address changes and confirmations. Request a new illustration to make sure information is accurate.
Read More: Compare Revocable and Irrevocable Life Insurance Beneficiaries
Tax Rules For A Parent-To-Child Transfer
Transferring the ownership of a life insurance policy can result in an unexpected taxable policy gain. Fortunately, if a policyholder transfers his or her interest in a life insurance policy to their child for no consideration, section 148(8) of the Income Tax Act can provide an adjusted-cost-basis rollover of the transfer. This can fit a parent transferring a policy on the child’s life to that child, but the facts and documents must satisfy the rule.
However, if any of the conditions are not met, for example, the child pays the parent for the policy, then the transfer may result in an otherwise taxable disposition of the life insurance policy, where a policy gain can be based on proceeds minus the policy’s adjusted cost basis; that is not the same as cash received minus total premiums paid. It is important to ensure that all of the conditions are met and that a child of the policyholder or transferee is the life insured. Accurate figures should be requested from the insurance company. Professional advice should be sought for transfers where consideration is paid, ownership structures are not commonplace or where a life insurance policy has a large cash value.
What Is A Dividend Offset?
Occasionally you may be able to use dividends from a participating whole life contract to help pay premiums. Keep in mind, however, dividends are not guaranteed. If an illustration shows a point when premiums are being offset (‘offset point’) this does not necessarily mean premiums will be offset forever. If dividends go down premiums may need to be paid again. Dividends used to pay premiums will not be available to increase cash values or buy paid-up additions.
We recommend policy owners obtain an in-force illustration using current and lower dividend scales. Find out if premiums are still contractually due. Review your automatic premium loan clause and determine how premiums will be collected.
Questions To Answer Before Taking Ownership
| Decision question | Why it matters |
|---|---|
| Do other people now depend on your income or care? | This helps test whether the death benefit still fills a real protection need. |
| Can you pay the guaranteed premium, not only the current illustrated amount? | After years of premium payments, a lapse could destroy the expected value. |
| How much of the value is guaranteed? | Universal life investment results and dividends can differ from the illustration. |
| Would replacement require new medical underwriting? | A change in health may make new coverage unavailable. It may also mean paying more. |
| Are the death benefit and ownership still suitable? | A childhood amount or parent-controlled beneficiary may no longer fit your family. |
| What do the non-forfeiture choices buy? | A lower paid-up benefit can be more useful than an unaffordable contract or a rushed surrender. |
Do not cancel an existing policy if you need continuous coverage until the new one is approved, delivered and reviewed.
Read More: Compare Keeping the Transferred Policy With Cashing It Out