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Gifting Life Insurance – What You Need to Know

By December 10, 2023 Advisor, Blog, Consumer, News
set of hands giving a present and a set of hands receiving the present

Gifting life insurance may seem unconventional, but it’s a considerate, forward-thinking, and financially savvy move. While traditionally considered a personal purchase for later life or when starting a family, the current trend towards valuing experiences and financial stability over material goods makes life insurance a meaningful gift.

With some types of insurance, the policy can accumulate cash value, which the recipient can borrow against if needed, offering additional financial flexibility. Life insurance is also often affordable for young adults, making it an ideal way to transfer wealth to the next generation. By naming heirs as beneficiaries, you can help ensure they receive a tax-free, immediate payout. This financial support can be invaluable in providing a solid financial start in life.

Though it may not be widely discussed, gifting life insurance can be a powerful way to provide significant financial benefits to someone you care deeply about, whether it’s a child or a cherished charity. At a time when financial planning is arguably more important than ever, life insurance stands out as a thoughtful and enduring gift.

Why Give Life Insurance as a Gift?

Long-term Financial Security

A life insurance policy can provide a robust financial safety net for the beneficiary and help ensure they are financially secure in the face of unexpected events. For example, grandparents who wish to contribute to their grandchild’s education or home purchase can help give effect to this by gifting a life insurance policy, naming the grandchild as the beneficiary. In many places, life insurance payouts are tax-free, so the beneficiary receives the full amount, a benefit, compared to gifting large sums that may incur taxes.

It’s important to note that various types of life insurance policies are available, such as Term Life Insurance, Whole Life Insurance, Universal Life Insurance, and Variable Life Insurance. Assess the financial needs and goals of the person you intend to gift the policy to. Consult a financial advisor to help you determine the appropriate coverage amount and type of policy suitable for your situation.

Affordable Large Gift

A life insurance policy involves paying regular amounts called premiums. However, the amount your loved ones receive if something happens to you can be much larger than what you paid in. Many life insurance policies offer flexibility in premium payments, allowing you to choose a payment schedule that fits your financial situation. This can make it more manageable and enable you to give a large sum you might not have been able to afford. Life insurance can also play a crucial role in estate planning. The payout from a life insurance policy can help cover estate taxes, ensuring that the beneficiary receives the maximum possible inheritance.

Control Over Policy

Until the life insurance policy is officially transferred to someone else, the original policy owner often has full control over it. This can include changing who will receive the money if something happens to them. This is a helpful feature because life situations often change. If the original beneficiary faces financial troubles or another person needs support, you can adjust the beneficiary as you wish. This flexibility ensures that you can adapt the policy to changing circumstances, so money goes where it is most needed or will have the most impact.

Emotional Value

Life insurance signifies a deep and enduring concern for the recipient’s well-being, as it involves helping them plan for their future and strengthen their financial security. It can serve as a conversation starter about the importance of financial planning and responsibility. It’s an opportunity to share your wisdom and experiences and influence the recipient’s future approach to financial management. Providing a financial safety net shows a deep desire to protect the recipient from future financial hardships.

Receiving Life Insurance as a Gift

Gifting insurance is straightforward, but it carries profound implications. When someone gives you life insurance, they have taken out a life insurance policy on their own life but have designated you as the beneficiary. This means that if the policyholder passes away, the insurance company will pay you a sum of money directly. A significant advantage of this gift is that life insurance payouts are typically not considered taxable income.

Make sure to understand the terms and conditions of the policy thoroughly. This includes the type of policy, the coverage amount, the premium payment schedule, and any other relevant details. These details will help you manage the policy effectively and maximize its benefits. To claim this money, you will need specific information on the policy, including the insurance company’s name and policy number. It is crucial to keep this information in a safe and accessible place because, without it, you may face difficulties or delays in claiming the money owed to you.

How to Gift Life Insurance

  1. Select the right type of policy. This will depend on various factors, including your financial goals, budget, and the beneficiary’s needs. Different types of life insurance policies are available, each with its own features and benefits. For example, a term life insurance policy provides coverage for a specified term, while a whole life insurance policy provides coverage for your entire life and may build cash value.
  2. Name the recipient as the beneficiary. You can also name multiple beneficiaries and decide on the percentage of the benefit each one will receive. Make sure to clearly designate the beneficiaries and the percentage of the benefit each one will receive. This will help avoid any confusion or disputes in the future. Regularly review and update the beneficiary information to ensure it remains accurate and reflects your current wishes.
  3. As the policy owner, it means you are responsible for paying the premiums. However, you may transfer ownership to the beneficiary at some point, especially if they are an adult who can take on the responsibility of premium payments. Make sure you have a plan for paying the premiums, whether through your regular income, savings, or other sources.
  4. Make regular premium payments to ensure the policy remains in effect. If premiums are missed, the policy could lapse, leaving the beneficiary without the expected benefit. Setting up automatic payments from your bank account can help ensure that you never miss a premium payment.
  5. Communicate with the recipient about the policy. They need to know that the policy exists, where to find essential information about it, and what steps they will need to take to claim the death benefit when the time comes.

Are you considering giving or receiving life insurance as a gift? Reach out to Canada Protection Plan for a complimentary, no-strings-attached consultation today!

Canada Protection Plan is one of Canada’s leading providers of No Medical and Simplified Issue Life Insurance. Our mission is to provide reliable protection and compassionate service from coast to coast with easy-to-purchase life insurance, critical illness insurance and related products. Our expanding product choices will help you get the coverage and peace of mind you need for a better financial future. Canada Protection Plan products are available through over 25,000 independent insurance advisors across Canada.

422732 CAN (11/23)

Foresters and Canada Protection Plan (CPP), and their employees and life insurance representatives, do not provide, on Foresters behalf, financial, estate, legal or tax advice. The information given here is merely a summary of our understanding of current laws and regulations. Clients and prospective purchasers should consult their financial, estate, tax or legal advisor regarding their situation.

To learn more about Canada Protection Plan and our line of comprehensive No Medical and Simplified Issue life insurance solutions, call Broker Services at 1-877-796-9090 and we will be happy to assist you or put you in contact with Sales support in your region.

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