Definition of property incidents


What are property incidents?

A person (including a trustee) has property incidents if they have the right to change the beneficiaries of a life insurance policy, to borrow the cash value, or to change or modify the policy in any way. This occurs even if the person chooses not to act on it and even if they do not borrow from the policy. Simply, the ability to do so grants the insured property incidents.

Key takeaways

  • Property incidents are a reference to the rights of a person or trustee to change the beneficiaries of a life insurance policy, borrow from the cash component, or modify the policy in any way.
  • The issue of property incidents arises in terms of tax liability when a person gifts a life insurance policy to another person or entity.
  • When such a transfer is made, the person making the donation must waive all legal rights to the policy and pay no premium.
  • Different types of life insurance policies have specific requirements regarding property incidents.

Understanding property incidents

Sometimes the Internal Revenue Service (IRS) will look for any incidents of ownership by a person gifting a life insurance policy to another person or entity. When transferring a policy, the original owner must lose all legal rights and must not pay premiums to keep the policy in force.

Additionally, upon completion of the transfer, if the insured or transferor dies within three years from the date the policy was transferred, the income from the life insurance will be included in the gross value of the owner’s estate. original (called the three-year rule). ).

Property Incidents and Basic Manual on Life Insurance Policies

Taking a step back, life insurance policies are numerous and all have a variety of special features, such as property incidents. The main types of life insurance policies include whole life, term life, universal life, and variable universal life (VUL) policies.

Whole life, one of the most common types of life insurance, guarantees coverage for the entire life of the insured and includes a death benefit and savings component where cash value can be built up. Term life only guarantees payment of a death benefit for a specified period. An insured may have several options when the term expires, including renewing for another term, converting to permanent coverage, or letting the policy terminate entirely.

Universal life is a type of permanent life insurance that adds an element of investment savings plus low premiums.

Finally, Variable Universal Life (VUL) has a built-in savings component that allows for investment of cash value in subaccounts. Like mutual funds, these subaccounts allow plan participants to select options with different market and risk exposures. While VULs can generate significant returns, as with any investment, they can also result in substantial losses.

Gift and property tax incidents

Gift tax regulations can be complex and change regularly. It is always best to check with your respective tax authorities if you have given someone a gift, including a life insurance policy valued at more than $ 15,000 as of January 1, 2018.

When is it important to know about property incidents?

The question is relevant when someone gives away a life insurance policy and tax liability must be decided. When such a transfer is made, the person making the donation must waive all legal rights to the policy and pay no premium.

What are the key points regarding different insurers and property incidents?

  • Different types of life insurance policies have specific requirements regarding property incidents. Remember that the term refers to the rights of a person or trustee to change the beneficiaries of a life insurance policy, borrow from the cash component, or modify the policy in any way.
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Mark Holland

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