Tax Consequences for Life Insurance

I have a large term-life policy in which my sister and brother-in-law are sole beneficiaries. They pay the annual premium on my behalf. Are there any tax consequences if they remain beneficiaries, or joint owners, of the policy? Should I inform the insurance company that my beneficiaries are paying the premium?

The issue is not so much income tax but the estate tax.

If you have any incidents of ownership in the policy, as you now do, the policy's face value (actually the amount that will eventually be paid, including any accidental death ride, the so-called "double indemnity") would be part of your estate. Upon your death, the policy proceeds plus all your other assets, such as any 401k, IRA, your home less mortgage, plus investments, etc. would be aggregated for estate tax purposes. And if it exceeds $675,000 in 2001, the estate tax would start at 37%. By transferring it as a gift, that does away with the problem in most cases.

As for the life insurance company, when you took out the policy, you had an insurable interest in your own life. You did not take the policy out to defraud the insurance company or to sell to others. If the insurable interest exists at the time the policy was issued, that's enough.

Your policy can be gifted or assigned. If your health is severely impaired, it can even be sold to a viatical company (but beware that many viatical brokers and companies rip off policyowners and their families).