This is sometimes referred to as “The Unholy Trinity.” Either way, it’s bad news for the life insurance policy owner and family! Every life insurance contract has three parties: the owner, the insured and the beneficiary. You’ll want to make sure that two of the three parties are the same person. For example, the owner and the insured are typically the same person while the beneficiary is someone else. In most cases, this means that the death benefit will remain tax free.
If, however, each party is different, then the life insurance proceeds are considered a taxable gift to the beneficiary! This happens more often than you may think. For example, a wife (the owner) may take out a life insurance policy on her husband (the insured) and designate their son as the beneficiary. Oops. Three different parties equals a taxable event that no one saw coming!
Best way to avoid this? Get a competent advisor! For more info, go to: http://www.thriftytermquote.com/