Q: My son-in-law can support his family but my daughter could not support herself. They just bought a house. We were considering buying a term life insurance policy for him to protect our own finances from having to help our daughter (and grandson) make house payments if needed. Should we do this or is there another way? — J. Ryan from California
A: For your daughter and son-in-law, owning life insurance would indeed be a prudent move. But before you go out and buy a policy for them, speak with the pair about their insurance needs and current coverage.
Your son-in-law may already have group life benefits through his employer, which would reduce the amount of term life insurance the couple needs. And if he were to die, your daughter and grandchild might be eligible for Social Security survivor benefits.
Ideally, your son-in-law would be the one to purchase the life insurance policy, but if he is unwilling or unable to afford payments, then it can make sense for you to step in.
Think carefully about your approach, however: Owning a policy where you’re the purchaser and the insured and beneficiary are two other individuals can create big tax headaches. “In life insurance, any time you have three different people involved, it is bad,” says Jim Swink, vice president of the Raymond James Insurance Group.
Most life insurance proceeds are delivered tax free. But if you own the policy, name your son-in-law as the insured and list your daughter as the beneficiary, then the death benefit becomes a taxable gift to the beneficiary.
Alternatively, you could own the policy on your son-in-law’s life and name yourself as the beneficiary. But then you would still have to gift the benefit money to your daughter, and doing so would likely create a taxable gift, says Chapel Hill, N.C., financial planner Ben Birken.
The best and simplest route: Have your son-in-law or daughter own the policy and your daughter be the beneficiary, and then gift them the amount needed to cover the premiums. Or if you’re worried about any spendthrift behavior, pay the insurance company directly for the policy, says Swink.
Either way, the money will still be seen as a gift by the IRS, but the cost of annual term life insurance premiums on a relatively young, healthy male should be well below the annual gift tax limit — $14,000 a year for an individual giver, or $28,000 for a married couple. That means neither you or your daughter w0uld owe any taxes on gifted insurance premium payments.