Gifting a Life Insurance Policy: A Smart Wealth Transfer Strategy
When it comes to wealth transfer, many people think of cash, stocks, or real estate—but few consider life insurance as a powerful and tax-efficient way to pass down financial security. One of the most overlooked strategies is gifting a life insurance policy, which allows parents to set their children up for long-term financial stability while taking advantage of tax benefits.
In this case study, we’ll explore how one of our clients used an Indexed Universal Life (IUL) policy linked to the S&P 500 to gift financial security to their daughter while navigating gift tax rules efficiently.
Case Study: A Father’s Gift of Financial Security
The Situation
David, a successful entrepreneur, purchased an Indexed Universal Life (IUL) insurance policy for his daughter, Emily, when she was just five years old. As the policyowner, he paid the premiums while Emily was the insured.
The IUL policy provided Emily with a death benefit while accumulating cash value based on the performance of the S&P 500 index, offering growth potential without direct exposure to market downturns. Over the years, this tax-advantaged cash value grew significantly, reaching $250,000 by the time Emily turned 25.
David wanted to transfer ownership of the policy to Emily, allowing her to take full control of this financial asset. However, he was concerned about potential gift tax implications, since the policy’s cash value far exceeded the annual gift tax exclusion of $18,000 in 2025.
The Challenges
Gift Tax Considerations – Transferring ownership of a life insurance policy is considered a gift, and with a cash surrender value of $250,000, the amount far exceeded the annual exclusion.
Avoiding Immediate Tax Liabilities – David wanted to structure the transfer in a way that minimized gift tax exposure while preserving the policy’s tax-advantaged growth potential.
The Strategy
After consulting with Tora Wealth, David took the following steps:
1️⃣ Determining the Taxable Gift Amount – The IRS considers the policy’s cash surrender value ($250,000) as the taxable gift amount upon transfer. Since this was well above the annual gift tax exclusion of $18,000, it required additional planning.
2️⃣ Using the Lifetime Gift Tax Exemption – Instead of paying immediate gift taxes, David applied a portion of his lifetime gift tax exemption, which in 2025 was $13.61 million per individual. By filing IRS Form 709, David reported the $250,000 gift but did not owe gift taxes, as it simply reduced his available lifetime exemption.
3️⃣ Structuring a Staggered Transfer (Alternative Approach) – For clients concerned about reducing their lifetime exemption, another option would have been to gradually transfer ownership over multiple years by using the annual exclusion ($18,000 per year). However, given the high cash value, this method would have taken over a decade to complete, making the one-time exemption filing the more practical choice.
4️⃣ Educating Emily on Policy Ownership – Before transferring ownership, we guided Emily on how to manage the IUL policy, including:
Understanding premium flexibility and ensuring the policy remains in force.
How to utilize tax-free policy loans for investments, emergencies, or a down payment on a home.
How the S&P 500 index-linked growth strategy works, including participation rates, caps, and floors, to maximize returns while protecting against downturns.
The Outcome
By leveraging the lifetime gift tax exemption, David successfully transferred ownership of a $250,000 IUL policy to Emily without paying immediate gift taxes. Emily now has full control over the policy, which continues to accumulate tax-advantaged cash value tied to S&P 500 market performance while providing lifelong coverage. More importantly, she has a flexible financial tool that aligns with her long-term wealth-building strategies.
Why an IUL Policy Linked to the S&P 500 Is a Smart Gift
Gifting an Indexed Universal Life (IUL) insurance policy linked to the S&P 500 offers unique advantages:
✅ Market-Linked Growth – Cash value accumulates based on the performance of the S&P 500 index, with caps and floors to limit risk.
✅ Tax-Free Access – Policyholders can take tax-free loans against the cash value for major financial needs.
✅ Flexible Premiums – Unlike whole life policies, IUL allows policyholders to adjust premium payments over time.
✅ Legacy Protection – The policy still provides a death benefit for future generations.
✅ Estate Planning Benefits – When structured properly, the gifted policy remains outside the parent’s taxable estate, offering additional tax efficiency.
For parents and grandparents looking to set up the next generation for financial success, an IUL policy is one of the most strategic and tax-efficient gifts available.
Interested in structuring a life insurance gift for your family? Contact Tora Wealth today to explore your options.
