South Carolina Life Insurance Practice Exam

When would life insurance policy proceeds be included in the insured's taxable estate?

1. When the policy is sold

2. When there is an incident of ownership at the time of death

3. When premiums are unpaid

4. When the beneficiary is a trust

The correct answer is: When there is an incident of ownership at the time of death

Life insurance policy proceeds are included in the insured's taxable estate when there is an incident of ownership at the time of death. This means that if the insured retained any rights or control over the policy—such as the ability to change beneficiaries, amend the policy, or borrow against the policy—those rights constitute ownership. Consequently, the value of the policy proceeds is included in the overall value of the decedent's estate for estate tax purposes. When the insured has an incident of ownership, the Internal Revenue Service considers it part of their taxable estate, regardless of who the beneficiary is or whether the policy was paid up at the time of death. This principle is essential for estate planning, as it highlights the importance of transferring ownership of the policy if the goal is to exclude it from the taxable estate. The other scenarios, while they may affect the policy's status or operations, do not have the same direct impact on including the proceeds in the taxable estate. For example, selling the policy can lead to tax implications, but it does not inherently mean the proceeds are included in the estate. Unpaid premiums typically do not affect the estate's taxable nature directly. Additionally, naming a trust as the beneficiary might serve specific purposes but doesn't automatically lead to inclusion in