However, done properly, you pay no gift tax on those payments, and when you die the trust will receive the policy proceeds free of estate tax.
That suit sought to recover life insurance policy proceeds for the families and heirs of the millions who lost their lives in the Holocaust, many of whom had purchased life insurance policies.
If the company found out that the insured had died, it would have to look for the beneficiaries and if they could not be found turn over policy proceeds to one of the states as unclaimed property.
FORBES: Unfair Tax Court Decisions On Life Insurance Are Tip Of Unclaimed Property Iceberg
Be aware, however, that if you buy and own the policy, the proceeds will be part of your estate--even if your child is the beneficiary.
The lending institution is the sole beneficiary of any such policy, and the proceeds are paid directly to the lender (not indirectly to the heirs first).
There's nothing illegal about this, and in fact most U.S. states require funeral homes to invest 70% or more of the proceeds in a trust account or insurance policy that can be drawn upon only when the customer dies.
In some limited instances, a life insurance policy may be paid out prior to death and those proceeds are excluded from income.
Because life-insurance proceeds at death aren't subject to this tax, a taxpayer could buy a policy, borrow from it and settle up at death, avoiding income tax on investment gains within the policy.
These are policies which promise to pay out a supposedly fixed sum to the policy holder's inheritors when the customer eventually dies, with the payment coming from the investment proceeds of the person's monthly premiums.
BBC: Whole-of-life insurance: Why complaints are rising fast
If the ownership of a life insurance policy is transferred to another party before death for cash or other consideration (like a business interest), the proceeds paid to the beneficiary may be considered taxable income to that beneficiary.
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