Understand the Rules Behind U.S. Citizen Life Insurance

Citizenship and residency questions are answered by each insurer’s own underwriting rules, and a coverage review with our licensed agent can help you see how they may apply to your situation. Citizenship is one factor. Insurers set their own rules, and they also look at residency, immigration status, identification and health before they issue a policy. Whether a specific application is approved depends on the facts of that application.

This guide is for non-citizens looking at U.S. coverage, including green card holders, visa holders and nonresident Indians. It also helps family members and business owners who are researching this for someone else after a move, a visa change or an ownership change.

NR CPAs & Business Advisors is a Miami, Florida CPA firm. Nischay Rawal is the responsible agent for this page and is a licensed insurance agent. Insurance is offered by the licensed agent, separately from the accounting practice.

Short answer: citizenship is not the only question

Citizenship is one question among several. Two people with the same status can get different answers, because each insurer decides what it accepts. Four areas usually matter most:

• Residency: where the applicant lives now, and for how long.
• Immigration status: the visa or green card that shows lawful presence, if the applicant has one.
• Documents: the identification and records the insurer asks for.
• Health underwriting: the health questions every applicant answers. The answers affect whether a policy is issued and on what terms.

Also, up to three people can be involved: the applicant, the insured person and the policy owner. They can have different statuses. Each person’s facts can matter.

Why insurers ask about citizenship, residency and status

Insurers ask these questions to confirm who is applying, where the policy will be handled and which underwriting guidelines apply. The questions are not the same. Citizenship asks about nationality. Residency asks where a person lives. Status asks about lawful presence under immigration rules.

Here is what the terms mean in plain words. A U.S. citizen holds U.S. citizenship. A nonresident alien is a non-citizen who does not live in the United States. Federal estate tax treats these groups differently. The estate tax applies to the taxable estate of a decedent nonresident who is not a U.S. citizen.

Carriers differ. One insurer may accept a visa holder that another declines. The insurer’s own rules control the final decision.

Green card holders and other lawful residents

Many lawful residents can apply for life insurance. Each insurer still sets its own rules. A green card shows the insurer your lawful permanent residence. The insurer may ask for a copy, along with a passport or other identification.

Two common types of coverage are worth knowing:

• Term life insurance covers the insured for a limited period. FINRA explains that term coverage runs for a set time.
• Whole life insurance, also called permanent life insurance, covers the insured for life and includes a cash-value feature, according to FINRA.

Health history still matters. Applications ask health questions, and issue may depend on insurability. Holding a green card does not mean coverage is issued automatically.

Nonresident aliens and NRI life insurance

NRI life insurance is coverage for nonresident Indians and other nonresidents who want a U.S. policy. Availability depends on the insurer and on the applicant’s country of residence.

For U.S. estate tax, life insurance on a non-citizen nonresident is treated differently from other assets. The amount receivable as insurance on that person’s life is not deemed property within the United States (26 U.S.C. § 2105). Under 26 U.S.C. § 2103, the gross estate of such a nonresident includes only the part situated in the United States.

Other U.S. assets still count. The IRS says an estate tax return is required when a nonresident’s U.S.-situated assets exceed $60,000.

Settle these practical points early:

• Where the policy will be issued.
• Which currency and address records apply.
• How premiums will be paid from abroad.

What an application may ask for

An application usually asks for identification, residence details and health history. Examples include a passport, visa or residence documents, and a taxpayer identification number. The insurer’s list controls, so treat this as a general guide.

Florida law also sets consent rules. A contract on a person’s life generally may not be carried out unless the insured, having legal capacity to contract, applies for it or consents to it in writing on or before the time of entering into the contract, with listed exceptions (Fla. Stat. § 627.404). Under Fla. Stat. § 627.404(5), a contract of insurance on a person may not be carried out unless, on or before the time the contract is entered into, the insured person, who has legal capacity to contract, applies for or consents in writing to the contract and its terms. Group life insurance, group or blanket accident, health, or disability insurance, and prepaid funeral contracts are excluded from this requirement. A person with an insurable interest in the life of a minor younger than 15 years of age, or a person on whom such a minor depends for support and maintenance, may obtain a policy on the minor.

Insurable interest is another point. A person generally may not buy coverage on another person’s life unless the benefits are payable to that insured or to someone with an insurable interest when the contract is made. That same statute covers family members closely related by blood or law who have a substantial interest engendered by love and affection.

Missing or inconsistent information can slow an application down. Check that names, dates and addresses match across every document.

Estate tax and ownership questions to raise early

Who owns the policy and who receives the money can change the tax result. Under 26 U.S.C. § 2042, insurance receivable by beneficiaries other than the executor is included in the gross estate to the extent of the amount receivable by those beneficiaries if the decedent possessed incidents of ownership at death, exercisable alone or together with another person. IRC § 2042 reads: “For purposes of the preceding sentence, the term “incident of ownership” includes a reversionary interest (whether arising by the express terms of the policy or other instrument or by operation of law) only if the value of such reversionary interest exceeded 5 percent of the value of the policy immediately before the death of the decedent.”

Incidents of ownership cover more than the legal title. They include the power to change the beneficiary, surrender or cancel the policy, assign it, or borrow against its cash value (26 C.F.R. § 20.2042-1).

Citizens and nonresidents follow different rules, so ownership needs a review against both sets of rules. A CPA’s view of tax and cash flow helps line up the premiums, the ownership and the estate plan before anyone applies. Estate planning life insurance works best when those pieces agree.

Key person and business owners who are not citizens

A business can generally insure a key owner or executive, and citizenship alone does not decide it. Florida law lets a business entity have an insurable interest in the owners, directors, officers, partners, managers, or key employees or key persons of the business entity or of its affiliate or subsidiary, if written consent is obtained from them before the insurance is purchased. The business must get written consent from the key person before buying the insurance (Fla. Stat. § 627.404). The business may not retaliate against or take adverse action against a key person who refuses consent.

Key person insurance is a policy the business owns on someone whose work or loss would affect the company. A buy-sell agreement is a written plan for what happens when an owner leaves or dies. Some owners fund that plan with life insurance.

Review the owner, the insured and the business entity together.

Talk with us about your situation

You may be reading this after a visa change, a move abroad or a call from a relative who needs coverage. A business partner’s status may also be unclear. These situations raise real questions about who applies, who owns the policy and who is insured.

NR CPAs & Business Advisors is a Miami CPA firm that helps families, professionals and business owners choose and buy life insurance, including term, whole life, key person, buy-sell, estate planning and NRI coverage.

Quick answers

Our team can arrange a coverage review with Nischay Rawal to go over status, documents and ownership. Our fee terms are explained in writing before any engagement. Contact our team to request a coverage review.