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The Goodman Rule: The Devil’s Triangle of Insurance

The Goodman Rule: The Devil’s Triangle of Insurance

| June 28, 2019

It is always difficult to lose a loved one, but at least you don’t have to worry about paying taxes on death benefits in most circumstances.  Although it doesn’t happen, a lot, who owns your policy could have a tremendous impact on the beneficiary.  Here at Innovative Financial Group – Atlanta, we are a full-service financial services firm, and we work with our clients to ensure this situation will not happen. 

Parts of the contract

The first thing to know is the three parts to a contract.  The owner, the insured, and the beneficiary and usually the owner and the insured are one and the same.  For example, I own and am the insured of my life insurance policy, and my wife is listed as the primary beneficiary.  If I happen to pass, she will receive the proceeds tax-free.  In this example, I am 2 of the three parts of the contract. 

The Trap

However, there is one situation in which this doesn’t apply and avoiding the so-called “Goodman Triangle” can save you a lot of time, grief, and money. Typically, death benefits are tax-free; your beneficiaries receive the payment and don’t have to worry about the IRS. The Goodman Triangle comes into play when three different people play the role of the policy owner, insured, and beneficiary.  In my example above, if I were to change the ownership of my policy to my son, it would look like

  • Owner- Son
  • Insured – me
  • Beneficiary - wife

The tax trap of the Goodman Rule refers to a 1946 court case Goodman v. Commissioner of the Internal Revenue Service. The three points of the triangle are the policy owner-the person who bought the policy and paid the premiums, the insured-the person whose life the policy covers, and the beneficiary-the person designated to receive the death benefit when the insured dies. As long as the policy owner and insured are the same person, the Goodman Triangle does not apply, but if there are three different people at the points of the triangle, then the death benefit could count as a taxable gift to the beneficiary.

What to look for

So how do you avoid falling into the clutches of the Goodman Triangle? One way is to make sure the policy owner and the insured are the same. You can then designate a beneficiary who will receive the proceeds tax-free.  When you first get the life insurance, most people who are applying for the insurance (the insured) also usually own the contract.  Most agents set it up correctly.  The tax trap could come into play when another advisor starts to make changes to an existing policy years after the contract has been active.  (i.e., change the beneficiary and/or ownership)  Without really knowing, a simple change could cause tax issues in the future. 

Things happen, and life circumstances change all the time, thus needing to update and change your insurance.  Just make sure when you do make a change- look at the three parts to ensure you do not fall into the Goodman Rule.  If we can be a resource or review your contracts, connect with us at