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Insurance policies require special consideration under the gifts with reservation rules because of the nature of the gift and the fact that it is separated from the ultimate benefit. Insurance policies may be used to cover a potential inheritance tax liability

A donor may make a gift of an insurance policy which comprises one or a series of premiums paid by him, sometimes over a period of time. The policy will be written in such terms that the proceeds of the policy will pass to the donee. In order to avoid the gift of premiums becoming a gift with reservation, and thus bringing the whole value of the proceeds into his estate, the donor must be effectively excluded from the benefits pertaining to the subject matter of the gift.

Where the donor will or may receive some benefit from the insurance policy, a distinction is to be made between:

1. Ìý

   –ÌýÌýÌýÌý a gift of a policy in which the donor has reserved a benefit, and

2. Ìý

   –ÌýÌýÌýÌý a gift of certain defined policy benefits and the retention of other