Key Takeaways:
- Life insurance can support estate planning by offering a death benefit that is typically income tax-free, and liquidity that may help with estate taxes.
- Strategies such as irrevocable life insurance trusts (ILITs), second-to-die policies, and careful beneficiary choices can all play a role in estate planning.
- Your state’s laws and the overall size of your estate will influence whether life insurance is the right fit for your plan.
What is Estate Planning?
Estate planning is the process of deciding how your assets will be managed and distributed after your death. It typically involves tools like wills or trusts, with the goal of minimizing excessive delays and keeping costs (like the expense of probate) more manageable.
A clear plan can reduce financial confusion, protect your financial legacy, and give your family a smoother path to inheriting your assets.
How Does Life Insurance Fit Into Estate Planning?
Life insurance for estate planning can provide liquidity and support long-term goals. The death benefit of a life insurance policy is typically not subject to federal income tax, which can help ease the financial burden on your beneficiaries. Here’s how using a life insurance plan for estate planning could be a good option:
- Life insurance can provide a death benefit to your beneficiaries that is typically free from income tax, helping them cover expenses without financial strain.
- It can help pay estate taxes and final expenses, helping preserve other assets for your heirs.
- It can distribute wealth more equally among heirs, especially if certain family members inherit assets of different value.
- It can fund trusts for long-term planning, giving you greater control over how and when the money is used.
Keep in mind that if your estate (including life insurance proceeds) is large enough to exceed the federal tax exemption, you may have to pay estate taxes.
Read: What Is Direct Term Life Insurance? How, Who, Pros & Cons
How Can You Use Life Insurance for Estate Planning?
Several strategies can help align life insurance with estate goals and provide financial support for your heirs. Here are a few of the most common approaches:
Irrevocable Life Insurance Trust (ILIT)
You can place a life insurance policy into an Irrevocable Life Insurance Trust, which means you no longer personally own the policy – instead, a trust owns the policy on your behalf. In an ILIT, the policy proceeds are kept outside your taxable estate, which may reduce estate tax exposure depending on applicable tax laws.
It’s important to know this is permanent: once you sent up an ILIT, you can’t change beneficiaries, access cash value, or adjust the policy if your needs change.
Second-to-Die (Survivorship) life insurance
A second-to-die life insurance policy covers two people, often a married couple, under one contract. The death benefit is paid out only after both insured individuals pass away, which can help cover estate taxes or other large financial obligations.
However, the death benefit for this life insurance is only paid after both the insured individuals pass away. The surviving partner doesn’t receive immediate support.
Read: What to Expect in a Life Insurance Medical Exam
Naming Beneficiaries Wisely
It’s important to name both a primary beneficiary and a contingent beneficiary on your policy to ensure your wishes are honored. Doing so generally allows life insurance proceeds to pass directly to your chosen individuals without going through probate, which may result in a faster and less costly process.
Considerations Before Incorporating Life Insurance Into Your Estate Plan
Before deciding how life insurance fits into your estate plan, it’s important to weigh a few key factors:
- Premiums: Life insurance premiums increase with age, so make sure your budget supports higher premiums in later years.
- Estate size: The total value of your estate will influence whether estate taxes apply and how much coverage could be helpful.
- State laws: Rules differ by state and may affect how life insurance proceeds are treated.
- Professional guidance: Estate planning can be complex. Working with legal and financial professionals can help ensure your plan is designed to meet your goals.
Final Thought: Is Life Insurance the Right Fit for your Estate Plan?
Life insurance can be a useful tool in estate planning, offering financial protection for your loved ones and potential liquidity for estate costs. It may also help manage tax exposure, depending on the size of your estate and the laws that apply.
Because every family’s situation is different, the right approach depends on your goals, budget, and estate structure. Rules around estate and inheritance taxes vary by state, so it’s best to get professional guidance to determine whether life insurance aligns with your broader plan.
FAQs on Life Insurance for Estate Planning
Life insurance can be a useful estate planning tool by providing beneficiaries with a death benefit that is typically tax-free ensuring funds to cover estate taxes, debts, or final expenses. It can help preserve other assets, balance wealth distribution among heirs, and fund trusts for long-term planning.
Permanent life insurance policies such as whole life insurance or universal life insurance are often used for estate planning as they offer lifelong protection, a cash value component, and a guaranteed death benefit (as long as premiums are paid). Term life insurance policies can help with shorter needs, but usually aren’t part of long-term estate strategies.
It can be a good fit if your estate is large enough to create tax obligations, or if you want to provide your heirs with a death benefit that is generally tax-free. It can also help ensure smooth wealth transfer. Whether it’s the right choice depends on your specific financial goals, finances, and state laws.
Yes, life insurance may be considered part of an estate if the policy was owned by the insured at the time of death. This means the death benefit may be included in the taxable estate if it surpasses the federal tax exemption limits. In some cases, an irrevocable life insurance trust (ILIT) can keep the policy outside of your taxable estate.
You may choose to include life insurance in your estate plan when you want to provide liquidity for estate taxes, or you're looking to pass on your inheritance to your heirs. You may also consider it when your estate value is high enough to trigger potential estate taxes or create probate challenges.
Life insurance creates an immediate estate by providing a lump-sum death benefit to your beneficiaries upon your death. This payout delivers instant liquidity, allowing your heirs to cover taxes, debts, funeral costs, or other financial needs without selling assets.
Yes, you can use term life insurance to help with your estate plan if you only need coverage for a specific period, such as until debts or a mortgage are paid off. For long-term goals, many people choose permanent policies like whole life or universal life because they offer lifelong protection.
If all your life insurance beneficiaries have passed away, the death benefit would typically become a part of your estate. This means the proceeds may go through probate and could be subject to estate taxes, depending on your specific state laws and the estate’s value. To help avoid this, it’s a good idea to name contingent beneficiaries so the policy has a clear line of payout.
You should review your life insurance as part of your estate plan every 2–3 years to ensure it still aligns with your current financial goals. It’s important to update it after major life events, such as marriage, divorce, the birth of a child, or significant changes in your financial situation.
Author
Chief Underwriter
Expert review
Chief Compliance & Privacy Officer
%2F2025%2520Update%2FAdobeStock_396125169_ov85k4.jpg&w=828&q=75)
%2FStocksy_txpdf1a777167U200_Medium_1911062_horizontalEdited_znqhgh.jpg&w=828&q=75)
