How to Establish an Estate with Life Insurance

Quick Article Guide

Here’s what we'll cover in this post:

• How to Protect Your Estate with Life Insurance
• What Type of Life Insurance Should I Buy To Protect My Estate from Taxes?
• Avoiding Estate Taxes with Guaranteed Universal Life Insurance
• What is an Irrevocable Life Insurance Trust (ILIT)?
• What’s the Difference Between a Revocable and Irrevocable Trust?
• Other Ways to Utilize Life Insurance for Estate Planning
• We can Help with your Estate Planning Needs

How To Protect Your Estate With Life Insurance

If you have a large estate, life insurance can be a critical component of your estate planning strategy.

Many individuals with substantial assets purchase life insurance to help protect their wealth and ensure it can be passed on to heirs. In addition to any state-level estate or inheritance taxes, the IRS imposes a federal estate tax of up to 40% on the portion of your estate that exceeds the federal exemption, with taxes due within nine months of your passing.

Currently, the federal estate tax exemption is approximately $15 million per individual, or $30 million for married couples. While this provides significant relief, future legislation could lower the exemption. Many states also have their own estate or inheritance taxes—for example, Oregon’s estate tax exemption is $1 million, with rates from 10% to 16% on amounts above that threshold.

Without adequate planning, your heirs may be forced to sell assets to cover estate taxes, often at a disadvantageous time or price.

Properly structured life insurance can help prevent this. By holding a policy in an irrevocable life insurance trust (ILIT), the death benefit can be paid directly to the trust, which then covers the estate taxes owed. This ensures your heirs receive the intended assets without needing to liquidate property or investments to meet tax obligations.

In this situation, it’s not just about creating an estate with life insurance—it’s about preserving the estate you already have. In other words, to keep your estate intact and prevent your heirs from being forced to sell off assets, you need to provide them with tax-free funds to cover any estate taxes due upon your passing.

The simplest way to accomplish this is with a permanent life insurance policy, such as guaranteed universal life (GUL) insurance, which offers level premiums and a guaranteed death benefit to help ensure your estate remains whole.

What Type Of Life Insurance Should I Buy To Protect My Estate from Taxes?

While term life insurance is excellent for replacing income or paying off mortgages and debts, it is not designed to provide coverage into old age. If your goal is to preserve or establish an estate, a permanent life insurance policy is the better choice.

Guaranteed universal life (GUL) insurance is often the ideal option for estate preservation. GUL policies offer fixed premiums and a guaranteed death benefit for the duration of the policy, which can be tailored to last until the age of your choice—commonly age 90, 95, 100, 105, 110, or even 121.

For example, if the men in your family typically live into their mid-80s, a policy that extends until age 90 or 95 may be sufficient. Because women generally live longer, coverage that lasts until at least age 95 is recommended.

You can compare permanent life insurance rates using our instant quote form below. We work directly with 63 highly-rated life insurance providers to help match you with the policy that best meets your estate-planning needs.

You can compare permanent life insurance rates using our instant quote form below. We work directly with 63 highly-rated life insurance providers to help match you with the policy that best meets your estate-planning needs.

Avoiding Estate Taxes With Guaranteed Universal Life Insurance

If your estate is worth more than $15 million, or if your state imposes estate taxes, permanent life insurance can provide the liquidity needed to pay estate taxes to the IRS without forcing your heirs to sell assets. To ensure the policy works as intended and reduces your estate tax liability, it should be owned by an Irrevocable Life Insurance Trust (ILIT). We’ll go into the details of ILITs later, but keep in mind that establishing one can be a complex and time-consuming process.

In addition to consulting a licensed life insurance agent who specializes in estate planning, we strongly recommend seeking legal counsel to assist with the trust and other paperwork. If you’re unsure where to start, call us at 855-247-9555, and we can guide you through the process.

This is why it’s so important to work with an agent who has experience with estate-focused life insurance. There are three main ways a life insurance policy can inadvertently create a tax liability:

1. The policy is payable to the estate or family members.
   To avoid estate taxes, the death benefit must be paid to an Irrevocable Life Insurance Trust (ILIT), not directly to family members.

2. The policy is set up with the wrong type of trust.
   Your policy should be held in an irrevocable trust, not a revocable trust, to ensure it is excluded from your taxable estate.

3. The deceased retained incidents of ownership.
   If the policy is transferred into an ILIT within three years of death, the death benefit may still be included in the estate for tax purposes. By establishing an ILIT before purchasing your policy, you avoid this three-year rule entirely.

Key takeaway: Setting up an Irrevocable Life Insurance Trust before you purchase your policy helps prevent these potential estate tax issues and preserves the full value of your estate for your heirs.

What Is An Irrevocable Life Insurance Trust (ILIT)?

If you personally own a life insurance policy, the IRS may include the death benefit in your estate for tax purposes. For most Americans, this isn’t an issue, as fewer than 1% of estates exceed the federal estate tax exemption. However, if your estate surpasses the exemption—or if you live in a state that imposes inheritance or estate taxes—your loved ones could face significant tax liabilities on the assets you leave behind.

An Irrevocable Life Insurance Trust (ILIT) is a legal arrangement designed to own and manage a life insurance policy. When the ILIT is the policy owner and beneficiary, the IRS does not consider the death benefit part of your estate. This makes ILITs a powerful tool for legally avoiding or reducing estate taxes for high-net-worth individuals.

By contrast, a revocable trust allows you to maintain ownership and control of the policy. Because you retain control, the IRS considers the policy a taxable asset in your estate, meaning the death benefit could be subject to estate taxes.

To work correctly, the ILIT must be established and named as the owner and beneficiary of the policy before it is purchased.

The tradeoff is that an ILIT cannot be modified after it is created. Once set up, it must be the payer and owner of the life insurance policy. Despite this, the benefits in terms of estate preservation and tax savings make it a key tool for estate planning.

What’s The Difference Between A Revocable And Irrevocable Trust?

This is a common question, and many clients find it confusing.

A revocable trust can be modified or revoked by the person who owns the life insurance policy. Because the insured retains control over the trust and can determine how the policy payout is distributed, a revocable trust does not provide the same tax advantages as an irrevocable trust.

If your life insurance policy is owned by a revocable trust, the IRS still considers the policy part of your estate. As a result, the death benefit could be subject to estate taxes if the combined value of your assets and life insurance payout exceeds the current federal estate tax exemption.

This is why establishing an Irrevocable Life Insurance Trust (ILIT) is so important. By placing your policy in an ILIT, the death benefit is legally separated from your estate, helping preserve your wealth for your heirs.

When purchasing a life insurance policy, the trust must be listed as the payer, owner, and beneficiary—not an individual or family member. Creating the trust before applying for the policy ensures that the life insurance proceeds are excluded from your taxable estate.

For a deeper comparison between revocable and irrevocable trusts, please read our article, "The Pros and Cons of an Irrevocable Life Insurance Trust."

How do Irrevocable Life Insurance Trust’s work?

This is a common question many clients ask. The Grantor or owner of the estate is the person who creates the trust. The grantor appoints a trustee to manage the trust and the beneficiaries of the trust will receive its assets after your death. The trustee purchases an insurance policy on you, the grantor, and names the trust as the owner and the beneficiary of the policy.

When you pass away, your trustee will collect the payout from your policy and use this money to and pay any outstanding debts (including estate taxes, outstanding bills, income taxes, probate costs, etc. and disburse the remaining assets to the beneficiaries as the trust directs. Because your estate never controls or owns the policy, it will not be considered part of your estate for taxation.

In this situation, it’s natural for people to want to appoint a family member or an adult child as the trustee of their Irrevocable Life Insurance Trust, but oftentimes they do not have enough experience to manage the trust properly. We usually recommend appointing an attorney or bank manager and sharing a copy of the trust with your loved ones.

Our agents believe that it’s prudent for most people to appoint a corporate or bank trustee since they have more experience in dealing with these types of trusts. A corporate trustee will also ensure the bills are paid promptly and that the remaining assets will be distributed to the beneficiaries as the trust directs. Some of the benefits of creating an Irrevocable Life Insurance Trust Include…

• Providing cash immediately to pay off any estate taxes/outstanding debts.
• Reducing estate taxes by removing insurance benefits from your estate.
• The proceeds of the policy avoid probate and estate taxes.
• Give you some control over the policy and how the benefits are distributed.
• Prevent the courts from controlling insurance benefits if the beneficiary is deceased.

JRC is appointed by over 50 top-rated life insurance companies and our experts will shop the market for you.  Give us a call today for a FREE consultation. Our agents offer at least 10 years of experience and they are licensed in every state. Toll free 855-247-9555.

Applicant’s always have their loved ones in mind when purchasing a life insurance policy, but make sure you purchase a policy that will be there when you need it. Below are several other purposes people typically buy permanent life insurance protection…

Other Ways To Utilize Life Insurance For Estate Planning

1. Dividing your Estate between Heirs

We frequently speak with parents who want to divide their estate fairly among their children, even when the assets themselves are not easily divisible.

Example:
Last year, we worked with Sam and Linda, a retired couple who owned a paid-off suburban home in Arizona. They had lived in the home for over 20 years, and it was worth approximately $400,000 at the time. In addition, they had a modest savings account earmarked for final expenses.

Their daughter, Anna, lives nearby and visits weekly. She hopes to raise her children in the same home she grew up in. Their son, Matt, lives in New Jersey and has no plans to return to Arizona. His goal is to pay off his own home and eventually start an accounting firm.

Sam and Linda decided it made the most sense to leave the home to Anna. To ensure things were divided fairly, they purchased a $500,000 permanent life insurance policy with coverage guaranteed until age 100.

When Sam and Linda pass away, Anna will receive the home—projected to be worth approximately $500,000—while Matt will receive $500,000 in tax-free life insurance proceeds. This allows both children to receive equal value without forcing the sale of the family home.

2. Pension Maximization

If you have a traditional pension and are approaching retirement, you’ve likely been asked to choose between a single-life payout and a joint-and-survivor payout.

Single-Life Payout
Pays a higher monthly benefit for the life of the pension holder. Payments stop when the pension holder passes away.

Joint-and-Survivor Payout
Pays a reduced monthly benefit but continues for the lifetime of both spouses.

While the joint option provides security, it often comes with a significant reduction in monthly income. In some cases, clients can use life insurance to replace the survivor benefit—often at a lower cost. This strategy is known as pension maximization.

Example:
We recently helped Cecil (67) and his wife Victoria (62). Cecil’s employer offered him two pension options:

• Joint payout: ~$3,200 per month for life

• Single payout: ~$5,100 per month, ending at Cecil’s death

Because Victoria is younger and has a longer life expectancy, the joint payout felt safer—but $3,200 per month wasn’t enough to retire comfortably with a mortgage still in place.

After reviewing their situation, we determined that a tax-free lump sum of $250,000 would provide Victoria with sufficient income if Cecil passed away first. That amount, combined with conservative investing, would bridge the income gap until their home was paid off.

Cecil qualified for preferred rates and secured a guaranteed life insurance policy to age 100 for $522 per month. By choosing the single pension payout and using life insurance to protect Victoria, Cecil increased their monthly retirement income by approximately $1,400, while still providing long-term security.

We strongly recommend speaking with an agent before making pension elections. You should always be approved for life insurance prior to committing to a pension option. Ideally, begin this process 3–6 months before your pension decision deadline to allow time for underwriting and policy review.

3. Charitable Giving

Life insurance can also be an effective way to support charitable causes. By naming a charity as a beneficiary, you can create a meaningful legacy without reducing the assets your heirs receive today.

Policies can be structured to distribute proceeds among multiple beneficiaries—allowing you to leave a portion to your family and a portion to one or more charities. When structured properly, the proceeds pass directly to the charity and are not subject to probate.

For more information on using life insurance for charitable donations, click here.

We Can Help With Your Estate Planning Needs

No matter your reason for purchasing life insurance, we are here to help. Our agents each have a decade or more of experience, and our comparative shopping services are always free. JRC is an independent agency that represents more than 50 top rated life insurance companies.

With access to dozens of insurers and hundreds of policy options, we can recommend the life insurance solution that best fits your specific goals. We also specialize in working with applicants who are in less than perfect health.

Give us a call today, Toll free: 855-247-9555, or click on the map below to instantly compare permanent life insurance quotes.