How to Establish an Estate with Life Insurance

Clifford PendellWritten by Clifford Pendell, Managing Partner and Co-founder

Life Insurance is commonly purchased for one of two reasons:

1) To preserve an estate that you have already created.

2) To create an estate for your heirs after you pass away.

Life Insurance should always play an important role in your estate. Upon your death, the proceeds from your life insurance policy will create an influx of cash when your loved ones need it most.

Our agency specializes with estate planning life insurance and we work directly with more than 50 top-rated life insurance providers. Keep reading to learn how we've helped hundreds of families preserve or create an estate with permanent life insurance

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The death proceeds from your life insurance policy can be used in a multitude of ways.

Life insurance benefits are commonly used to; 1) settle estate taxes with the IRS to preserve your estate 2) divide your estate between family members 3) fund buy-sell agreements for your business 4) settling existing debts or a mortgage 5) to pay off any other expenses that your heirs might encounter after you pass away

How to Establish an Estate with Life Insurance:

If you have a large estate worth $5 million or more, life insurance should be an essential component of your estate.

Life insurance is often purchased by individuals with large estates as a way to protect and pass along their hard-earned assets. In additon to any inheritance or estate taxes that your state may collect, the IRS levies a 40% tax on the value of your estate that exceeds the federal estate exemption, and this money is due within nine months of your passing.

While the current federal estate exemption is $12,060,000, this amount will be reduced to roughly $6 million in 2026 unless new legislation is passed. If your estate is worth less than $6,000,000, your heirs won’t have to worry about estate taxes, unless you live in a state that collects them. As an example, Oregon's estate tax exemption is only $1 million, and any assets that exceed this amount are subject to a tax of 10-16%.

If your family doesn’t have the money to pay these taxes, they will be forced to sell the assets you intended to leave them, oftentimes for less than they are worth.

However, if your life insurance policy is setup properly, the death proceeds can be used to settle the estate taxes your heirs will owe. The death benefit from your life insurance policy will be paid to your trust and your trust will then pay the IRS. This prevents the money from being in anyone's possession, avoiding potential tax obligations.

The In this situation, it’s not so much of how to create an estate with life insurance, but rather how to preserve the estate you already have. In other words, in order to keep your estate whole (not force your heirs to sell off assets) you will need to provide your loved ones with tax free money to pay the estate taxes due upon your death. The simplest way to do this is with a permanent life insurance policy called guaranteed universal life insurance.

What Type of Life Insurance Should I Buy To Establish or Protect My Estate from Taxes?

While term life insurance policies provide great protection to replace income, pay off existing mortgages and debts, they are not designed to last until old age. If you need to preserve or establish an estate, you should purchase a permanent life insurance policy that does not build a cash value.

Guaranteed universal life insurance policies are the best policies to preserve an estate because your rates and coverage are guaranteed until the age of your choice. Depending on your life expectancy, you can purchase a policy that will provide guaranteed coverage and rates until you reach age 90, 95, 100, 105, 110, or 121.

If the men in your family typically live until their mid-80’s, you’re probably safe with a policy that extends until age 90 or 95. Because females tend to live longer, we recommend that women purchase permanent coverage until age 95 or later. You can compare permanent life insurance rates using the instant quote form below. We work directly with 63 life insurance providers.

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Avoiding Estate Taxes with Guaranteed Universal Life Insurance Coverage

If your estate is worth more than $5 million dollars, permanent life insurance should be used to provide liquid cash to settle estate taxes with the IRS. In order for this policy to function correctly and reduce you estate tax liability, your policy must be owned by an Irrevocable Life Insurance Trust or “ILIT.” We will get into the nitty gritty of an ILIT later on, but please note that creating these trusts can be a complicated and timely process.

In addition to speaking to a licensed agent who is an estate planning expert, we normally suggest you seek legal counsel to assist you with the legal paperwork as well. If you’re not sure where to begin, give us a call and we can help you get started 855-247-9555. Life insurance benefits are normally paid to beneficiaries tax-free unless the proceeds of the policy become part of the deceased’s estate.

This is why it is so important to work with an agent that has lots of experience with this type of coverage. There are three ways that your life insurance can inadvertently create a tax liability…

  1. The insurance policy is made payable to the estate or family members of the deceased.
Your policy must pay the death benefit to an irrevocable trust to avoid taxes, not to a family member.
  1. The policy is set up to pay the wrong type of trust.
Your policy needs to be set up with an irrevocable living trust, not a revocable trust.
  1. The deceased possessed incidents of ownership at the time of their death.
Your policy must not have been transferred into an irrevocable trust within 3 years of your passing. If your irrevocable life insurance trust is set up when you purchase your policy, you do not have to worry about the 3 year limit, this only applies to transfers.

*Setting up an Irrevocable Trust before you purchase your policy will help you to avoid these potential estate tax issues.

What is an Irrevocable Life Insurance Trust or an Irrevocable Living Trust?

If you own your life insurance policy, the IRS will include the death benefit in the evaluation of your estate when you pass away. For most people, this is a non-issue, as less than 1% of American's estates are worth more than the current federal estate exemption. But, if your estate's value exceeds the exemption, or you live in a state with inheritance taxes, your loved ones could owe taxes on the assets you leave behind. 

An irrevocable life insurance trust, or ILIT, is a legal arrangement that is set up to own and manage a life insurance policy. The IRS does not consider life insurance to be a personal asset if it is controlled by an irrevocable trust, so affluent individuals often utilize them to legally avoid or reduce estate taxes. 

In contrast, a revocable trust allows the individual to maintain control and ownership of their life insurance policy, so the IRS will consider it as part of your estate. This means that the payout from your life insurance policy can be subject to estate tax, if your policy or your trust is not set up correctly. The ILIT must be named as the owner and beneficiary of your policy BEFORE it is purchased.

The downside is that an irrevocable trust cannot be modified or changed once it is set up and it must be listed as the payer and owner of the life insurance policy. For more information, please read about the pros and cons of an irrevocable life insurance trust.

What’s the Difference Between a Revocable and Irrevocable Trust?

This is a very common question…and a lot of client’s find this confusing.

A revocable trust can be revoked or modified by the person who is covered by the life insurance policy, in other words, a revocable trust can be modified. Because a revocable trust allows the insured to make changes to the trust and determine the final outcome of the policy payout, a revocable trust does not have the same tax advantages as an irrevocable trust.

If your policy is owned by a revocable trust, your policy will still be considered part of your estate and it could be subject to estate taxes if the combined value of your assets and life insurance policy payout exceeds the current year’s estate tax exemption.This is why it is so important to set up an irrevocable life insurance trust. For more information about the difference between revocable and irrevocable life trusts, please read our article here.

When you purchase your life insurance policy, you must list your trust as the payer, owner, and beneficiary of your trust. You do not want to name an immediate family member or an individual. This is why you need to have your trust created prior to applying for life insurance, it ensures that the life insurance proceeds are separated from your estate. 

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.

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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.
Taking care of loved ones is arguably the most important thing people do in life. We spend the majority of our lives working, saving, and sacrificing in order to provide for them. Life Insurance is a way that we can continue to protect our loved ones financially after we pass away. Whether you’re estate is worth $250,000 or $10,000,000 one of our agents will be happy to help you find the best policy at an affordable rate.

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.

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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 often receive calls from parents who want to equally divide their estate between their adult child when they pass away.

Here’s an Example: Last year we worked with Sam and Linda, a retired couple that owned a nice suburban home in Arizona.

Sam and Linda had raised their children in their home and had lived there for more than 20 years. At the time, their house was paid off and worth roughly $400,000, and their children had grown up and moved out. In addition to the equity in their home, the couple also had a small savings set aside for their final expenses and burial costs. Their daughter Anna, still lives nearby and visits her parents every week. Her hope is to raise her children in the same house she grew up in.

Their son, Matt, moved to New Jersey when he graduated from college. Matt still visits for the holidays, but he has made it clear that he does not want to move back to Arizona. Matt’s hope is to pay off his house and start an accounting firm in New Jersey. In this scenario, the couple decided it was best to leave the house to their daughter Anna.

To make things equal, they purchased a $500,000 life insurance policy until age 100 as a way to leave money behind for their son. When Sam and Linda pass way, Anna will receive the house, which should be worth about $500,000 by then. Matt will receive $500,000 from their life insurance policy which he can pay off his own house or start his accounting firm. 

2. Pension Maximization

If your employer provides you with a pension plan and you are approaching retirement, chances are, you may have already had this conversation. Most traditional pensions offer a single payout or a joint payout.

• Single Payout

A single payout pension pays a monthly amount to the pension holder until they pass away. This payout is based on the lifetime expectancy of the pension holder. When the pension owner passes away, the benefit ends.

• Joint Payout

A joint pension pays a reduced monthly amount to the pension holder but the policy pays until the pension owner and his or her spouse passes away. The single payout pays you more money each month, but if your spouse is younger than you or has a longer lifetime expectancy, this can be dangerous. If you pass away before your spouse, the pension payments will stop.

The joint payout is the safer option, but by choosing a joint payout, you will be reducing the amount of money you receive from your pension each month. In some situations, our clients are able to buy life insurance for less than the monthly reduction of their pension. This strategy is known as pension maximization.

For Example: Last year we helped Cecil and his wife Victoria with a pension maximization strategy.

Cecil was getting ready to retire and his employer had offered him the choice of a single payout pension and a joint payout pension. With the joint payout pension, Cecil and his wife would receive approximately $3,200 a month, if Cecil passed away Victoria would still receive $3,200 per month. If Cecil elected the single pay pension, he would receive approximately $5,100 per month, but if he passed away, the pension payments to Victoria would stop.

Cecil and Victoria still have a house payment, and after paying the mortgage, $3,200 a month wasn’t enough for them to retire comfortably. Cecil decided to give us a call to determine his best options.

Cecil is 67 and his wife is 62. Most of the men in Cecil’s family live to their mid-80s while the women in Victoria’s family tend to live until age 90. This could potentially leave Victoria without an income for about 10 years. Cecil and Victoria’s home will be paid off in about 8 years and they feel that once their house has been paid off, they will easily be able to survive on $2,000 - $3,000 a month.

After speaking with Cecil and Victoria, we determined that if Victoria received a tax-free lump sum of $250,000, she would have enough money to survive for the rest of her life. With the life insurance paying out as a lump sum, Victoria will allow be able to invest the money in a safe investment with modest interest. This also protects Cecil and his pension if his wife passes away before him.

Cecil is in good health, he was approved at preferred rates for his life insurance policy from Prudential. His policy provides guaranteed rates and coverage until the age of 100 for $522.00 a month. This pension maximization strategy will allow Victoria and Cecil to enjoy their retirement with an extra $1,400 a month.

We highly recommend speaking to one of our agents before moving forward with any decisions about your pension. You want to be approved for your life insurance policy before making any decisions. We often receive calls from client’s that are just a few weeks from their deadline to make a decision.

We recommend applying at least 3-6 months before your pension decision deadline. It takes up to two months to get approved for life insurance and you will want to review you policy before making a final decision. For a complete pension maximization guide, please read here.

3. Charitable Donations

In some cases, clients purchase a life insurance policy to donate to their favorite charity. This is very simple to set up, you will just name the charity of choice as the beneficiary of your policy. When you pass away, this benefit will be paid directly to the charity.

If you decide to donate your life insurance payout to a charity, you will have an option to select a percentage of the total benefit for each beneficiary. This allows you to leave your life insurance payout to more than one charity or to leave a percentage to your family and a percentage to charity. To learn more about donating your life insurance proceeds to charity, please read this article.

We can Help with your Estate Planning Needs

No matter what your need for the life insurance is, we can help. Our agents offer at least a decade of experience and our comparative shopping services are free. JRC is an independent agency that represents more than 50 top-rated life insurance companies. 

By having access to dozens of companies and hundreds of products we can recommend the type of life insurance policy that is best for your situation, no matter what your need for coverage is. We also specialize with applicants that 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. 

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Clifford Pendell

Clifford Pendell

Managing Partner and Co-founder

Cliff is a licensed life insurance agent and one of the owners of JRC Insurance Group. He has helped thousands of families of businesses with their life insurance needs since 2012 and specializes with applicants who are less than perfect health. In his spare time he enjoys spending time with family, traveling, and the great outdoors.

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