Can Life Insurance Help with Estate Planning?

Life insurance is often used as a way for families to help protect loved ones. However, you can also include life insurance in an estate plan to help increase the assets your heirs could receive and, when structured properly, it may help reduce their taxes. This article explains a few ways life insurance helps estate planning and then discusses how to include it in an estate plan to maximize its benefits.

Three ways life insurance helps with estate planning

Here are a few ways life insurance can enhance your estate planning:

1. It helps provide heirs with possible tax benefits

Income taxes are not usually a worry for policyholders since life insurance death benefits are typically not subject to income taxes. This can give heirs a significant influx of funds without owing income taxes. However, estate taxes may be a concern. A life insurance policy can count toward the estate tax threshold of $13.61 million unless structured properly in a trust, as discussed later.¹ Properly structuring your life insurance policy lets you pass down a larger amount of assets to heirs without them owing taxes on your estate.

For example, if you don’t purchase life insurance, you’d pass down the cash you saved in a bank or investment account. This will typically be included in your estate. Purchasing life insurance would be similar to transferring some of that cash into the policy as you pay each premium.

2. It eliminates inequality in inheritance

Some assets, such as homes, vehicles, and businesses, can be harder to divide among heirs than cash or cash equivalents. Life insurance can help resolve this issue by giving you a way to more evenly distribute assets among your heirs. For example, perhaps you have two heirs. You pass down your home to one heir, leaving the other with nothing of value. However, if you have life insurance, you could divide your proceeds in reverse order. Your second heir could get a much larger share to account for not getting the house.

3. It helps with final expenses

Life insurance can help provide your loved ones with substantial funds, to take time off work, to travel, if they would like to, or need help to cover the costs of the funeral. Traditional life insurance policies can help cover these costs while possibly leaving extra funds for loved ones to put toward future goals. However, if your loved ones don’t need as many assets, you can save money by investing in a final expense insurance policy. This type of smaller permanent policy offers lifelong coverage and typically has a smaller death benefit with competitive premiums. As a result, it’s designed to provide options to help loved ones cover your end-of-life costs. Still, it’s smart to shop around for life insurance quotes to find the best rates.

How to include life insurance in your estate plan

Here’s how to include life insurance in your estate plan:

1. Determine your beneficiaries

Start by determining your beneficiaries and how much you want each to receive. You can assign each beneficiary a percentage of the death benefit to meet your needs. For example, if you pass more hard assets on to some heirs, you may give the remaining heirs a larger share of other assets.

Name contingent beneficiaries as well. These are backup beneficiaries who become eligible to receive a share of the death benefit if a primary beneficiary passes away. Contingent beneficiaries can help ensure your wishes are met if you don’t update your beneficiaries between a primary beneficiary’s passing and your own.

2. Create the right trust

Trusts can be used to help maximize the potential tax benefits of life insurance in estate planning by removing the life insurance’s death benefit from your estate. A common example is the Irrevocable Life Insurance Trust (ILIT). With an ILIT, you permanently transfer the policy to the trust. This transfer is irrevocable, meaning the ownership cannot change once the ILIT owns it. Furthermore, the IRS mandates that the ILIT have the policy for three years before it’s removed from your estate for tax purposes. That means you can’t pass away within three years of the transfer to the ILIT

3. Continue paying premiums

You are still responsible for premiums once you place your policy in a trust. You must continue paying premiums for the policy to remain in force. You’ll continue to pay the premiums to your insurer while the trustee manages the trust that includes the policy.

The bottom line

Life insurance can help you leave more wealth to your heirs, rectify any inequalities in your estate plan, and, when arranged properly, may help reduce the estate taxes your heirs could owe. Determine your beneficiaries according to your wishes, then create an ILIT and continue paying premiums for the policy to stay in force. Consider speaking with an estate planning attorney. They can help explain the estate tax implications of life insurance, explore ILITs, and help you set up your estate plan.

Sources:

¹ Investopedia – Estate Taxes: Who Pays? And How Much? Updated February 12, 2025 https://www.investopedia.com/articles/personal-finance/120715/estate-taxes-who-pays-what-and-how-much.asp. Accessed July 31, 2024.

Content within this article is provided for general informational purposes and is not provided as tax, legal, health, or financial advice for any person or for any specific situation. Employers, employees, and other individuals should contact their own advisers about their situations. For complete details, including availability and costs of Aflac insurance, please contact your local Aflac agent.

Aflac coverage is underwritten by American Family Life Assurance Company of Columbus. In New York, Aflac coverage is underwritten by American Family Life Assurance Company of New York.

Aflac life plans – A68000 series: Term Life Policies: In Arkansas, Idaho, Oklahoma, Oregon, Texas, Pennsylvania & Virginia, Policies: ICC1368200, ICC1368300, ICC1368400. In Delaware, Policies A68200, A68300 & A68400. In New York, Policies NY68200, NY68300 and NY68400. Whole Life Policies: In Arkansas, Idaho, Oklahoma, Oregon, Texas, Pennsylvania & Virginia, Policies: ICC1368100. In Delaware, Policy A68100. In New York, Policy NYR68100. B60000 series: In Arkansas, Idaho, Oklahoma & Virginia, Policies: ICC18B60C10, ICC18B60100, ICC18B60200, ICC18B60300, & ICC18B60400. Not available in Delaware. Q60000 series/Whole: In Arkansas & Delaware, Policy Q60100M. In Idaho, Policy Q60100MID. In Oklahoma, Policy Q60100MOK. Not available in Virginia. Q60000 series/Term: In Delaware, Policies Q60200CM. In Arkansas, Idaho, Oklahoma, Policies ICC18Q60200C, ICC18Q60300C, ICC18Q60400C. Not available in Virginia.

Aflac Final Expense insurance coverage is underwritten by Tier One Insurance Company, a subsidiary of Aflac Incorporated and is administered by Aetna Life Insurance Company. Tier One Insurance Company is part of the Aflac family of insurers. In California, Tier One Insurance Company does business as Tier One Life Insurance Company (NAIC 92908).

In AR, DE, ID, OK and VA: Policies ICC21-AFLLBL21 and ICC21-AFLRPL21; and Riders ICC21-AFLABR22, ICC21-AFLADB22, and ICC21-AFLCDR22. Aflac Final Expense policies are not available in New York.

Coverage may not be available in all states, including but not limited to DE, ID, NJ, NM, NY, VA or VT. Benefits/premium rates may vary based on state and plan levels. Optional riders may be available at an additional cost. Policies and riders may also contain a waiting period. Refer to the exact policy and rider forms for benefit details, definitions, limitations, and exclusions.

Aflac WWHQ | Tier One | 1932 Wynnton Road | Columbus, GA 31999

Aflac New York | 22 Corporate Woods Boulevard, Suite 2 | Albany, NY 12211

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