How to Use Life Insurance to Fund Estate Tax Liability

Throughout our lifetimes, we are taxed on many things. When income is earned, it is taxed. When items are purchased, they are taxed. When investments are sold at a profit, the gains are taxed. And unfortunately, when many people die, their heirs are levied with what is known as the estate tax.

Estate taxes are defined as being the tax that is imposed on one’s heir’s inherited portion of an estate – provided that the value of the estate exceeds a certain amount. There are certain exceptions to this, however. For example, if an individual leaves everything to his or her spouse, then all assets will transfer to the spouse estate tax free.

Unfortunately, when the second spouse dies, the beneficiaries who inherit his or her assets will then likely be hit with a substantial amount of estate taxes if the amount of assets exceeds the exclusion limit. In this case, it is a good idea to have at least some amount of estate planning in place.

Life insurance is the best safety net you can every buy for your loved ones. It’s one of the few ways you can ensure your family will have the money they need, regardless of what happens to you. When you’re planning for the inevitable and securing your family’s financial future, there are dozens of factors you need to consider to ensure your family will have the money they need if something tragic were to happen to you.

One question a lot of policyholders have about life insurance is in regards to estate tax. It’s important you understand how taxes are going to impact your life insurance and funds.

How Life Insurance Can Help to Reduce Estate Taxes

Although people can never completely eliminate estate taxes, these taxes can at least be reduced by the proper structuring of life insurance through estate planning. Without such a plan, you could be at risk of paying unnecessary taxes to Uncle Sam – money that could instead be going to loved ones.

Life insurance can be an important part of setting up a solid estate plan. This financial tool can provide a number of benefits to your estate, including estate liquidity for the payment of tax, wealth accumulation, income replacement for your survivors, and debt repayment options for any obligations that have been left unpaid.

How to Set Up the Plan

When using life insurance to reduce estate taxes, it is essential that the plan be properly set up and implemented. Otherwise, you could actually end up with an even larger tax liability than you started out with. This is because if you retain ownership of the life insurance policy, the policy’s death benefit proceeds will actually be counted as assets in your estate, and will therefore be included in the taxable amount.

With this in mind, you will need to remove the life insurance policy from your ownership. One way to do so is to set up an irrevocable life insurance trust, or ILIT. By making the trust the owner of the life insurance policy, the trust will actually own the policy. Therefore, the policy proceeds will not be counted as a part of your estate’s taxable assets.

When the ILIT is set up, you will begin to gift funds into the trust for the purpose of paying the life insurance policy’s premium. One thing that you will need to do when creating an ILIT is choose a trustee. This is because you are not allowed to serve as the trustee of your own ILIT. Therefore, it will be necessary to choose either another individual, or a corporate trustee.

At death, the life insurance death benefit proceeds will be paid to the trust, where the trust document will provide instructions on the use of those funds. This could include the ability to loan money to your estate, or even to pay an amount to your beneficiaries.

Because the death benefit of the life insurance policy will pass directly to your beneficiaries outside of your taxable estate, the money will essentially replace the wealth that will be lost to estate taxes. If you are needing final expense insurance rates, we can point you in the right direction.

Other Possible Uses for Irrevocable Life Insurance Trusts

ILITs can be used in situations other than estate planning. For example, young parents may create a life insurance trust for the purpose of enhancing the value of their estate if they happen to pass away prematurely.

Because many younger parents have not accumulated a sizeable estate, the death benefit of the life insurance policy can be used for care of their family members if the primary wage earner is no longer alive.

Still others may set up an ILIT to offset assets that are given to a charity. A typical situation may involve someone who makes either a direct gift to a charity or creates a charitable remainder trust. Because the charity receives the assets rather than family members at the time of the donor’s death, the ILIT is set up to benefit the family and to replace the assets.

Taking the Next Step

The setting up of an irrevocable life insurance trust can be somewhat complex. Therefore, it is important to work with a professional who is well versed in estate planning in order to ensure that your trust is set up correctly. Although this process does take some time, it is well worth the effort for the amount of money that it can potentially save you and your loved ones in unnecessary estate taxation.

There are so many different factors you should consider. It can be an overwhelming and confusing process. Regardless of the decision you make, it’s important you start taking those next steps as soon as possible.

Getting the Best Life Insurance

If you decide to go with a traditional insurance policy, there are a couple of things you can do to trim down your premiums. It’s important you get the most affordable life insurance out there.  One simple way you can lower your rates is to cut out any cigarettes. If you’re a smoker, you should expect to get drastically more expensive rates. Smokers are going to pay at least twice as much for their insurance coverage compared to what a non-smoker is going to pay for the same sized policy.

Another way you can save money is to improve your overall health. When you apply for life insurance plan, the insurance company is going to require you take a medical exam. The results of the exam are going to impact how much you pay. Improving your health is one of the best ways to lower your rates and keep more money in your pockets. Two of the best ways to do this are to get exercise and stick to a healthy diet.

When you are looking around for life insurance, there are a lot of various factors you need to consider to ensure you’re getting the best plan for you and your loved ones. It can be a confusing process, but it’s why we are here to help.

Every insurance company is different, and all of them are going to give you different rates. It’s important you get dozens of quotes before you decide which company is best for you.

Unlike a traditional insurance agency, we are a group of independent insurance brokers. We don’t work with one single company, we represent dozens of the best rated companies across the nation. We can bring a personalized set of rates directly to you. Working with our agents can save you both time and money on your life insurance coverage.

Bottom Line

You never know what life’s going to throw at you tomorrow, which means you shouldn’t wait any longer to get the insurance coverage you and your loved ones deserve. Regardless of the kind of life insurance you’re buying, either a traditional plan or a trust, it’s important you have the proper plans in place.

If you have any questions about how your life insurance will impact estate taxes, or you want to explore some of the options available, please don’t hesitate to contact us today. We would love to answer those questions and give you the best plan for you and your loved ones. Our agents have years of experience working with all kinds of clients and companies.

About Jack D. Davis at
About Jack D. Davis at

Jack D DavisBorn and raised in a quiet suburb of Philadelphia, PA, the youngest of nine children, son of two wonderful parents, Jack developed his work ethic early on. While attending West Chester University, he volunteered to join the US Army Reserves for a six-year enlistment. Attending college during the day, working evenings, and fulfilling his military obligation on various weekends, Jack learned the value of hard work and time management. After graduating from college (BS in Business Management), he began working as a sales representative for a Fortune 100 company and honed his marketing skills. In 1985 Jack started his financial planning career as an agent with Mutual Benefit Life.  After Mutual Benefit Life ran into financial difficulties, Jack decided to “go it alone”. His company, “Eagles Soar Enterprises, LLC.” successfully grew for almost 30 years. Jack’s skill-set is understanding and recognizing the personal needs of families and business owners. His patience in explaining the numerous options available is greatly appreciated by his clients. Jack agrees that life insurance is a difficult topic and people are rarely “excited” about discussing the subject. When Jack was 23 he witnessed firsthand how important life insurance is when he lost his Dad to cancer. Jack’s Mom used the life insurance proceeds to help minimize the financial loss.  Jack recognizes how critically important proper insurance planning is to the surviving spouse, business partner and, most importantly, the children of his clients. In his free time Jack enjoys playing tennis, horseshoes, ping pong, exercising, reading and attending Philadelphia Eagles football games. Jack has two wonderful children and currently resides in beautiful St. Petersburg, FL. Questions? Call Jack at 1.800.277.3098 or email:

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