The role of life insurance in estate planning

Explore tax-free options for passing down your assets

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Bob Phillips

Personal Finance Writer

Bob Phillips is a personal finance writer whose expertise in insurance and investments has been developed through over fifteen years as an advisor/tr…

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Ross Martin

Insurance Writer

  • 4+ years in the Insurance Industry

Ross joined The Zebra as a writer and researcher in 2019. He specializes in writing insurance content to help shoppers make informed decisions.

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Susan Meyer

Senior Editorial Manager

  • Licensed Insurance Agent — Property and Casualty

Susan is a licensed insurance agent and has worked as a writer and editor for over 10 years across a number of industries. She has worked at The Zebr…

When many people think of estate planning, they picture wealthy individuals huddled around a conference table with their CPAs and tax attorneys, strategizing how to pass all of their vast personal and business holdings to their heirs. And there is a measure of truth to that.

But estate planning isn’t just for the rich. Do you have assets that you want to pass to your loved ones when you die? Do you want to do it in the most expedient and tax-efficient manner possible? If so, you need to do your estate planning.

A life insurance policy can play a vital role in ensuring your beneficiaries receive all that you want them to, with as few complications as possible.

In this article, we’ll delve into a few estate planning basics before introducing how life insurance can be a critical element of an effective estate plan. We’ll also tell you how to determine how much life insurance you need and what type to get.

What is estate planning?

Estate planning isn’t complicated – it’s simply financial planning for how you want to divide your property and assets when you die. No matter how many zeroes you have in your bank account, estate planning is essential. If you have people you care about and want the best for after you pass, you need to spend some time planning your estate.

There are two primary considerations when it comes to estate planning: property and people (“the 2 P’s”). Let’s look briefly at both.


In order to pass your property to the people you want to receive it, you first have to know what you have. There are several ways to get a handle on your property and assets to calculate your gross estate:

Update your financial statement semi-annually:  If you own real estate or investments, you know that values can fluctuate rapidly, for better or worse. An updated financial statement will give you an accurate picture of your property and investment values, as well as your debt, which you’ll ideally want to have paid off when you die.

Take a physical inventory: Your tangible personal property (jewelry, collectibles, vehicles, etc.) will either have cash value or sentimental value to someone when you pass, probably both. An inventory will make it easier for your heirs to identify that property and whom it’s intended for at a difficult time.

 price house

Once you identify what you possess, you must consider who you want to receive your estate or part of your estate when you die. These are not always easy decisions, particularly when it comes to possessions that have a deep personal meaning for you.

To help the people you care about receive what you want them to, having wills and trusts in place will do two things for your heirs: 

Avoid probate: Without wills and trusts, your estate may have to go through a court process called “probate,” which will make your financial affairs public, delay your heirs from receiving their inheritance and cost them a small fortune in attorney’s fees.

Avoid family conflict: Specifying “who gets what” in the form of named beneficiaries reduces the probability of discord between family members. This means your property and assets will be distributed according to your wishes, not which family members get there first.

 family with baby

How does life insurance enter into the estate planning picture?

Once you’ve considered the two “P’s,” property and people, a third “P” must be considered: protection. Your property and the important people in your life need to be protected against a couple of nemeses, namely taxes (income tax, federal estate tax, etc.) and lifestyle damage. Let’s look at each and how life insurance prevents these enemies from gaining a foothold.


 After you’ve completed your estate planning and directed how you want your property and other assets to be distributed, there is one other entity that must be considered: the tax liability.

If your taxable estate exceeds a certain value, your heirs may need to pay federal estate tax or inheritance taxes at the federal and/or state level. There are three ways for them to pay estate taxes

  1. Pay cash: This is not possible for many families

  2. Sell assets: Your home or some of your other assets may need to be sold to gain liquidity for tax purposes

  3. Use life insurance: It can be used to pay any taxes due

In most cases, the least expensive of these three options is to use life insurance proceeds. And, if your estate is planned properly, your beneficiaries will receive the policy’s death benefit tax-free.

In some cases, depending on the value of your estate, it might make sense to create an irrevocable life insurance trust (ILIT). This creates an exemption that removes the insurance policy from being counted as an estate asset.

You will likely need to consult an expert on tax law for legal advice.

Lifestyle damage

This is the adversary that concerns most people doing estate planning. In some cases, when you add up the assets, you’ll see that the value of those assets won’t sustain the lifestyle of your survivors in the manner they’re used to. And, of course, you also need to consider final expenses like end-of-life health care and funeral costs.

If you’re still working when you do your estate planning, you’ll see that your biggest asset is your future earnings. For example, if you earn $100,000 per year and have 25 years left before you retire, those future earnings are worth $2.5 million, not taking into consideration any future increases in your income.

Having enough life insurance in place for the payout to replace that income will safeguard your family’s lifestyle. They will be able to continue to stay in the same home if they wish, pay for the children’s education, pay their medical expenses and enjoy life without financial stress. Once you’ve accomplished this, your estate planning will have been a success.

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Deciding which type of insurance you need

Deciding how much life insurance you need and what type you should buy are the two biggest hurdles for people buying life insurance. There are two ways to figure out these issues: speak with a life insurance agent or get quotes and buy your life insurance online.

Here are the main types of life insurance:

Term life insurance

Term life insurance is an agreement with the life insurance company to cover the policyholder for a set number of years. The most common is a ten-year term. Term life insurance provides a death benefit only without cash value. It tends to more affordable than whole life insurance, so can be more budget friendly. While premiums remain level for the duration of the policy, costs may increase in later years.

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Whole life insurance

By contract, whole life insurance (also known as cash value life insurance or permanent life insurance policy) is a permanent form of coverage that covers the policyholder for their whole life. It combines a death benefit with cash value accumulations. Your insurance company sets an interest rate by which your cash value can grow over time. Premiums remain fixed in a whole life policy, but this type of life insurance is the most expensive.


Term vs. whole life insurance: what's the difference?

The key differences between term and whole life policies are the length of coverage (temporary versus permanent) and whether or not cash value accrual will complement a death benefit

Term policies are cheaper because they do not build cash value and are shorter-term. However, while rates are fixed in the duration of the policy, once it expires and you’re up for renewal, it gets more expensive over time. Whole life policies are more expensive as cash value gives the policyholder some additional financial leeway. Plus, the length of the policy lasts for as long as they are alive. Premiums remain level from the original effective date of the policy and won’t increase over time.

Some people enjoy getting help from an insurance agent, and some prefer buying their life insurance online. Either way is satisfactory as long as you take care of getting it done. Procrastination will kill an estate plan and put your beneficiaries in harm’s way financially.

Many life insurance websites have “life insurance calculators” that will help you determine how much life insurance you need. There are also sites that will give you quotes on different types of life insurance so you can do some comparison shopping and find the best coverage that fits your budget.

Wrapping up

Estate planning doesn’t need to be complicated. Having an attorney draft the basic documents you need and using life insurance for paying estate taxes and maintaining your family’s lifestyle are things that everyone should do, not just those considered “wealthy.” Not planning your estate or not having enough life insurance in place won’t help you leave the legacy you want and deserve.