1st Quality Insurance

Estate Planning Life Insurance

How funding with life insurance works

For small estates, the amount of applicable exclusion ($2 million per person per estate), death taxes are not a significant consideration. For this reason, insurance ownership as a tax-savings device is not critical. The main item that policy owners should be aware of is to ensure that the beneficiaries are well provided for by the chosen insurance policy.

For larger estates with more assets than the amount of the applicable exclusion of $2 million, life insurance is an essential component of the estate plan.

Tax Implications of Life Insurance and Your Estate

Proceeds from life insurance that are received by the beneficiaries upon the death of the insured are generally income tax-free. However, there are three circumstances that cause life insurance to be included in the decedent's estate:

  • The proceeds are paid to the executor of the decedent's estate.
  • The decendent at death possessed an incidnet of ownership in the policy
  • There is a transfer of ownership within three years of death (three year rule must be observed)

An incident of ownership includes the right to assign, to terminate, to name beneficiaries, to change beneficiaries and to borrow against the cash reserves.