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