Life Insurance for Estate Planning: What You Need to Know

Life insurance can support your estate planning goals, including distributing your assets, covering the cost of long-term care or a funeral, and otherwise providing for your loved ones when you’re gone.

Most people know that life insurance pays a lump sum of money to your beneficiaries so they can continue to pay their living expenses after you die. But the payout from your policy can also be used to pay off your debt and offset any estate taxes your family will owe, ensuring more money can go to the people you care about.

What is estate planning & why can life insurance help with it?

An estate plan refers to the set of instructions that specify how you’d like your assets and responsibilities to be managed after you die. This usually includes a last will and testament, a living will, life insurance policies, written wishes for your funeral, and any titles or deeds for anything you own.

There are three basic ways to create an estate plan.

Use an online service.
Work with an estate planning attorney.
Create a plan yourself using online templates.

Estate planning isn’t only for wealthy people. No matter what your net worth is, having an estate plan in place can ensure peace of mind for your loved ones after you die.

Life insurance can be a key part of an estate plan by providing the capital for your wishes to be carried out. The money from a policy can help:

Pay for your funeral.
Cover any debt you have.
Provide an inheritance for your family.

Main benefits of life insurance in estate planning

Quick financial support to beneficiaries. Life insurance provides a way for your beneficiaries to receive relatively quick financial support. After you die, your beneficiary will receive the payout from your policy within two months, and often in as little as two weeks.
Access to funds to cover financial obligations. The liquidity of a death benefit can help cover final expenses, debt, and any outstanding tax obligations relatively quickly.
Tax-free inheritance for your family. Beneficiaries also don’t have to pay income tax on the death benefit like they would with other assets, like traditional retirement accounts. A life insurance policy can be an ideal way to secure a financial legacy for your loved ones.

Estate taxes payment

While the payout from a life insurance policy generally isn’t taxable, the total amount can be factored into the overall value of your estate in some rare circumstances. This is usually only a possibility for high-net-worth individuals.

If you have a high net worth, you can protect your estate from this by setting up an irrevocable life insurance trust (also known as an ILIT), to prevent your life insurance money from being counted as a taxable asset. This will ensure that the policy payout goes to the trust, rather than to your estate, where it can be taxed.

Preserving family assets

Estates valued at less than $13.61 million aren’t susceptible to federal estate tax, although some states have lower thresholds. [1]

If you’re a high-net-worth individual, it might make sense for you to set up one or more permanent life insurance policies. Permanent policies don’t expire and usually have a cash value savings component.

They also pay out in a way that makes it easier for you to minimize what you’ll pay in estate taxes. Your beneficiaries won’t have to pay taxes on the money they receive from your insurance policy like they would if they inherited a retirement account or annuity from you.

Estate equalization

As long as it’s paid in a lump sum, the death benefit passes to your beneficiaries tax-free after you die. Most people name their spouse, parents, or children as beneficiaries. With a life insurance policy, you can choose exactly how much money each person will receive. This is called estate equalization.

Life insurance is an easy way to achieve estate equalization in comparison to other assets, like real estate, that are harder to divide between beneficiaries.

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Special considerations when using life insurance in estate planning

Family members with a disability

A life insurance policy can be a valuable part of your estate plan if you have a child or other family member with a disability.

If you have a dependent who’ll likely need long-term care, a permanent policy may be a good fit to ensure their financial protection. Unlike a term life insurance policy, a permanent policy will last the rest of your life and guarantee a payout to care for your loved one.

If you’re getting a policy to care for someone with a disability, you may also want to designate a special needs trust as a beneficiary for your policy. This way, your chosen trustee will be able to distribute funds to your family member and the funds won’t disqualify them from getting Social Security or Medicaid benefits.

Blended families

Estate planning can be especially important for blended families to ensure that each party is included and receives the money they’re entitled to.

Using a trust as part of your estate plan in addition to a life insurance policy can be a useful tool to designate funds and assets to your surviving spouse, children, and step-children. This ensures that none of them are left out of the inheritance, even if they’re minors.

It’s not recommended to list minors as beneficiaries on life insurance policies because they can’t legally claim the benefit. With a trust, you can arrange for your minor children to receive the money from your policy when they’re adults.

If you already have a policy and go through a divorce or separation, you can change the beneficiaries at any time and for any reason. You’ll just need to contact your insurance company.

Family businesses

Life insurance can also aid in keeping family businesses running if a key partner or owner passes away. Buy-sell agreements are contracts usually funded by life insurance policies that determine how a deceased person’s share of the business is to be redistributed.

In cases like this, the death benefit can help the surviving family members maintain their control of the business and business operations.

Charitable organizations

Some people wish to make charitable contributions from their estate after they die. Life insurance can help achieve this goal, too.

Some insurance companies allow you to select a charitable organization to receive the money from your life insurance policy directly. If this isn’t an option for your policy, you can always set up a trust, and the trust can provide the money to the charity you choose.

What types of policies can be useful in estate planning?

Term life insurance

You can use a term life insurance policy for estate planning to make sure all of your debts are paid and your assets like your home, vehicles, or even a business will be able to pass to your beneficiaries without threat of repossession.

Term life is the most popular option for most people because it’s affordable, only lasts for as long as you need it — usually 10 to 30 years — and doesn’t come with any complex tax restrictions or regulations.

Permanent life insurance

If you have a high net worth and are looking to maximize the inheritance that you’ll leave to your loved ones, a permanent life policy can be a useful tool in your estate plan.

Permanent policies like whole life insurance guarantee lifelong coverage and come with a cash value component that can accumulate over time. Your heirs will also be able to claim the death benefit without paying income tax regardless of when you die.

Guaranteed universal life insurance

Guaranteed universal life insurance is a type of permanent policy that can help you build a tax-free inheritance for your family or supplement your retirement income.

It’s cheaper than other permanent coverage products such as whole life because it doesn’t accumulate as much cash value. Instead, it offers a guaranteed level payment and a death benefit payout. This payout can be used to cover estate taxes when you die.

Survivorship life insurance

Survivorship life insurance is a type of permanent coverage that covers two people — typically spouses — and pays out when both people die — that’s why it’s also called second-to-die life insurance. This type of policy is another way to provide a tax-free benefit for your loved ones and minimize estate tax.

Final expense insurance

Final expense insurance is a type of permanent insurance in which the death benefit is meant to go toward end-of-life costs, such as a funeral or medical bills.

This type of policy doesn’t require a medical exam and remains active for the rest of your life. While the death benefit is lower than you’d receive through a term life policy, a final expense can be a good addition to your estate plan if all you need is a small coverage amount to cover end-of-life expenses.

Pre-need insurance

If you’re primarily concerned with burial and funeral costs, a pre-need policy essentially allows you to plan your funeral in advance.

You’ll enter into an agreement with a funeral home for their services at a predetermined set cost, so your loved ones don’t have to worry about the details or payments.

However, these plans usually cost more than other more flexible policies and might not be honored if the funeral home closes or its ownership changes.

Best life insurance companies for estate planning

Methodology

Why you can trust our picks

Our recommendations are based on internal and external expert analysis, as well as our Policygenius Life Insurance Price Index, which uses real-time data from leading life insurance companies to determine pricing trends. When reviewing a life insurance company, our editorial team uses a proprietary scoring rubric with five factors — price, policy details, financial strength, transparency, and customer experience — to assign an unbiased rating between one and five stars. These ratings are also taken into consideration as part of our company recommendations. We don’t get paid for our reviews.

Our reviews and recommendations can help you find a reliable insurer for your family’s financial protection, but the best life insurance company for you depends on multiple factors. A licensed agent at Policygenius can support you during the application process to ensure you get the right coverage for your circumstances at the most competitive price.

Transamerica

Policygenius rating

4.6

AM Best rating

Cost

No-medical-exam option

Why we chose it

Transamerica is one of the oldest and largest life insurance companies, with over 12 million active accounts today. It offers affordable rates for almost every age, and you can even skip the medical exam if you fall under a certain age or coverage amount.

Pros and cons

Pros

Competitive rates for term life insurance
No-medical-exam available for qualifying applicants, including smokers and people between 60 and 70, which is rare
One of the fastest turnaround times in the industry for traditionally underwritten term policies

Cons

Term life not available in New York
Not a good option for people with a history of cancer, alcohol abuse, or asthma

Read our full Transamerica review

Best term life insurance for estate planning: Transamerica

Our analysis found that Transamerica offers the best term life insurance to complement an estate plan. The company has a policy with living benefits — which allow you to claim money while you’re still alive if you meet certain criteria — that includes terminal illness, chronic illness, and critical illness accelerated death benefit riders.

These riders — add-ons that can supplement a policy’s coverage under unexpected circumstances — allow you to claim money while you’re still alive. The terms to activate a rider will be written in your policy, but they’re usually things like being diagnosed with a terminal or chronic illness, where you can benefit from your policy’s death benefit while you’re still alive.

Mutual of Omaha

Policygenius rating

4.5

AM Best rating

A+

Cost

No-medical-exam option

Why we chose it

Mutual of Omaha is a reputable company that offers a variety of life insurance products — including a no-medical-exam option — so that you can select the type of life insurance that best suits your needs.

Pros and cons

Pros

No-medical-exam options for older applicants
Strong financial and customer ratings

Cons

Policies are more expensive than average
Slow turnaround time

Read our full Mutual of Omaha review

Best final expense life insurance: Mutual of Omaha

We recommend Mutual of Omaha for final expense policies. There are no medical restrictions to prevent you from applying, and the policies are available for anyone age 45 to 85. Mutual of Omaha also offers some of the cheapest final expense policies available.

2024 Policygenius award winner

Pacific Life

Policygenius rating

4.8

AM Best rating

A+

Cost

All 50 states

No-medical-exam option

Why we chose it

Pacific Life offers some of the lowest rates for term life insurance across age brackets. It also has the most competitive rates for many health conditions and builds.

Pros and cons

Pros

Extremely affordable across age brackets
Affordable guaranteed universal life insurance option for people who need lifetime coverage
Favorable underwriting for many health conditions

Cons

Traditional term life not available in NY
There are better carriers for active duty military, people who have a history of alcohol abuse, and people who have been through bankruptcy

Read our full Pacific Life review

Best guaranteed universal life insurance for estate planning: Pacific Life

According to our analysis, Pacific Life has one of the most affordable guaranteed universal life insurance policies on the market. This is a solid option for estate planning since it provides a permanent death benefit at a relatively low cost compared to other types of permanent policies.

2024 Policygenius award winner

MassMutual

Policygenius rating

4.9

AM Best rating

A++

Cost

All 50 states

Why we chose it

MassMutual’s whole life insurance plan provides a lifetime coverage option that builds cash value with the potential to earn dividends.

Pros and cons

Pros

Strong financial stability ratings
Higher potential for dividends for whole life policyholders than many competitors
Good customer satisfaction ratings

Cons

High term life premiums
Term life not available through Policygenius

Read our full MassMutual review

Best permanent life insurance for estate planning: MassMutual

Our pick for best permanent life insurance is MassMutual. The company offers a wide range of permanent options, including universal and variable universal life insurance policies. The company has high customer experience ratings compared to other insurers and consistently receives high third-party financial stability ratings.

2024 Policygenius award winner

Prudential

Policygenius rating

4.1

AM Best rating

A+

Cost

No-medical-exam option

Why we chose it

With nearly four million policyholders and 150 years to its name, Prudential offers competitive coverage options for seniors, as well as people with some of the most common medical conditions, including asthma, depression, and fibromyalgia.

Pros and cons

Pros

Good for people over 60
More flexible income requirements than some other insurers
Considers applicants with a variety of immigration statuses (visas and green cards)

Cons

Younger applicants will likely find better prices elsewhere

Read our full Prudential review

Best survivorship life insurance for estate planning: Prudential

Prudential is our top pick for joint life insurance. The company offers a good option for those seeking a second-to-die or survivorship policy as part of their estate planning needs, which fewer insurers offer since they’re not as common.

Foresters Financial

Policygenius rating

4.3

AM Best rating

Cost

No-medical-exam option

Why we chose it

For people under age 55 and in relatively decent health, Foresters Financial's Your Term policy is a solid choice for a term life policy. You can get it without a medical exam and coverage can be offered within 24 hours.

Pros and cons

Pros

Accelerated death benefit rider includes coverage for critical, chronic, and terminal illnesses
Includes several no-cost riders that aren’t available through other insurers, including Family Health Benefit Rider and Charity Benefit Provision
No-medical-exam option available for people up to age 55

Cons

Not available in New York or Maine
People with complicated health histories will likely find their best rates elsewhere

Read our full Foresters Financial review

Best life insurance for including charities in estate planning: Foresters Financial

Our analysis found that Foresters Financial’s term life policy automatically includes a charity benefit provision at no additional cost. It provides that Foresters will pay an additional 1% of your coverage to a nonprofit organization of your choosing, which you can select at the time of application but change at a later time if need be.

Comparing the best life insurance companies for estate planning

Company	Policygenius rating	Best for	AM Best rating
Mass Mutual	4.9/5 ★	Permanent life insurance	A++
Pacific Life	4.8/5 ★	Guaranteed universal life insurance	A+
Transamerica	4.6/5 ★	Overall estate planning	A
Mutual of Omaha	4.5/5 ★	Final expense	A+
Foresters Financial	4.3/5 ★	Charitable giving	A
Prudential	4.1/5 ★	Survivorship life insurance	A+

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Other life insurance estate planning considerations

ILIT: How does it work & should you set up one?

If you have a significant estate, an irrevocable life insurance trust (ILIT) can help offset the value of your policy so that your beneficiaries aren’t subject to estate tax. An ILIT shields a policy’s death benefit from estate taxes and probate.

An ILIT also protects your assets from your beneficiaries’ creditors, in case they have other debt. When the death benefit is in an ILIT, it can’t be used to satisfy your beneficiaries’ debts or claims from creditors.

By protecting the death benefit from tax and debt liabilities, an ILIT can give you more control over how a beneficiary’s inheritance is spent.

ILITs can be expensive to set up since you’ll need legal assistance. If you’re not sure which kind of trust is best for you, you should consult with an estate planning attorney to go over your specific situation and financial protection needs.

Do you need life insurance if you already have a will?

Wills and life insurance policies are both tools to protect your family when you pass away, but they function very differently. A will and testament ensures your assets are properly distributed to your loved ones when you die, but even then, life insurance can still offer added benefits and support.

Life insurance replaces any financial support you’d have provided, whereas a will outlines assets you already have and how they’ll be divided.
If you already have a will in place, setting up a life insurance policy creates more robust financial security for your family and ensures their well-being when you’re gone.

Is life insurance part of your estate?

Life insurance policies pay out directly to your beneficiaries and won’t become part of your estate unless your beneficiaries aren’t able to claim the death benefit. This usually only happens if both your primary and contingent beneficiaries predecease you. In these rare cases, the payout from your policy will become part of your estate and will go through probate.

But all life insurance proceeds are also considered part of an estate for tax purposes. That means the value of the death benefit is included in the valuation of your estate, and if it’s over the federal estate tax exemption ($13.61 million in 2024), you may have to pay estate taxes.

Estate taxes will ultimately decrease the size of an inheritance your beneficiaries receive, but keeping your beneficiaries up to date, proper estate planning, and utilizing a trust can help you maximize your assets.

What happens when life insurance goes to your estate?

When you die, your assets will usually go through probate court to ensure that everything you own is distributed appropriately to your loved ones. If you don’t have a will, a judge will decide how your assets are allocated. If you have a life insurance policy that is paid out to your estate, the proceeds will be subject to your will or the judge’s decision.

You may intentionally set up your life insurance policy to be paid out to your estate, though this isn’t usually recommended because the death benefit can then be collected by creditors to pay for any debts you owe before it’s dispersed amongst your estate. The money will also be subject to additional taxes and fees.

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How to avoid common mistakes in estate planning

Consider your assets & liabilities

It’s important to have an up-to-date list of your assets and liabilities so that you know exactly what your beneficiaries will inherit, or the remaining financial responsibilities they’ll have to cover. Your assets and liabilities will also determine which type of life insurance policy will be the best fit for your estate planning needs.

Talk to your family

Make sure your family knows about important estate planning components like a will and any policies that list them as beneficiaries. If they don’t know about your policy, they can’t make a claim if you die.

Establish beneficiaries

Name beneficiaries who’ll need financial support when you’re gone. Many people list their spouse, children, or a family trust.

Decide who should own the policy

In most cases, the insured should own the policy so that they can make any desired changes over the policy’s lifetime. However, there are cases where you may want to name a trust, your spouse, or another family member as the policy owner.

Discuss with professionals

You should meet with an estate planning attorney in addition to a life insurance agent if you have significant estate planning needs or aren’t sure what type of policy is best for you.