Estate Planning Life Insurance

Most estate planning mistakes happen at the ownership level—not the product selection level. A permanent policy you own personally is included in your gross estate. The same policy owned by an irrevocable life insurance trust (ILIT) may sit outside it. A survivorship policy on two spouses pays at the second death, when federal estate tax is often due. A life settlement converts a policy you no longer need into cash today instead of letting it lapse. Each tool solves a different problem; mixing them up is expensive.

Compare estate planning coverage options

Survivorship and ILIT structures require illustrations matched to your estate size, health profile, and attorney's trust design. Compare permanent policy options across carriers before you commit to a structure your estate plan cannot support.

How does survivorship life insurance work for estates?

Survivorship life insurance—also called second-to-die or joint survivorship—covers two people and pays the death benefit when the second insured dies. Premiums are lower than two individual policies because the carrier pays only one claim, and underwriting is based on both lives.

Couples use survivorship coverage when the estate tax liability arrives at the second death, not the first. The surviving spouse typically inherits assets tax-free under the unlimited marital deduction, but children or other heirs may face federal estate tax when the second spouse dies if the estate exceeds the exemption. A survivorship policy owned by an ILIT provides tax-free liquidity at that moment without forcing the sale of a business, real estate, or concentrated stock positions.

Read our full guide on survivorship life insurance for product types, typical face amounts, and how second-to-die policies pair with trust planning.

What is an irrevocable life insurance trust (ILIT)?

An ILIT is a legal entity that owns your life insurance policy and receives the death benefit on your behalf. Because you do not own the policy at death—and because the trust is irrevocable—the proceeds are generally not included in your taxable estate.

Setting up an ILIT requires an estate attorney. You transfer ownership of an existing policy or have the trust apply for a new one. Premium gifts to fund the trust require annual Crummey notices so beneficiaries have a brief window to withdraw gifts; most waive the right, allowing the trustee to pay premiums. If you transfer an existing policy into an ILIT, the three-year rule applies: if you die within three years of the transfer, the death benefit may still be pulled back into your estate for tax purposes.

See irrevocable life insurance trusts explained for funding mechanics, trustee duties, and who actually needs an ILIT versus a simpler beneficiary structure.

When does a life settlement make sense?

A life settlement is the sale of an existing life insurance policy to a third-party investor for more than the cash surrender value. The buyer assumes premium payments and receives the death benefit when the insured dies. The original policyowner gets a lump sum today and walks away from future premiums.

Life settlements suit seniors who no longer need the coverage—children are grown, the mortgage is paid, or estate plans changed—and who would otherwise lapse or surrender the policy. Eligibility typically requires the insured to be age 65 or older (sometimes younger with serious health conditions), a policy that has been in force two or more years, and a face amount large enough to attract buyers—often $100,000 or more.

Our life settlements guide covers the sale process, tax treatment, and how settlements compare to surrendering or keeping the policy.

What is a viatical settlement?

A viatical settlement is a life settlement for someone with a terminal illness and a life expectancy of roughly 24 months or less. The insured sells the policy to access cash for medical bills, hospice care, or final expenses while still alive. Proceeds may receive favorable tax treatment when the seller is terminally ill under federal rules, though state law and individual circumstances vary.

Viatical settlements are not a substitute for health insurance or long-term care coverage, but they can unlock value trapped in a policy when time is limited. They differ from standard life settlements in health requirements, timing, and tax treatment.

Read how viatical settlements work for eligibility, the application process, and when to explore this option versus accelerated death benefit riders.

How estate planning life insurance fits your overall plan

Life insurance is one piece of a coordinated estate plan—not a replacement for wills, trusts, powers of attorney, or tax planning with your attorney and CPA. The policy funds the plan; the documents execute it.

Common pairings:

1. ILIT + survivorship whole life — Second-to-die coverage owned outside the estate to pay federal estate tax at the surviving spouse's death
2. Individual permanent policy + revocable trust beneficiary — Simpler liquidity for heirs without federal estate tax exposure
3. Term coverage during accumulation years + conversion later — Income replacement now; permanent structure when net worth crosses planning thresholds
4. Life settlement — Exit strategy when a permanent policy no longer matches your goals and premiums are straining retirement cash flow

Beneficiary designations must align with trust documents. Naming "estate" as beneficiary sends proceeds through probate and may inflate your taxable estate. Our beneficiary guide covers primary vs contingent designations, trusts, and when to update forms after life changes.

For product fundamentals—whole life vs universal vs IUL—start with permanent life insurance and the life insurance calculator to size coverage before you layer in trust structures.