Is Life Insurance Part Of An Estate?

Written by Jason Fisher

Is Life Insurance In Your Estate

Ever wonder is life insurance in your estate?

With some clients I’ve dealt with before, I’ve been asked, “Is life insurance part of an estate?”

There could be many reasons for a person wanting to know this, but without knowing a little more about the person and their intent with the life insurance, it’s hard to say yes or no definitively.

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Each situation is different.

But we can dive into the question a little further so you can have a better understanding of what life insurance is, how it works, and how it affects an estate.

Let’s start from the beginning.

What Is Life Insurance?

You might think you know what a life insurance policy is, but do you know how it affects your estate from the day you sign the dotted line? You might want to know a few intimate details up front so you can structure your policy in the best manner, both for you and your beneficiaries.

As defined in Merriam-Webster,

Life Insurance Definition

While this seems basic enough, it only gives us one tiny snippet which might lead us to finding out is life insurance part of an estate. The words “to the family” means there is a passing of assets to heirs. Although life insurance doesn’t necessarily have to be paid to family, it is most of the time.

The important and most basic thing to note is life insurance is something which has value and is passed along once the insured has passed. You pay a premium while you’re living so you can pass on cash for a particular reason when you’re gone.

Also, it might be important to know, life insurance pays dollars which are not taxable in most circumstances from the deceased. The full amount can then be used for things like funerals, debt obligations, or the IRS if the estate itself owes money to the state or federal entities.

How Does Life Insurance Really Work?

So if you understand the above, you could assume life insurance works by the insurance company writing the heirs a check when the insured dies. In some cases, it is this simple.

But life insurance can do more, if it’s set up to do so. You also have to consider how life insurance looks on the books, per se.

The Purpose Of Life Insurance


Your life insurance can point to where you want it to go.

Each policy should be purchased for a designated purpose. It could be as simple as clearing debts which are unpaid at the time of death, or it could be directly to a spouse for missing income.

Life insurance could also be used for business purposes in buy/sell agreements, it could be used in complex estate tax situations, and it can be used strictly for gifting purposes. The purpose of the life insurance determines the proper structure, and the structure could determine it’s place in the estate.

Ownership In Life Insurance Policies

If you’re wondering, “Is life insurance part of an estate?”, this could be one of the first places to explore. The ownership style of the policy could be a quick determining factor in whether or not it’s in the insured’s estate or not.

Life insurance can be owned by the insured, which is common for simple term life insurance in a household, but it could also be owned by someone else, a business, a trust, and others. If there is insurable interest on the insured’s life, and the insured agrees to life insurance, a policy can be placed.

So Where Does It Fall In The Estate?


The first part of an accurate answer is at what point are you asking about? Life insurance can be in the estate before the insured passes, and remain there afterwards. But, it could also be outside of the estate before and after. It could even be in the estate before death, but fall outside after death.

Let’s go through a couple examples:

Life Insurance While Alive

Let’s assume you’re a common consumer, and you bought life insurance for your family in the event of your premature death. You beneficiary is your spouse:

  • While you’re alive, the life insurance is an instant creation of an estate valued at the amount of your death benefit. This is credited to your estate value for the calculation of estate taxes.

Let’s now assume you had life insurance for the purpose of passing it along to a charity and a trust owned the life insurance. The beneficiary was the charity:

  • While you’re alive, the life insurance could be out of your estate. This could avoid the calculation of your estate tax including the life insurance proceeds.

Life Insurance After Death


Using the same instance of owning life insurance for you family:

  • Even though your estate was calculated with the death benefit inside, the life insurance proceeds pass through probate directly to your beneficiary, your spouse.

Using the same instance of life insurance for the charity:

  • The owner of the life insurance policy wasn’t you, and your estate was not the beneficiary. The proceeds could lie entirely outside of your estate.

Assets which pass to heirs come in many forms. In a perfect world, there is a will which expunges the estate to the heirs in an orderly fashion. When the estate has been distributed, and probate has been cleared, there is a final tally of assets and liabilities, and the difference between the two is the estate value.

But if you noticed in the case above with the family, the cash from the life insurance skipped probate and was paid directly to the family members listed as beneficiaries.

In most cases, this is how life insurance can be treated. The cash value is attributed to the estate when adding up the estates value for tax purposes, yet the cash moves directly to where it it’s supposed to go.

But it’s completely dependent on how you set it up in the first place!

So, Is Life Insurance Part Of An Estate?

Life insurance is an instant creation of a larger estate, yet it can be manipulated as you need to, based on how it will be used. This manipulation, however formatted, can be permanent!

Disclaimer: I am not a legal or tax advisor/adviser. This article is written to the best of my ability. Contact your own attorney and accountant or CPA to ensure yours is set up properly, especially if considering trusts. In the even we ever have any questions about how a life insurance beneficiary should be titled, we too, resort to legal and tax professionals.
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