How can life insurance help reduce estate taxes & preserve generational wealth?

How can using life insurance help reduce estate taxes & preserve generational wealth?

Permanent life insurance can provide the liquidity your heirs need to cover estate

PublishedSeptember 8, 2025|2 min read

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Key takeaways

Using life insurance for estate taxes can provide a tax-free cash benefit, helping your heirs avoid selling off assets.
High-net-worth individuals often use whole or universal life insurance as part of a long-term estate planning strategy.
Irrevocable life insurance trusts (ILITs) can keep the death benefit out of your taxable estate.
Planning early is key — especially if your estate includes businesses, real estate, or other illiquid assets.
Consult a financial advisor or estate attorney to explore what structure fits your legacy goals.

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Why estate taxes matter for the wealthy

As of 2025, the federal estate tax exemption is $13.61 million per person — but anything above that is taxed at up to 40%. Many affluent families have assets that exceed that threshold, especially when you factor in real estate, business equity, investments, or family trusts. Estate taxes are typically due within nine months of death. Without proper planning, heirs may be forced to sell assets quickly — and often at a loss — just to cover the tax bill.

Learn more about how life insurance fits into estate planning.

How life insurance provides liquidity

Life insurance can provide fast, tax-free liquidity when it’s needed most. When structured properly, the death benefit can cover estate taxes or settlement costs — without touching the value of the estate itself.

Explore how life insurance fits into estate planning

For example:

A $10 million permanent life insurance policy can deliver cash to pay a $4 million estate tax bill.
This prevents heirs from needing to sell long-held property, businesses, or investment portfolios.
The policy’s payout typically passes outside of probate and can be delivered quickly.

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What is an ILIT & why use one?

An Irrevocable Life Insurance Trust (ILIT) is a legal structure designed to hold a life insurance policy outside of your taxable estate. When properly set up, the trust typically:

Owns the policy and pays the premiums (often with gifts you make to the trust)
Receives the death benefit when you pass away
Distributes funds according to your instructions, tax-free to your beneficiaries

Without an ILIT, your life insurance policy could increase the size of your estate and trigger more taxes. With an ILIT, the death benefit avoids inclusion in your estate and can be used specifically to pay estate taxes.

See how ILITs support financial planning

Strategy example: Covering a $3M tax bill

Let’s say your total estate — including your primary residence, business holdings, and investments — is valued at $20 million. That’s nearly $6.4 million above the 2025 federal exemption.

Without planning, your estate could face a tax bill of roughly $2.5 to $3 million. Instead of selling a stake in the family business or liquidating investment property, you could:

Set up an ILIT to hold a $3 million permanent life insurance policy
Gift annual exclusions to the trust to fund premiums
Ensure the death benefit passes outside the estate and is used solely to cover taxes

This strategy protects both liquidity and legacy — ensuring your heirs keep the full estate, not just what’s left after taxes. Learn how life insurance is treated as an asset.

When to start planning

Estate tax planning with life insurance works best when you start early. Premiums are lower when you’re younger and in good health, and setting up a trust requires legal and financial coordination.

Start the conversation if:

Your net worth exceeds $10 million (or $20 million for couples)
You have illiquid assets like a family business or real estate
You’re concerned about future changes to estate tax laws

Life insurance isn’t just about coverage — it can be a sophisticated tax strategy when used properly.

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This article is for informational purposes only and does not constitute legal or financial advice. Always consult an estate planning attorney or licensed advisor before structuring a trust or purchasing insurance for estate planning purposes.

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