Because of its flexibility, life insurance is a component within virtually every estate plan. It can provide cash and other support for a host of interests, including:


 The cost of college and graduate school

 Liquidity to pay for estate or inheritance taxes

 Cash to fund business buy-sell agreements

 Investment options to fund the retirement years


Unfortunately, the landscape is littered with misinformation about life insurance. Here are five things you might not know about the operation of life insurance in estate planning.

Tip Number One: A Policy Has Four “Players”

A life insurance policy typically has four “players” or components:

 The owner: Generally the person or entity responsible for paying the premiums.

 The insurer: The insurance company that is responsible for paying out the benefits under the terms of the policy.

 The insured: The person whose life is being insured.

 The beneficiary: The person, trust, or other entity that will receive the proceeds of the policy at the death of the insured.


While the owner is sometimes the insured, this need not be the case. Having a different owner and insured can offer significant tax advantages in some instances.

Tip Number Two: Terms of Your Will Do Not Usually Control Life Insurance Payouts

Some persons are surprised to hear that the carefully crafted will that they have in force will likely have no effect on how (and to whom) your life insurance is paid. Generally speaking, unless your estate is the beneficiary of the policy, the life insurance proceeds will not pass through probate. They will generally flow to your beneficiary without income tax ramifications. There are three situations in which the proceeds are included in one’s estate:

  1. The proceeds are payable to the estate or to the estate’s executor.

  2. The decedent possessed an “incident of ownership” in the policy at the time of death.

  3. There was a transfer of ownership of the policy within three years prior to the date of death.

Tip Number Three: Transferring Ownership of Policy Early in the Policy’s Life Can be Inexpensive

As noted in tip number one, you can avoid having the life insurance taxed as part of your estate by transferring (subject to the three-year rule) the policy to another (usually a trust). That transfer may be subject, however, to gift tax if the cash value of the policy exceeds the annual exclusion (currently $14,000). Transferring a policy early in its “life” can, therefore, often be done without incurring liability.

Tip Number Four: Insurance Should Be Used to Manage Risk

While there are exceptions to this rule, insurance policies are not usually used as investment tools. They are more appropriately designed to manage risks. If someone looks to you or relies upon you for financial needs and stability, you likely need life insurance. Note that the list is much longer than you may think. In addition to spouse and children, you may have dependent parents or siblings. If you are a partner in a business, the others are almost always dependent in some form upon you. It goes without saying, therefore, that once you are stably retired or financially independent, or otherwise at a point where no one would suffer financially if you were to die, your need for insurance is substantially less.

Tip Number Five: Life Insurance Can Be Effective in Long-Term Charitable Giving

Utilizing life insurance for a charitable giving program involves some complex issues, but structured correctly, life insurance can be a great tool to honor or endow universities, religious organizations, and other charitable enterprises.

Life Insurance & Estate Planning: Skilled, Experienced Legal Counsel is Key

The law firm of CKB VIENNA LLP has a long history of providing legal and business consultation to individuals to nearly every type of business. We have represented entrepreneurs both in their early, creative years and later as well, when their interests have moved toward managing their legacy. We are skilled in drafting and coordinating all sorts of estate planning documents, from wills to trusts to buy-sell agreements and succession planning arrangements. While the firm is skilled in all forms of litigation, our attorneys provide preventive training and offer guidance designed to avoid the consequence and cost of litigation. CKB VIENNA LLP has offices in Rancho Cucamonga, San Bernardino, and Los Angeles. Contact us by telephone – 909-980-1040 – or complete our online form.