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Considering a Life Insurance Policy?

Kevin Wong, CPA, MST, MSA

08.01.22 | T&E Chat

Life insurance is one of many financial instruments out there. Its primary purpose is to provide a financial benefit to the dependents of the insured. I remember during my childhood, every year, a life insurance sales agent would come by my house. Initially, my parents thought life insurance was a scam, but after some convincing from the agent, they finally understood it could be a saving grace for the family in case either one of them died prematurely. Luckily, my parents are still alive and well and have not had to make use of the policy. Nevertheless, they don’t regret ever purchasing it as it provided them with peace of mind. If structured correctly, the payouts may also be tax-free and should be a consideration in your estate planning.

Benefits of Having Life Insurance

Life insurance can give families peace of mind and stability after a loved one passes. The benefits include, but are not limited to the following:

  • Death benefit payouts are typically income tax-free
  • Provides an inheritance
  • Paying federal and state estate taxes
  • Provides liquidity to pay for funeral costs and creditors
  • Income replacement
  • Fund kids’ college education

Who Should Own the Policy?

Life insurance is an includible asset in the estate of the owner. Even though the proceeds may be income tax-free, special care must be taken when you are doing your estate planning. If you are the owner as well as the insured, the proceeds will be includible in your estate upon your death and may be subject to estate taxes. If estate taxes are a concern, not owning the policy when you die could be a solution.

Ownership is determined by several factors, of which control and the right to name the beneficiaries are only two. Depending on your reason for owning life insurance, the best owner for the policy may not be you. Is it to provide liquidity? To transfer wealth? Or will it be used to replace income? You should also consider the tax implications, control, cost and administration, and flexibility.

Here are possible owners:

  1. You or your spouse. Ownership will provide you with flexibility and control over the policy. However, estate tax is a risk. Ownership of the policy by you or your spouse would be ideal if your combined assets, including insurance, do not put your estate in a taxable position.
  2. Your children or heirs. Ownership by your children or heirs works best if your goal is to pass on wealth to them. As you and your spouse do not own the policies, the proceeds are not subject to estate taxes upon your or your spouse’s death. However, you will no longer have control. It could also prove problematic if your children or heirs have creditor problems.
  3. Your business. Ownership by the business can work if business continuity and succession planning is your goal. This works well when there are multiple owners of a company, and one dies. The proceeds can be used to buy out the deceased member’s share and provide liquidity to the survivors.
  4. An ILIT. An irrevocable life insurance trust (ILIT) can be used if your primary goal is to provide benefits to your surviving spouse and beneficiaries while saving estate taxes. The trust will own the policy and pay the premiums with the proceeds remaining income and estate tax-free. However, funding the trust would be a gift. The ILIT can be structured to direct how the benefits will be used.


The inclusion of life insurance should be a consideration when doing your estate planning. It can be tailored to align with your goals and provide much-needed security for your family. Discuss with your trusted advisor if a life insurance policy is right for you or if you want to review your estate plan.

Questions? I can be reached at 212.331.7441 | kewong@berdonllp.com or contact your Berdon advisor.

Kevin Wong is a Senior Manager in the Personal Wealth Services Group of Berdon LLP with nearly 10 years of professional experience. He works closely with high net worth individuals on matters involving their personal income tax, family businesses, and fiduciary, gift and estate taxes.

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