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Personally owning a life insurance policy could cause the life insurance proceeds to be included in your estate for estate tax calculation purposes. If your estate value (including the life insurance) exceeds the estate tax exemption amount1, estate taxes may be imposed on the property at your death. The estate tax must be paid by your estate within nine months after your death.

On the other hand, if your estate's taxable value (including the life insurance) is under the estate tax exemption amount1, then you may consider personally owning the life insurance policy. Estate Tax Calculator can help you estimate if your estate might be subject to estate taxes.

By shifting ownership to an irrevocable life insurance trust (ILIT), the death benefit proceeds are not included in the grantor's/insured's estate. ILITs may be used to hold the life insurance policy outside of the insured's estate. The ILIT purchases a life insurance policy on the life of the grantor/insured. The ILIT becomes the owner and beneficiary of the life insurance policy and at the death of the insured, the life insurance death benefit proceeds are paid to the ILIT free from estate and income taxes.2 The death benefit proceeds may then be used to pay estate taxes and other estate settlement costs and any remaining funds may be distributed to the beneficiaries of the trust.

Another option is to have a third‐party (i.e. an adult child) own the policy. However, it is important to note that when the owner of the life insurance policy is a third‐party, if the beneficiary dies before you (the insured), the proceeds may be paid to your estate. Naming a contingent beneficiary to the policy will ensure that the proceeds will go directly to that person, thus avoiding probate and estate taxes. The "Rule of Two" holds that a policy should always have at least two contingent beneficiaries in order to avoid such problems.

You should remember that any gift of life insurance to a third party (except to your spouse) may carry with it gift tax consequences3. Furthermore, if you make a gift of a life insurance policy it could be brought back into your estate if you do not survive your gift by three years. As the facts and circumstances of each individual varies, it it is important to consult with tax and legal counsel prior to any transfer. 



1 According to the American Taxpayer Relief Act of 2012, the federal estate, gift and generation skipping transfer (GST) tax exemption amounts are all $5,000,000 (indexed for inflation effective for tax years after 2011); the maximum estate, gift and GST tax rates are 40%.

2 As of January 1, 2016, the annual gift tax exclusion is $14,000 per donee (indexed for inflation). For more information on this subject, and professional guidance in selecting the right kind and amount of insurance coverage, contact your life insurance producer.

This material is not intended to be used, nor can it be used by any taxpayer, for the purpose of avoiding U.S. federal, state or local tax penalties. This material is written to support the promotion or marketing of the transaction(s) or matter(s) addressed by this material. Pacific Life, its affiliates, their distributors and respective representatives do not provide tax, accounting or legal advice. Any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor or attorney.

Pacific Life refers to Pacific Life Insurance Company and its affiliates, including Pacific Life & Annuity Company. Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state. Each insurance company is solely responsible for the financial obligations accruing under the products it issues. Insurance products and their guarantees, including optional benefits and any crediting rates, are backed by the financial strength and claims-paying ability of the issuing insurance company. Look to the strength of the life insurance company with regard to such guarantees as these guarantees are not backed by the broker-dealer, insurance agency or their affiliates from which this product is purchased. Neither these entities nor their representatives make any representation or assurance regarding the claims-paying ability of the life insurance company.

Pacific Life is located in Newport Beach, CA.