Is Life Insurance Part of an Estate?

Estate planning is one of the most difficult and important financial planning processes you’ll ever go through. It’s complex, and the bigger your estate, the more challenging it gets. While creating your estate plan, you may find yourself wondering if life insurance is part of an estate. In the end, your beneficiary designation determines who receives the death benefit and how it will interact with your estate. If that sounds confusing, consider working with a financial advisor as you put together your estate plan.

Understanding Life Insurance and Estate Planning

When an individual purchases a life insurance policy, they essentially sign a contract with an insurance company. The policyholder who owns it can then use it to insure themselves or someone else. During the course of their life, the policy owner pays regular premiums to the company. Then, per the contract, once the insured person passes, the company pays out a lump sum of cash called the death benefit to the policy’s beneficiaries.

Policy owners may instead name their estate as the beneficiary of the life insurance. If so, the proceeds will likely pay for debts, like leftover bills or loans. This may also happen by default if the policyholder doesn’t name a beneficiary.

Regardless of whether it passes to a named beneficiary or to an estate, the insurance proceeds can face federal estate taxes if you owned the policy when you died. Because of the $15 million federal exemption in 2026, the tax applies only to estates above that amount, and the portion above the exemption is effectively taxed at 40%.

Usually, if the beneficiary on the policy is the estate, then the insurance company must directly pay the probate court. The court first uses said money to pay associated legal costs, like court fees. Afterward, it distributes whatever amount is left according to the deceased’s will.

But if you purchase a life insurance policy and name at least one beneficiary who is alive at the time of your death, then they will receive the policy’s proceeds. This is a direct transfer, meaning the exchange avoids probate altogether.

It’s often in the best interest of the surviving family to avoid the probate process. It’s typically a lengthy and costly series of legal procedures that sort through the deceased’s estate, debt and lines of credit. The court uses funds from the estate to pay any remaining debt following the passing. But by naming a beneficiary, the funds solely belong to the named recipient, meaning the court and creditors cannot touch them. The table shows how different beneficiary choices can affect the death benefit:

Beneficiary Choice	Goes Through Probate?	Reachable by Estate Creditors?	Counted in Taxable Estate?
Named individual	No	Generally no	Yes, if you owned the policy
Your estate	Yes	Yes	Yes
No living beneficiary	Often, depending on the policy and state law	Often	Yes, if you owned the policy
Spouse who is a U.S. citizen	No	Generally no	Yes, but covered by the unlimited marital deduction
Irrevocable life insurance trust that owns the policy	No	Generally no	Generally no, if transferred more than three years before death

Estate Planning for a Life Insurance Policy Without a Beneficiary

Policyholders can name their child as a beneficiary on their lift insurance policy.

There are some unique circumstances to consider when thinking about life insurance, such as issues arising regarding the beneficiary when life insurance is part of an estate. For example, let’s say the life insurance policyholder fails to designate one in the first place, or they suddenly change the beneficiary at the last minute. In the latter situation, the original beneficiary could challenge the change, though insurers generally pay according to the designation on file.

But things can become even more difficult if there’s no designated beneficiary at the time of the decedent’s passing who is alive. So if the decedent’s choice of beneficiary has also passed away at the time of their death, there can be a few different resolutions.

In some cases, the proceeds from the life insurance policy go to the probate estate. There, the estate uses the funds to cover any remaining bills and costs. Other times, the life insurance proceeds pass on to the living heirs-at-law of the policyholder. Heirs-at-law are close relations with a legal entitlement to the deceased’s assets if they died without a will. Depending on state law, going to the heirs-at-law may protect the funds from the estate’s creditors.

Ultimately, though, the insurance company’s payment policy and the local laws based on the estate’s location influence where the insurance money goes.

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Naming a Trust as Your Life Insurance Beneficiary

Ensuring your beneficiaries are well taken care of is a challenge. You want to guarantee they receive what they need and help them make the most of their future benefit. That requires you to minimize the eventual taxes on anything you pass down.

One solution people use to lessen the tax burden on a life insurance payout is to name a trust as the primary beneficiary. In particular, they use an irrevocable trust. Irrevocable trusts are trusts you, the grantor, generally cannot change. Changes are limited and may require approval from the trustee, the beneficiaries or a court, depending on the trust and state law.

For estate tax purposes, the trust generally needs to own the policy, not just be named as its beneficiary. If you transfer an existing policy to the trust and die within three years, the proceeds are still included in your estate. After your death, the designated beneficiary of the trust can take out the funds.

While this means your beneficiary does not directly receive the money, it preserves the amount. This way, the funds may not be subject to estate taxes. But this is at a cost. You cannot touch, amend or borrow from the policy once you transfer it to the trust.

Alternatively, you can use a revocable, or changeable, trust. These provide a little more flexibility, which may be helpful if your circumstances change. And they help loved ones skip probate. However, you still technically own assets in a revocable trust, making them part of your estate. So, a revocable trust does not allow you or your beneficiaries to avoid estate taxes. This may not be an issue for smaller estates that don’t qualify for the estate tax, though. The table compares the two types of trusts:

Feature	Irrevocable Life Insurance Trust	Revocable Trust
Can you change it?	Generally no	Yes
Who owns the policy?	The trust	You
Avoids probate?	Yes	Yes
Removes proceeds from your taxable estate?	Generally yes, if the trust owns the policy	No
Best suited for	Large estates that may owe estate tax	Smaller estates focused on flexibility and avoiding probate

You might not even need a trust ultimately. If you name your spouse as the policy beneficiary, there’s usually no issue, thanks to the unlimited marital deduction. Assets are exchanged between spouses on an estate-tax-free basis as long as the spouse is a U.S. citizen.

Bottom Line

Determining if life insurance can be part of your estate plan can help you make better estate planning decisions.

Life insurance policyholders need to remember one vital thing when naming a beneficiary: be specific. Don’t leave anything up to guesswork. And if you worry that your intended beneficiary may pass, name several. But name each one specifically.

Otherwise, they may have to wait a lengthy amount of time to receive the policy’s death benefit. Or, they might even need to go to probate court to contest if things are too ambiguous. Probate is both long, taking upwards of a year, and costly. If life insurance is part of your estate, you can help your loved ones avoid probate court and any other issues by acting carefully.

Estate Planning Tips

Estate planning can be complicated. However, working with a financial advisor can help simplify the process. Finding a financial advisor doesn’t have to be hard, either. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Our insurance calculator can help determine how much life insurance you need and help you find policies that match your needs.
Most estate plans include a will. But there is much more to the process than that, including more documents. Read SmartAsset’s guide to estate planning vs. wills to help you prepare.