Life Insurance

Life Insurance

Are the proceeds/value of term life insurance includable in the owner's estate for estate tax purposes? If I purchase a $500,000 term life insurance policy, with myself as the owner, with my spouse as the beneficiary, what would be the tax consequences?


Life insurance is included in the insured's estate if the insured owned the policy, named his/her estate as beneficiary, or retained "incidence of ownership" (e.g. the right to change beneficiaries). The type of insurance product (whole live, universal, term, variable, etc.) does not affect this. If you purchase life insurance and own the policy and name your spouse as beneficiary the policy will be included in your taxable estate, but your estate will receive an estate tax unlimited marital deduction (if your spouse is a United States citizen) for the value of the policy passing on your death direct to your surviving spouse. On the second death (what if you both die together or your spouse pre-deceases you?) a state or federal estate tax will be due if your taxable estate exceeds the then available exclusion. Apart from taxes, how will the insurance proceeds be protected from a new spouse? Lawsuits? Mismanagement? An insurance trust might be a safer bet. See The Complete Book of Trusts (John Wiley & Sons, Inc.) for more information.

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