Stop Buying Huge Life Insurance Policies In Your Own Name!

​By Attorney Kelly Jesson

You’re working hard, building wealth, and, because you're a responsible person, you've purchased a large life insurance policy to protect your family when you're gone.  While that's admirable, this is one of the most common planning errors we see among high-net-worth individuals. They do everything right in terms of getting the life insurance, but the way they structure ownership quietly sets their heirs up for a significant, and often completely avoidable, tax bill.

Here's what many affluent individuals don't realize: when you die owning a life insurance policy, the death benefit gets included in your taxable estate, even if you name a beneficiary.

Think about that for a moment. You purchase a $5 million life insurance policy to take care of your family. You pay the premiums. The policy is in your name. You are the owner.  You name your kids as the beneficiaries.  And when you pass away, the IRS considers that $5 million to be part of your estate, along with your home, investment accounts, business interests, retirement, etc., even though the money goes to your kids.

If your estate is already large, adding a $5 million life insurance death benefit could push you into federal estate tax territory or deepen the tax burden significantly if you're already there.

As of 2026, the federal estate tax exemption is $15 million per individual ($30 million for married couples using portability). For most people, that is a large, unreachable number.  But it’s certainly easier to hit if you add a $5 million (or larger!) life insurance policy to your portfolio.  At your death, if your estate exceeds the exemption threshold, the federal estate tax rate is 40% on every dollar above the limit.

A $5 million life insurance policy owned in your name could generate $2 million in federal estate taxes that would not have existed if the policy had been structured correctly.

Even worse, if you had purchased that life insurance policy in order to pay estate tax so your family wouldn’t have to liquidate real estate or business interests, now you have $2 million less with which to pay said tax.

The good news is that this problem has a well-established, time-tested solution: an Irrevocable Life Insurance Trust, commonly called an ILIT.  Instead of owning the life insurance policy yourself, the trust is the policy owner, the trust pays the premiums, and the trust is the beneficiary of the death benefit, which means that it is not part of your estate when you pass away.  The trust can then distribute funds to your heirs according to the terms you establish.

While it’s not impossible to transfer an existing policy to an ILIT, it is a lot trickier (because you are “gifting” some present value and there’s a three-year look back period), which is why we are always disheartened to begin working with a high net worth individual only to learn that they were just sold a large insurance policy. Or even worse if they purchase the policy after they start working with us without telling us about it! The latter example is one of the reasons why we have an annual estate planning Legacy Care Club so we can stay in routine contact with our clients and their trusted advisors.

To summarize, for high-net-worth individuals, large life insurance policies can sometimes do more harm than good.  Additionally, it is important to involve your estate planning attorney (a fiduciary) in important decisions like this.  The better approach is to have the ILIT purchase the policy from the start.

Please give Jesson & Rains a call if you’d like to talk about whether an ILIT makes sense for your situation. You should review any existing policies to ensure your strategy to protect your family does not end up costing them a fortune.