There is a way to avoid (not evade) taxing these proceeds, however, via an estate-planning tool called the Irrevocable Life Insurance Trust (“ILIT”). By having a designated trustee of this very specific trust own the life insurance policy, you can ensure that its proceeds will be available tax-free to your family.
By transferring a life insurance policy into an irrevocable trust, or funding the trust with cash for the purpose of purchasing a life insurance policy on the settler of the trust, the settlor gives up all control over the policy and the insurance proceeds are not included in the gross estate.
However, there is a little-known IHT loophole that does not have a set limit or post-gift survival requirement, known as 'Gifts for the Maintenance of Family'. Any gift that qualifies under this loophole is exempt from IHT. If HMRC decide that the gift was larger than reasonable, the reasonable part is still exempt.
The 'seven-pay test' simply refers to how the government determines if your life insurance becomes a MEC. This test generally limits how much you as a policyholder can deposit each year during the first seven years of your policy.
An irrevocable life insurance trust (ILIT) is one option. It removes the policy from your estate, ensuring that the death benefit passes to your beneficiaries free of estate tax.
Is life insurance part of an estate? The value of your life insurance policy will form part of your estate unless you've written your life insurance policy 'in trust'. If this is the case, the amount the policy pays out wouldn't be counted as part of your estate for Inheritance Tax purposes.
To avoid being declared a modified endowment contract, a life insurance policy must meet the “7-pay” test. This test calculates the annual premium a life insurance policy would need to be paid up after seven level annual premiums. (When a life insurance policy is “paid up,” no further premiums are due.)
How much does life insurance for seniors cost? The average cost of a $500,000, 20-year term life insurance policy for a 70-year-old nonsmoking man is $9,702 per year. For women, this type of policy can cost $7,994 per year.
Many people in their 60s and 70s may no longer need life insurance. They may have already paid off the house, stopped working, sent the kids off to care for themselves or accumulated enough assets to offset the need for life insurance. But sometimes buying or maintaining a life insurance policy over age 60 makes sense.
However, estates that might exceed that amount should be aware of the IRS' three-year "clawback" rule, which mandates that any assets transferred out of your estate within three years of your death be counted as part of your estate for tax purposes.
Give more money away
Lifetime gifting is a straightforward way to begin reducing your IHT bill. By gifting money during lifetime, that would have been part of an inheritance anyway, you reduce the size of your estate so that there is smaller amount subject to IHT on your death.
Wealthy family buys stocks, bonds, real estate, art, or other high-value assets. It strategically holds on to these assets and allows them to grow in value. The family won't owe income tax on the growth in the assets' value unless it sells them and makes a profit.
Every individual has a basic Inheritance Tax (IHT) threshold of £325,000, known as the Nil Rate Band. Assets below this value generally pass to beneficiaries free of tax. If the estate is worth more than that, IHT at 40% usually applies on the excess, unless exemptions or reliefs reduce the amount due.
In 2025, the first $13,990,000 of an estate is exempt from federal estate taxes, up from $13,610,000 in 2024. Estate taxes are based on the size of the estate. It's a progressive tax, just like the federal income tax system. This means that the larger the estate, the higher the tax rate it is subject to.
Generally, life insurance proceeds you receive as a beneficiary due to the death of the insured person, aren't includable in gross income and you don't have to report them. However, any interest you receive is taxable and you should report it as interest received.
Life insurance is one of the most important long-term financial planning tools you can consider. A life insurance policy can protect loved ones while bringing you some much-needed peace of mind and financial benefits. By placing a life insurance policy in a trust, it may be possible to shelter assets from estate taxes.
Berkshire Hathaway owns companies like GEICO and General Re, and it invests heavily in life insurance operations. Insurance is not just a side business for Buffett. It is the foundation of his success. Buffett understands that insurance is about managing risk fairly and building trust.
With that in mind, in my opinion, the only type of life insurance that makes sense is term, which is good for a specific period of time. The premium is based on your age, gender, health, the death benefit desired, and the term.
Whole life insurance builds cash value, but here's the catch: It can take years—sometimes over a decade—before the cash value grows into a meaningful amount. Initially, most of your premiums are allocated to fees, commissions, and insurance costs.
With Colonial Penn, they express their life insurance availability in terms of units or a unit of coverage. A unit is the amount of coverage / death benefit that $9.95 per month pays for. For example, a single unit of coverage (i.e. $9.95 per month) will buy $1,515 in death benefit for a 53-year-old man.
Core Ramsey Teaching: You only need life insurance while you have people depending on your income. Buy a 10–20-year term policy worth 10–12 times your annual income.
Whether it's term or permanent insurance, the golden rule is to get the coverage amount correct. To get the proper amount of benefit so the family is taken care of.
Your $500,000 can give you about $20,000 each year using the 4% rule, and it could last over 30 years. The Bureau of Labor Statistics shows retirees spend around $54,000 yearly. Smart investments can make your savings last longer.
If a policy has an outstanding loan at the time of a 1035 exchange that is not paid off or carried over to the new policy, the IRS will treat the loan as "boot," taxable as ordinary income to the extent of the gain.