Could you benefit from considering insurance as part of your overall portfolio strategy?
It’s hard to argue with the basic benefit associated with permanent life insurance—providing coverage and benefits to your loved ones if you die. However, life insurance can do more than just insure your life. Whole life insurance, in particular, has powerful additional benefits. These include favorable tax treatment upon death, liquidity and tax-deferred asset growth during your life.
Yet, this is a complex topic, and wealthy individuals and families could be at risk of paying more in tax than they need to if the policies are not suited to their needs.
“To make sure you get the most out of a whole life insurance policy, it helps to build out a policy with regard to your overall portfolio strategy and the structure of your estate plan,” says Charles Bosch, regional fiduciary manager for Regions Private Wealth Management. Here’s how to start thinking about a policy that could work for you.
Powerful tax benefits
Here’s an overview of the tax benefits associated with whole life insurance:
- Tax-deferred asset growth. Because the cash value of a whole life insurance policy is not taxed, the money in the policy compounds faster.
- Estate tax-free death benefit. Importantly, the life insurance proceeds will be free from estate tax if the policy ownership is structured properly. The key is to keep the life insurance policy outside of the insured’s estate. That way, the death benefit will not go through the probate process and will not be subject to estate tax, which could be substantial if an individual’s taxable estate exceeds the estate tax threshold.
The federal estate tax exemption currently is $13.61 million for an individual and $27.22 million for a couple. However, those exemptions are currently scheduled to be cut in half on January 1, 2026. Anyone who might be subject to estate tax once the exemption is cut should seek guidance from estate planning professionals now, while they still have time to make adjustments.
Using an insurance trust
One of the best ways to keep the life insurance policy ownership outside of one’s estate is through an irrevocable life insurance trust (ILIT), Bosch advises. With an ILIT, the trustee owns the policy and receives the death benefit.
“Additionally, you can structure the terms of the trust to care for the beneficiaries for a set number of years, for a lifetime or even for successive generations,” Bosch says. “And with the appropriate language incorporated into the trust document, those funds will be protected from creditors.”
Tapping into liquidity
Liquidity can be a major consideration when someone passes. The bereaved family members will have much to think about and manage while grieving the deceased. Life insurance death benefits paid to an ILIT can be available tax-free relatively quickly for use by the trust’s beneficiaries.
The availability of a cash inheritance can also serve as a powerful and effective tool to help equitize the inheritance left to the insured’s beneficiaries. Take, for example, a business owner who has three children, only one of whom has a desire to keep the business in the family. In that case, the insurance policy could provide an equivalent value to the other two children.
Tax-free asset growth even more attractive after the SECURE Act
Reviewing the use of life insurance as a powerful way to grow assets, it generally compares favorably to the use of a traditional IRA or Roth IRA in several ways. Unlike those dedicated retirement products, a whole life insurance policy is available to anyone at any income level, and the amounts that can be saved and can accumulate tax-free are potentially far greater.
The SECURE Act established another important difference. It eliminated the stretch IRA for non-spouse beneficiaries. Instead of being able to make IRA withdrawals over their entire life expectancy, non-spouse beneficiaries (with some exceptions) must deplete the account in 10 years.
Many considerations call for experienced guidance
Estate planning is an inherently complex area. And the use of life insurance within an estate plan should be planned and managed with expert guidance. There are numerous considerations to be aware of.
“It’s important to have the right type of policy and make sure you have the right amount of coverage,” Bosch says. “We’ve seen clients with policies from decades ago with a $20,000 death benefit. That might have seemed a lot 30 years ago, but it won’t do much more now than pay for your funeral.”
At the other extreme, a $10 million policy might seem like a great idea, allowing for immense potential benefits. However, the high premium may be so burdensome, you let the policy lapse.
Review your estate planning needs regularly
Because people’s life situations and financial status change over time, it’s important to treat insurance use and estate planning as an ongoing consideration. Review your plans regularly, at least every few years, to make sure your coverage remains appropriate. And work with trusted advisors.
Talk to your Regions Wealth Advisor about:
- How a whole life insurance policy could fit into your current financial plans.
- Whether your estate plan should be reviewed ahead of the 2026 tax changes.
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