How to Use Life Insurance to Pay Estate Taxes in 2025

*Preserve Your Legacy. Protect Your Family. *

For high-net-worth individuals and families, estate taxes can quietly erode a legacy built over decades. While federal and state estate taxes only affect estates above certain thresholds, those who are affected often face **millions in potential tax liability**. The good news? **Life insurance**—specifically, **permanent life insurance**—offers a strategic solution to cover estate taxes **without draining your assets**.

Here’s how it works—and how you can use it to protect your heirs in 2025 and beyond.

💡 What Are Estate Taxes in 2025?

As of 2025, the **federal estate tax exemption** is projected to **decrease** due to the sunset of the Tax Cuts and Jobs Act. This means:

* More estates may become **taxable**
* The **40% federal estate tax rate** will apply to any value above the exemption
* **State estate taxes** may also apply (e.g., New York, Massachusetts)

If your estate exceeds the federal exemption (likely between **\$6–7 million per person** in 2025), your heirs could face a **significant tax bill** within 9 months of your death—whether they have liquid assets or not.

🛡️ How Life Insurance Can Help Pay Estate Taxes

Using **life insurance** as a tool to pay estate taxes is a common and effective wealth preservation strategy. Here’s how it works:

1. **Permanent Life Insurance Policy**

Purchase a **whole life** or **universal life** insurance policy with a death benefit sized to cover the anticipated estate tax liability.

2. **Ownership by an Irrevocable Life Insurance Trust (ILIT)**

To keep the policy *outside* your taxable estate:

* You set up an **ILIT**, which owns and pays for the policy
* Upon death, the **death benefit is paid tax-free** to the trust
* The trust then pays the estate taxes directly or loans the funds to your estate

3. **Preserves Your Legacy**

Instead of your heirs being forced to sell property, businesses, or investments to cover estate taxes, the insurance proceeds **provide immediate liquidity**—giving your family breathing room and preserving wealth for the next generation.

✅ Benefits of Using Life Insurance to Pay Estate Taxes

* **Tax-Free Death Benefit**
Life insurance proceeds are income-tax free and, when structured properly, estate-tax free.

* **Avoid Forced Liquidation**
No need to sell valuable or illiquid assets (e.g., real estate, businesses) quickly at a discount.

* **Control and Flexibility**
You can structure how and when heirs receive money through the trust.

* **Peace of Mind**
Your legacy and wishes are protected regardless of future tax changes.

⚠️ Risks and Considerations

* **Proper Structuring Is Critical**
If the policy is owned in your name, it **will be included in your estate**. Use a trust to keep it out.

* **Premium Costs**
Permanent policies have higher premiums, but this is often outweighed by tax savings.

* **Changing Tax Laws**
Estate tax thresholds and rules are subject to change. Regular policy reviews are essential.

🏁 Is It Right for You?

This strategy is ideal if you:

* Expect your estate to exceed the federal or state tax exemption
* Own illiquid assets like real estate or a family business
* Want to ensure a smooth, tax-efficient transfer of wealth

Working with a fiduciary advisor experienced in **estate planning and life insurance** is essential.