Over our lifespan, the needs for life insurance can change dramatically. Early in your adult life, as you begin a career and start a family, there is a need to protect your family against loss of income and additional costs due to a premature death. In midlife, there is often a need to protect your survivors against loss of leveraged assets (i.e., a mortgaged home) in addition to a loss of income.

Finally, for the mature estate, there is a need to protect the equity that you’ve worked hard to accumulate over your lifetime. This article will address that final need—protecting your estate.

Varying Needs for Insuring the Mature Estate

Life insurance needs vary depending on the nature of the estate, not necessarily the size of the estate. Those needs include avoiding the transfer of debt to heirs, facilitating the transfer of closely held business interests, balancing inheritances among beneficiaries, and providing liquidity for estate taxes and settlement costs.

Avoid Passing on Debt to Your Heirs

Common debts such as home mortgages, car loans, and credit card balances are often overlooked and can significantly reduce the liquidity and value of even a modest estate. Debt related to highly leveraged assets or business interests, such as real estate investments or a used car lot, can place a significant burden on those inheriting those assets. Life insurance can provide the funds necessary to satisfy these obligations without forcing heirs to liquidate assets.

Transfer of Closely Held Business Interests

Business interests are typically not liquid, which can create challenges when an owner passes away. In multi-owner businesses, such as partnerships and corporations, buy-sell agreements often require substantial cash outlays by either the business itself (through a redemption agreement) or the surviving owners (through a cross-purchase agreement). Life insurance is frequently used to provide the liquidity needed to fulfill these obligations while allowing the business to continue operating smoothly.

Balancing Distributions to Heirs

Estates are generally divided into equal shares among heirs at a given relationship level, most commonly the children. If there is a surviving spouse, the division may occur upon the spouse’s death rather than at the death of the first spouse.

For estates where a substantial portion of the value is concentrated in one or a few illiquid assets—such as a business or real estate holdings—equal distribution can become difficult. In some cases, heirs may receive partial interests in the same asset despite having very different goals.

Example:

• Five children each inherit a 20% interest in a parent’s wholly owned S Corporation.
• Two children actively work in the business and prefer higher salaries and retaining earnings for future growth.
• The other three children prefer receiving dividend distributions.
• The result can be family conflict and, ultimately, a need for the two active owners to buy out the other three.

Life insurance can help address this issue by providing cash that can be distributed to some heirs while allowing other heirs to retain ownership of the business or other illiquid assets.

Providing Liquidity for Estate Taxes and Settlement Costs

For very large estates that may be subject to estate taxes, life insurance can provide an important source of liquidity.

The current federal estate tax rate is 40% on every dollar that the taxable estate (increased by prior taxable gifts) exceeds the exemption amount ($13.99 million for 2025). In addition, twelve states, including Connecticut and the District of Columbia, impose separate estate taxes.

Probate fees can also be substantial and vary by state and local jurisdiction. Connecticut currently caps probate fees at $40,000 for estates in excess of $8.877 million. Legal fees and other estate settlement costs can further reduce the value ultimately received by heirs.

Insurance and Who Should Own It

The cash needs discussed above can cause an estate to become illiquid if there is no life insurance—or not enough life insurance—available at death. However, determining who should own the policy is an important part of the planning process and depends largely on the intended purpose of the insurance.

For large estates that may be subject to estate taxes, life insurance should generally be owned in a manner that keeps the death benefit outside of the taxable estate. Insurance owned by the decedent is typically includable in the taxable estate, which can increase the estate tax liability and create a need for even more insurance.

If there is a surviving spouse, insurance owned by that spouse is generally excluded from the decedent’s estate while still being available to provide liquidity if needed. Another commonly used strategy is the use of an Irrevocable Life Insurance Trust (ILIT), which can keep insurance proceeds outside of the taxable estate while preserving their intended benefit. (ILITs will be discussed in a future article.)

For estates that are not subject to estate taxes, ownership considerations are often less restrictive, although an ILIT may still provide benefits. For example:

• Policies intended to pay common debts may simply be owned by the insured.
• Policies designed to cover leveraged debt may be owned by the insured and made payable directly to creditors.
• Policies used to facilitate business succession may be owned by the business under a redemption agreement or by co-owners under a cross-purchase agreement.
• Policies intended to balance inheritances among heirs may be owned by the insured or by an ILIT.

Final Thoughts

The use of life insurance in estate planning can be complex, but it is also one of the most flexible tools available for preserving wealth, protecting heirs, and providing liquidity when it is needed most. Properly structured life insurance can help ensure that your estate plan achieves your goals while minimizing burdens on your family and beneficiaries.

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