Life insurance for high-net-worth families

A family with substantial wealth rarely needs life insurance to replace income. It uses insurance for other jobs: paying estate taxes and debts without selling assets in a hurry, equalizing inheritances when one heir takes a family business, funding a buy-sell agreement, leaving a legacy to heirs or charity, and creating a guaranteed sum that does not depend on markets. The tool that keeps the death benefit out of the taxable estate is usually an irrevocable trust that owns the policy.

Does estate tax still matter in 2026?

For fewer families than before. The federal estate tax basic exclusion is $15,000,000 per person in 2026, up from $13,990,000 in 2025, set by Public Law 119-21, the 2025 tax law known as the One Big Beautiful Bill Act, and indexed for inflation thereafter, according to the IRS. A married couple can generally shield about twice that amount using both exclusions (portability must be elected by the executor). The annual gift tax exclusion for 2026 is $19,000 per recipient.

That makes the federal tax a concern mainly for estates above those thresholds, but note:

• Death benefits are generally income-tax-free to beneficiaries, but they count in your taxable estate if you own the policy or hold "incidents of ownership." See life insurance and the federal estate tax.
• Some states have their own estate or inheritance taxes with much lower thresholds; see state estate and inheritance taxes and life insurance.
• Estates mostly made of illiquid assets, such as a business, farmland or real estate, can owe tax with no cash to pay it. That gap is estate liquidity: paying taxes and debts without a fire sale.
• Congress can change the exemption. Planning that depends on a specific threshold stays flexible if the policy is easy to adapt.

The estate tax exposure check gives a rough view of where you stand.

What high-net-worth families use insurance for

Keep the policy out of the estate

If you own a policy on your own life, the death benefit is included in your gross estate. An irrevocable life insurance trust (ILIT) removes it:

1. A trust is drafted and signed by the grantor, with an independent trustee.
2. The trust applies for and owns the policy on the grantor's life.
3. The grantor makes annual gifts to the trust, which the trustee uses to pay premiums. Gifts that qualify for the annual exclusion use Crummey notices that give beneficiaries a short window to withdraw the money.
4. At the insured's death the policy pays the trust, which distributes under its terms.

The the three-year rule for transferring a policy matters if you transfer an existing policy: if you die within three years of the transfer, the death benefit is pulled back into your estate. A new policy bought by the trust avoids that. Larger premium gifts may require filing a gift tax return and can reduce your lifetime exemption. See gift tax and life insurance premiums and The Goodman triangle: an expensive ownership mistake, an ownership mistake that creates unexpected gift tax.

Which policy type

• Survivorship (second-to-die) life insures two spouses and pays after the second death, when estate tax on a married couple usually comes due. It is generally cheaper than two single-life policies of the same size. See survivorship (second-to-die) life insurance.
• Guaranteed universal life locks in a death benefit for life with low cash value; it suits a pure legacy goal where you want the lowest guaranteed cost. See guaranteed universal life: permanent coverage without the cash.
• Whole life adds guaranteed cash value and possible dividends; it costs more per dollar of death benefit. See how whole life insurance works.
• IUL and variable universal life attach cash value to market-linked crediting. They carry more risk and complexity, and illustrations can look better than outcomes; read IUL pros and cons: what the sales pitch leaves out and IUL illustrations and Actuarial Guideline 49 first.
• Term still has a role: temporary needs such as a business loan or a few years before a trust is funded.

High earners often compare these to taxable investments. Policy cash value grows tax-deferred, and death proceeds avoid income tax, but the policy has costs and the return on the death benefit falls the longer you live. Be skeptical of any illustration that assumes high, non-guaranteed returns.

Strategies to approach carefully

• Premium financing borrows to pay premiums, betting that policy growth will exceed the loan's cost. It adds interest-rate and collateral risk, and a policy that underperforms can force the borrower to pay in cash. See premium-financed life insurance: how it works and the risks.
• Business-owned policies. In Connelly v. United States (2024), the Supreme Court held that life insurance proceeds a company receives to redeem a deceased owner's shares increase the company's value for estate tax; the redemption obligation does not offset them. Owners with entity-redemption buy-sell agreements should review them with counsel. See cross-purchase vs entity-redemption buy-sell plans.
• Split-dollar and executive bonus plans have specialized tax rules; see split-dollar life insurance.

Questions for your advisors

1. What is my projected taxable estate, federal and state, under current law and if the exemption drops?
2. How much liquidity does my estate need and when?
3. Who will be trustee and how will premiums be funded?
4. What are the policy's guarantees, and what happens if non-guaranteed assumptions fall short?
5. Is the insurer financially strong enough for a policy that may last decades? See AM Best, S&P, Moody's and Fitch ratings explained.

An estate attorney drafts the trust, a CPA reviews tax effects, and an independent advisor who is not paid on the policy sale can help you compare.

Key takeaways

• At $15 million per person in 2026, the federal estate tax reaches fewer families, but state taxes, illiquid assets and business ownership still create real needs.
• Owning a policy personally pulls the death benefit into your estate; an ILIT can keep it out, but mind the three-year rule on transfers.
• Survivorship and guaranteed universal life suit legacy and tax goals; terms and cash-value products serve other jobs.
• Premium financing and market-linked policies add risk; ask for guaranteed figures, not just illustrated ones.
• After Connelly (2024), review any business buy-sell agreement funded with company-owned life insurance.