Wealth Insights

The tax benefits of whole life insurance

Could you benefit from considering life insurance as part of your overall portfolio strategy?

Key takeaways

• The tax benefits of whole life insurance and other types of permanent life insurance can include tax deferred cash value growth and a generally income tax free death benefit when structured properly.
• Permanent life insurance may play a strategic role in estate planning by providing liquidity and supporting wealth transfer goals.
• Policy design and ownership structure are critical to realizing tax advantages and avoiding unintended tax consequences.

The primary purpose of life insurance is straightforward—providing coverage and benefits to your loved ones if you die. However, life insurance can do more than just insure your life.

It’s important to note that there are many forms of permanent life insurance—such as universal life, variable life and hybrid variable universal life policies—that can offer similar tax advantages to whole life insurance and, in many cases, greater flexibility. The most appropriate structure depends on an individual’s goals, risk tolerance and overall portfolio strategy.

Selecting and structuring the right policy can significantly impact outcomes, as the array of options can add complexity. “To make sure you get the most out of a 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.

Tax benefits of life insurance

Here’s an overview of some of the tax benefits associated with permanent life insurance.

• Tax advantaged asset growth. The cash value within a permanent life insurance policy generally grows on a tax deferred basis, which may allow assets to compound more efficiently over time when the policy is properly structured and maintained.
• Potential for an estate tax efficient death benefit. When life insurance is structured correctly and owned outside of the insured’s taxable estate, the death benefit may, in certain cases, pass to beneficiaries without being subject to estate taxes, depending on individual circumstances and applicable law.
• Settling other taxes. Even if an estate is not subject to federal tax, it might face state-level estate taxes, or the estate may consist of illiquid assets (like a business, real estate or artwork). Life insurance provides liquidity to help pay these taxes or debts without forcing the sale of assets.

Under current federal law, the estate and gift tax exemption is approximately $15 million per individual, up from $13.99 million in 2025. This higher exemption level will be indexed annually for inflation starting in 2027.

While the increased exemption may reduce estate tax exposure for many families, high‑net‑worth individuals, business owners, and multigenerational households could still benefit from intentional estate planning. Properly structured life insurance can continue to play an important role in providing liquidity, supporting legacy goals and helping address estate settlement needs even when federal estate taxes are not expected to apply.

Whole life insurance, issued by an insurance carrier, typically offers guaranteed level premiums and a minimum guaranteed cash value as defined in the policy and backed by the insurer’s financial strength and claims-paying ability. Any additional cash value growth may rely on dividends, which are not guaranteed. Although this structure might provide predictability, tradeoffs may include higher upfront costs, limited liquidity in early years, and lower potential returns compared to some alternative options. However, for those who value flexibility or investment customization, universal life and variable life policies may be more desirable.

• Universal life insurance generally provides adjustable premiums and death benefits, which can be useful as income and liquidity needs evolve.
• Variable life insurance may allow cash value to be invested in market based subaccounts, offering growth potential along with greater risk.
• Hybrid variable universal life policies generally combine policy flexibility with investment choices and are often used by high net worth individuals as part of a broader wealth strategy, though they involve added complexity and risk.

Using an insurance trust

For high-net-worth individuals, using part of the estate tax exemption to fund a permanent life insurance policy—such as whole life, universal life, variable life, or hybrid variable universal life—could lock current high exemptions and, if structured properly, remove the growth and proceeds from future taxable estates.

One of the most common 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 may offer protection from creditors, depending on applicable law and trust structure.”

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 could 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 ensure a fair distribution of the assets 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.

Long-term care and policy riders

Many permanent life insurance policies now offer extra cost riders that allow for early access to the death benefit for long-term care needs, which may provide additional flexibility as you age. Talk with your advisor about the options available to you.

A changing landscape for legacy planning

Reviewing the use of life insurance as a powerful way to grow assets, it generally compares to the use of a traditional IRA or Roth IRA in several ways . Unlike those dedicated retirement products, a permanent life insurance policy is available to anyone at any income level (subject to underwriting and eligibility requirements).

Federal legislation, including the SECURE Act and subsequent enhancements under SECURE 2.0, significantly altered how inherited retirement accounts are treated. For most non spouse beneficiaries, the ability to stretch distributions over a lifetime has been replaced with shorter distribution timeframes, which could result in accelerated income tax exposure.

These changes have prompted many families to reassess how retirement assets fit into their broader estate and legacy plans, particularly when balancing tax efficiency, liquidity needs and beneficiary outcomes.

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 professional 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 like a lot 30 years ago, but it won’t do much more now than pay for your funeral.”

At the other extreme, a policy with more coverage than needed might seem like a great idea, but the premiums will be higher and the policy may lapse if required payments are not maintained.

Review your estate planning needs regularly

Because people’s life situations and financial status change over time, it’s important to treat life insurance coverage and estate planning as an ongoing consideration. Review your plans with your estate attorney regularly, at least every few years, to make sure your coverage remains appropriate, and coordinate with your financial advisors.

Talk to your Regions Wealth Advisor about:

• How a life insurance policy could fit into your current financial plans.
• Your estate plan and whether big life changes require an update that your advisor can coordinate with your estate attorney.

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