Estate Planning with Life Insurance: How to Use Coverage to Protect Your Estate

By Elizabeth Kusmider, CFP®

Estate planning and life insurance planning are often handled separately. An estate attorney drafts the documents, and a financial advisor or insurance agent handles coverage. In my experience, that separation is one of the most common sources of gaps in otherwise well-designed plans.

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I am Elizabeth Kusmider, CFP® and independent life insurance broker. I work alongside estate attorneys and wealth managers as the insurance specialist in an integrated planning team. Here is how life insurance fits into estate planning, where it creates the most value, and how to make sure the two are actually working together.

What Life Insurance Does in an Estate Plan

Life insurance serves three distinct functions in estate planning, and the right approach depends on which problem you are trying to solve.

Providing Liquidity for Estate Taxes and Costs

Federal and state estate taxes are due in cash, typically within nine months of death. For estates that are wealthy in illiquid assets (a closely held business, real estate, private investments), finding that cash without selling something at a disadvantageous time is a real problem.

A properly structured life insurance policy solves the liquidity problem directly. The death benefit arrives when it is needed, provides cash without requiring asset sales, and does so outside the taxable estate when held in an irrevocable life insurance trust.

Additionally, for Illinois residents specifically, state estate taxes apply at a lower threshold than federal, around $4 million, making liquidity planning relevant at a lower wealth level than most people assume.

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Equalizing Inheritances

Business owners passing a company to one child while treating other children equally face one of the most common estate planning dilemmas. Leaving the business equally to all children typically creates conflict and operational dysfunction. Leaving it only to the child who runs it can feel inequitable to everyone else.

Life insurance provides the tool to equalize without disrupting the business. The active child receives the business interest. Other children receive a comparable benefit through the life insurance proceeds. The estate is divided fairly, and the business continuity is preserved.

Funding Legacy Goals

For clients who want to leave a meaningful inheritance or a charitable gift regardless of how their investment portfolio performs in their final years, permanent life insurance provides a guaranteed result. The death benefit does not depend on market conditions, sequence of returns, or how long you live. It is a contractual obligation from a financially rated insurance carrier.

The Tools Used in Estate Planning with Life Insurance

Irrevocable Life Insurance Trust (ILIT)

An ILIT holds the life insurance policy outside your taxable estate, meaning the death benefit is received by the trust's beneficiaries without being reduced by estate tax. It is the primary vehicle for large death benefits in estates with estate tax exposure. For a deeper explanation of how ILITs work, see my post on life insurance trusts and when you need one.

Permanent Life Insurance

Estate planning applications almost always require permanent coverage: whole life, universal life, or indexed universal life. The reason is simple: estate planning needs do not expire. You do not know when you will die, and the liquidity need, the inheritance equalization, or the legacy goal exists regardless of timing. Term coverage cannot guarantee the death benefit will be there, which makes it unsuitable for planning that depends on a certain outcome.

Split Dollar Arrangements

In some business and estate planning contexts, split dollar arrangements allow the cost of a life insurance policy to be shared between an employer and an employee, or between a business and a shareholder. These arrangements can be effective tools for executive benefit planning when designed correctly, and they interact with estate planning in ways that require careful coordination.

What Can Go Wrong When Insurance and Estate Planning Are Not Coordinated

The most common failure mode I see is an estate plan that assumes a certain death benefit will be available, paired with a life insurance policy that is structured incorrectly to deliver it.

• A policy owned personally rather than by a trust, resulting in the death benefit being included in the taxable estate
• A beneficiary designation that names the estate directly, routing the proceeds through probate rather than directly to beneficiaries
• A term policy that expires before the estate planning need is resolved
• Coverage amounts that were set at policy inception and never updated as the estate grew
• An ILIT that was established but never funded because the premium gifting process was not properly maintained

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Each of these is a fixable problem, but only if someone is reviewing the insurance and the estate documents together. That is the coordination I provide.

The Role of the Insurance Specialist in Your Advisory Team

Estate planning works best when the attorney, the wealth manager, and the insurance specialist are working from the same set of facts and toward the same outcome. My role in that team is to handle the insurance piece with the same rigor that the attorney brings to the legal documents and the wealth manager brings to the investment strategy.

If you have an estate plan in place and are not certain whether the insurance component is designed to support it correctly, that review is worth scheduling. The gap between the legal plan and the insurance behind it is exactly where well-intentioned plans fall short.

Elizabeth works closely with wealth managers and estate attorneys to bring insurance planning into broader client conversations. We are here to help make that process simple, not stressful. To schedule a planning session or discuss a client situation, reach out to Elizabeth Kusmider, CFP® at info@kusmiderconsulting.com.

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