Tax Planning with Life Insurance Life insurance, typically in the form of a universal life or whole life policy, can help families provide funding to pay estate taxes and provide other benefits for protecting wealth. When people think about life insurance, they generally envision how it will help those they leave behind. Life insurance can let you pay for a child's future college education, provide a retirement fund for your spouse, or simply make sure your survivors have the money to live the lifestyle you want for them.Proper tax planning should do two things: reduce your taxes while you are alive, as well as after you die. Creative strategies using permanent or universal life insurance give you the potential to cover these two bases at once. Life insurance gives you the ability to transfer a policy's death benefit income-tax-free to beneficiaries and also build up tax-deferred growth of cash inside the policy. It is important to know that if you hold any incidents of ownership in an insurance policy at the time of your death, the proceeds from that insurance policy will be included in your taxable estate. Likewise, if you gift away an insurance policy within three years of your death, then the proceeds from that policy will be pulled back into your taxable estate. To avoid having the policy included in your taxable estate, someone other than you, e.g., a beneficiary or a trust, should be the owner. The same is true if you have enough wealth that you expect your estate to be taxed, at either the state or the federal level, you may want to consider more advanced strategies such as using life insurance in a trust.Universal and permanent life insurance are two of the most powerful tax planning tools you can find. They offer several unique ways to address your estate tax and income tax liabilities while resolving those tax issues for pennies on the dollar.