How to Use Life Insurance as a Tool for Legacy Planning

At a glance

Tax treatment of death benefit

Proceeds are generally received free of federal income tax by beneficiaries

Who most often cites legacy as a reason to buy

Nearly 1 in 3 life insurance owners say leaving money to heirs is a top reason for coverage (LIMRA, 2024)

Permanent vs. term for legacy

Permanent policies last your lifetime and build cash value; term covers a set period at lower initial cost

Beneficiary flexibility

You can name individuals, trusts, or qualifying charities—giving you control over where the money goes

What 'Legacy Planning' Actually Means in Insurance Terms

Legacy planning is simply deciding what you want to leave behind and making sure the money to do it will be there. Life insurance is one of the most direct tools for this because it creates a defined sum of money—the death benefit—that passes to whoever you name at a moment when your family may need it most. Unlike savings accounts or investments, the benefit is available immediately upon a valid claim, without waiting for an estate to settle.

People pursue legacy goals for many reasons: clearing a mortgage so a surviving spouse keeps the family home, funding a grandchild's college expenses, endowing a scholarship, or supporting a nonprofit whose mission matters to them. Life insurance can serve any of these purposes, often more efficiently than setting aside cash during your lifetime, because the full benefit is in force from day one of the policy.

Term Life Insurance: A Starting Point for Many Legacy Goals

Term life insurance covers you for a chosen period—commonly 10, 15, 20, 25, or 30 years—and pays the death benefit only if you die during that term. Because coverage is temporary, term is generally the least expensive way to secure a large benefit for a defined stretch of time. That makes it well suited to legacy goals tied to a specific obligation, such as ensuring a mortgage is paid off or that children are financially independent before the coverage window closes.

If you outlive the term, the policy ends with no cash value returned (unless you chose a return-of-premium option, which costs more). Some term policies include a conversion privilege allowing you to switch to permanent coverage without answering new health questions, within a specified window. Knowing that window before you buy is important if your health could change and you later want lifetime coverage for legacy purposes.

Permanent Life Insurance: Coverage Designed to Last a Lifetime

Whole life and universal life policies are designed to remain in force as long as premiums are paid, making them a natural fit for legacy goals that aren't tied to a deadline. Because the benefit is paid whenever you die—not only within a fixed term—permanent policies are often chosen by people who want to guarantee something will be there for heirs or a favorite cause regardless of how long they live.

Most permanent policies also accumulate cash value over time, which you can access through loans or withdrawals during your lifetime. That feature adds flexibility, though loans and withdrawals reduce the death benefit if not repaid and can have tax implications. A licensed professional can walk you through how cash value growth works for any specific policy type you're considering.

• Whole life: fixed premiums, guaranteed death benefit, predictable cash value growth
• Universal life: adjustable premiums and death benefit, more flexibility but also more responsibility to monitor
• Indexed universal life: cash value growth tied to a market index, with floor and cap limits (see FINRA guidance for details)
• Survivorship life: covers two people and pays when the second dies—commonly used in estate and legacy strategies

Naming Beneficiaries: The Heart of a Legacy Strategy

The death benefit goes to whoever you name as beneficiary—and that designation typically overrides your will. Keeping beneficiary designations current is one of the most important maintenance tasks in any legacy plan. A policy bought decades ago may still name an ex-spouse, a deceased parent, or a child who is now an adult with their own family.

You can name primary and contingent beneficiaries, split percentages among multiple people, or direct proceeds to a trust that controls how and when money is distributed. Charitable organizations can also be named, turning a modest premium investment into a meaningful gift. Review your designations after major life events—marriage, divorce, the birth of a child, or a beneficiary's death.

• Primary beneficiary receives the proceeds first
• Contingent beneficiary receives proceeds if the primary predeceases you
• Per stirpes designation passes a share to a beneficiary's children if that beneficiary dies first
• Minor children usually need a guardian or trust named to manage funds on their behalf
• Charity designations should include the organization's full legal name and tax ID

How Much Coverage Makes Sense for a Legacy Goal?

The right amount depends on what you want to accomplish. A helpful starting point is to list your legacy objectives—pay off the mortgage, fund education, endow a charity, replace income for a spouse—assign rough dollar amounts to each, and then subtract assets already earmarked for those purposes. The gap is roughly what insurance needs to fill.

For income replacement, a common rule of thumb is ten to twelve times annual income, though your specific debts, dependents, and savings may push that figure higher or lower. For charity or estate equalization goals, the target is whatever amount achieves your intended gift. There is no single right answer; the value of working with a licensed professional is getting a calculation tailored to your numbers, not a generic formula.

Understanding the Tax Landscape

Life insurance death benefits are generally received free of federal income tax by beneficiaries, which is one reason the dollar amount you leave can be more predictable than assets subject to capital gains or ordinary income tax. However, large estates may face federal estate tax if the policy is owned by the insured and the proceeds push the estate over applicable exemption thresholds. Strategies such as an irrevocable life insurance trust (ILIT) exist to address this, but they involve legal and financial complexity that goes beyond insurance selection alone.

AskLily connects you with licensed insurance professionals who can explain policy mechanics. For tax strategy involving trusts or estates, you'll also want to work with a qualified tax or legal advisor. These disciplines overlap in legacy planning, and a coordinated approach tends to produce better outcomes than addressing each in isolation.

What to do next

1. Step 1: Clarify Your Legacy Goals Before You ShopWrite down what you want to accomplish—specific people, amounts, or causes. A clear goal makes it much easier to choose between term and permanent coverage and to select an appropriate benefit amount. Vague intentions often lead to either underbuying or paying for features you don't need.
2. Step 2: Gather Basic Financial InformationCollect figures on your outstanding debts, annual income, existing savings, and any coverage you already have through work. This snapshot helps a licensed professional identify the gap your new policy needs to fill and avoids duplicate coverage.
3. Step 3: Connect With a Licensed Insurance ProfessionalLegacy planning involves both insurance and financial decisions that a licensed independent professional is positioned to address. AskLily can connect you with one at no cost to you. They can compare policy types, explain underwriting requirements honestly, and show you how different structures affect the benefit your beneficiaries ultimately receive.
4. Step 4: Review Your Plan PeriodicallyLife changes—and so should your coverage. Marriage, divorce, new children or grandchildren, a significant inheritance, or a change in charitable priorities can all shift what your legacy plan needs to accomplish. Most professionals recommend a review every few years or after any major life event.