Life insurance is a contract in which a policyholder pays regular premiums in exchange for a lump-sum death benefit paid to the policyholder's beneficiaries. The lump-sum benefit is paid when the policyholder either passes away or a specific amount of time has passed.

Life insurance policies can provide financial security for surviving family members by replacing lost income and covering expenses. The relatively prompt payment of the policy proceeds directly to the named beneficiary (often a surviving spouse) and their exemption from federal income taxes make life insurance an attractive investment for some people.

But despite being exempt from federal income taxes, life insurance proceeds may be included in a deceased person's (decedent's) gross estate and may be subject to estate taxes. Section 2042 of the Internal Revenue Code (26 U.S.C. §2042) states that the value of life insurance proceeds insuring your life are included in your gross estate if the proceeds are payable: (1) to your estate, either directly or indirectly, or (2) to named beneficiaries if you possessed any incidents of ownership in the policy at the time of your death.

Laws and Internal Revenue Service (IRS) interpretations may change at any time and a person who owns or is considering purchasing a life insurance policy may want to consult with an estate planning lawyer or financial advisor to try to avoid having the policy included in their gross estate at death.

Types of Life Insurance Policies

There are a number of different types of life insurance policies (sometimes referred to as products)—all of which generally fall under the categories of term life insurance and whole life insurance. The names and terms of different life insurance products in these two categories vary from one insurance company to another.

Some examples of life insurance products include:

• term life insurance

• whole life insurance

• universal life insurance

• indexed universal life insurance

• guaranteed universal life insurance

• variable life insurance

• variable universal life insurance

• hybrid life insurance with long term care

• group life insurance

• mortgage life insurance

• credit life insurance

• joint life insurance

• simplified issue life insurance

• guaranteed issue life insurance

• accidental death and dismemberment insurance

In South Carolina, life insurance is a contract where the policyholder pays premiums for a death benefit to beneficiaries upon the policyholder's death or after a certain period. These proceeds are generally not subject to federal income taxes, providing financial security for families by replacing income and covering expenses. However, under Section 2042 of the Internal Revenue Code, life insurance proceeds may be included in the decedent's estate for estate tax purposes if the decedent had incidents of ownership in the policy or if proceeds are payable to the estate. Life insurance products in South Carolina include term life, whole life, universal life, and various other types, each with different terms and conditions. Policyholders and potential buyers should consult with an attorney or financial advisor to navigate estate planning and tax implications associated with life insurance policies.