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 Texas, life insurance is a legally binding contract where the policyholder pays premiums in exchange for a lump-sum death benefit to beneficiaries upon the policyholder's death or after a certain period. Beneficiaries typically receive the death benefit free from federal income taxes, providing financial security for expenses and income replacement. However, under Section 2042 of the Internal Revenue Code, life insurance proceeds may be included in the decedent's gross estate for estate tax purposes if the decedent had incidents of ownership in the policy or if the proceeds are payable to the estate. The landscape of life insurance in Texas includes various products such as term life, whole life, universal life, and other specialized policies. Each type offers different features and coverage options. Given the complexity of life insurance and its potential estate tax implications, individuals in Texas may benefit from consulting with an attorney specializing in estate planning or a financial advisor to navigate these issues and make informed decisions about their life insurance policies.