Mastering Life Insurance: Risks, Tax Implications, and Estate Planning

January 21, 2026

The Heckerling Institute on Estate Planning recently hosted a pivotal session titled “From Soup to Nuts: Life Insurance Fundamentals – Risks and Products, Income and Transfer Taxes.” Expert panelists Donald O. Jansen, Mary Ann Mancini, and Lawrence Brody delved into essential life insurance topics and associated regulatory compliance requirements.

Understanding Life Insurance Risks

Lawrence Brody opened the discussion on the risks facing permanent life insurance policies today. These products are subject to investment, credit, and pricing risks, necessitating active management over a simple "buy and hold" approach. The performance relies heavily on factors like investment returns, crediting rates, dividends, mortality rates, and expense assumptions, impacting underwriting and claims processes.

Brody advised against over-relying on policy illustrations, which often project performance based on static assumptions, potentially leading to underperformance. He recommended hypothetical models and regular, stress-tested re-illustrations with conservative assumptions to ensure the policies align with actual performance. This approach is essential for effective risk management and regulatory compliance.

Tax Implications and Regulatory Compliance

Donald Jansen discussed favorable tax treatments within the Internal Revenue Code, cautioning against potential pitfalls in life insurance structuring. While death benefits usually avoid income tax, they can become taxable if policies are improperly structured or transferred, impacting provider and payer agreements. Jansen explained exceptions like accelerated death benefits and modified endowment contracts (MECs) under federal tax law.

He also elaborated on the "transfer for value" rule and employer-owned life insurance (EOLI), which carry significant tax implications and compliance requirements. Policy ownership changes and structuring must be evaluated carefully to avoid unintended tax outcomes.

Estate Planning Considerations

Mary Ann Mancini explored life insurance's transfer tax implications, focusing on ownership, funding, and trust design impacts on gift, estate, and generation-skipping transfer taxes. She emphasized proper structuring of irrevocable life insurance trusts (ILITs) to meet technical requirements for premium gifts and qualify for annual exclusions, crucial for maintaining regulatory compliance.

Mancini highlighted risks like estate tax inclusion and valuation concerns, particularly when policy ownership or control changes occur within three years of death. She recommended aligning policyholder decisions with family and business contexts to mitigate these risks, underscoring the importance of proactive risk management and claims processing strategies.

The session underscored life insurance as a complex planning tool, necessitating careful structuring and compliance with intricate legal frameworks. Coordination among advisors is crucial to optimize effectiveness and maintain alignment with regulatory compliance requirements within the insurance industry.

Katie Coeyman
Tax and Estate Planning Attorney, Schechter