In most cases, life insurance proceeds become part of your estate and are potentially subject to the inheritance tax. The good news is that most people won’t have to pay estate taxes.
When do life insurance proceeds become part of your estate?
There are two primary ways your life insurance payout can become part of your estate. If you want to read the technical details, start with Internal Revenue Code 20.2042-1.
Your estate is your life insurance policy beneficiary.
The first way is simple. If you designate your life insurance proceeds to be paid to your estate, they’ll become part of your estate.