Life insurance inclusion refers to whether life insurance policy values or death benefits are included in the insured's taxable estate or taxable income under various tax rules. For estate tax purposes, inclusion is governed primarily by IRC Section 2042, which includes death benefits in the estate if they are payable to or for the benefit of the estate, or if the insured held incidents of ownership at death. Other sections, such as 2035, may pull policies back into the estate if ownership was transferred within three years of death. Understanding life insurance inclusion is crucial for designing ILITs, third party ownership structures, and business arrangements that seek to keep large death benefits outside the taxable estate while still meeting planning goals.

In everyday advanced planning, advisors address life insurance inclusion when recommending who should own policies and how beneficiaries should be structured. For high net worth clients, they often propose ILITs or spousal lifetime access trusts to hold policies, carefully avoiding incidents of ownership in the insured's hands. They also consider the three year look back when transferring existing policies, sometimes preferring to issue new coverage inside a trust instead. In business settings, advisors weigh the estate inclusion impact of entity owned versus cross purchase arrangements for buy sell funding. Periodic reviews of in force policies may reveal ownership or beneficiary structures that inadvertently cause estate inclusion. By understanding life insurance inclusion rules and coordinating with estate planning attorneys, producers can design coverage that delivers liquidity and wealth transfer benefits without unnecessarily inflating the taxable estate or creating avoidable tax exposure.