As with most legal questions, the answer is maybe. Life insurance does pass income tax free, but it is still subject to estate tax. “But the estate tax has been repealed,” you say. That’s true, but only for 2010. The tax relief act that repealed the estate tax sunsets at the end of 2010, and the estate tax comes back at its pre-relief act rates. This means that without legislative action, beginning in 2011, only one million will pass tax free. Every dollar after that will be subject to the estate tax up to 55%. Keep in mind, the one million dollar exemption applies to all assets, not just insurance. Throw in your house, retirement funds, businesses, vehicles, investment accounts and life insurance; and it adds up quickly.
“Is there anything that can be done about it”? Of course, otherwise why bother talking about it. With proper planning, you can be sure that every dollar of your life insurance passes tax free to your loved ones. This can free up your exemption to ensure other assets pass tax free as well. The estate tax has been described as the only voluntary tax in America. You choose to pay it by not planning ahead.