Life Insurance Policy Setup: Avoid Estate Taxes and Probate Delays

Introduction: Why Life Insurance Policy Setup Matters

Do you have life insurance or are considering getting some? If yes, it’s crucial you think beyond just the coverage amount. Most people make a common mistake setting up their life insurance policy. It's a really easy error to make and it's this, they are both the policy owner and the life insured.

This simple oversight could mean your life insurance payout is part of your estate. As a result, it might be subject to estate/inheritance taxes and delayed in probate for months—or even years.

That’s not what you want for your loved ones during an already difficult time.

Once you know and think about it doing this makes no sense at all. That's because for your life insurance to pay out you're not going to be around. So why would you need ownership and control of the policy?

The good news...

There’s ways to make sure 100% of your life insurance benefit goes directly to your beneficiaries. And not only that it will get to them in a matter of days at most weeks and tax-free.

Whether you already have a policy or are setting up a new one. This guide will walk you through the smartest life policy setup options available. So that your loved ones avoid estate taxes and probate delays.

Here's some more good news...

Even if you've set your policy up and you've already made this mistake, then it's not too late. We're going to show you the steps you can take to make sure your loved ones get 100% of the policy proceeds, fast.

The Real Purpose of Life Insurance

The goal of life insurance is simple! To provide financial support to the people you love when you’re gone. So, it makes sense that you want them to receive the full benefit, as fast and easily as possible.

Unfortunately, if your life policy setup isn’t correct, your payout could get delayed for over a year. On top of that the benefit amount could get reduced by as much as 55% due to taxes.

Let’s avoid that.

Why Making This Common Mistakes Setting Up Your Policy Matters

As we've highlighted the most common mistake is when you're both policy owner and life insured.

When the policy is structured this way, the payout becomes part of your estate. That means:

• Estate/inheritance taxes may apply

• Probate delays the payout

  
  

Even if you've nominated beneficiaries, some countries don’t recognise these nominations legally. This is especially relevant for expats. This is because your country of residence may affect how policies are treated. Also depending on your nationality you could go through probate and be subject to estate/inheritance tax there.

What is Probate and Why Your Should Avoid it!

Probate is the legal process that takes place after someone dies. During which their estate (money, property, possessions, etc.) is managed and distributed.

Here’s a breakdown of what probate involves:

🔍 What Happens During Probate?

1. Validating the Will

   If the deceased had a will, the court confirms it’s legally valid. If there’s no will, the estate is considered intestate, and local laws decide who inherits what.

2. Appointing an Executor or Administrator

   * If there’s a will: the person named in it (the executor) applies for probate.

   * No will? A close relative applies to be the administrator of the estate.

3. Valuing the Estate

   All assets and debts of the deceased are identified and valued. This includes property, savings, investments, and personal belongings.

4. Paying Debts and Taxes

   Before any money goes to beneficiaries, the estate must settle outstanding debts, bills, and taxes. This includes inheritance or estate tax, that are applicable.

5. Distributing the Estate

   After debts and taxes are paid, the remaining assets get distributed. These go to beneficiaries according to the will or by law if there’s no will. Though some countries have forced heirship which means your wishes get ignored. This is a civil law principle in countries (such as France, Spain, Italy, and parts of the Middle East and Asia). It restricts your freedom to choose who inherits your assets when you die.

⏱️ How Long Does Probate Take?

It depends on the size and complexity of the estate and where you live:

• Simple cases: around 6–12 months

• Complicated or contested estates: can take years. When you're an expat living in another country, you're in the realms of complicated.

⚠️ Why People Try to Avoid Probate

• It’s slow – your loved ones might wait months or years.

• It can be expensive, with legal fees and court costs.

• It’s often public, so estate details can be accessed by anyone.

• It can delay life insurance payouts, causing financial stress for beneficiaries.

Two Smart Options for Life Insurance Policy Setup

Depending on whether you have an existing policy or are creating a new one. Here are two effective ways to structure your life insurance:

1. "Life of Another" Policy Ownership

This setup means someone else owns the policy, and you are just the life insured. Here's how it works:

• On the application form, fill out the "Life Assured" (you) and a different person as the "Policy Owner."

• The owner should be the person you want to receive the benefit—usually a spouse or partner.

  
  

Pros:

• The payout goes directly to the policy owner, avoiding your estate.

• No probate delays or inheritance taxes.

Cons:

• Doesn’t work if the policy owner and life insured die together.

• Minors can’t legally own a policy—making this setup tricky for single parents.

2. Writing Your Life Insurance Policy Into Trust

This is the most robust life insurance policy setup method. It works for both new and existing policies.

What does it mean? You transfer ownership of the policy to a trust. Trustees manage it and ensure the money goes to your chosen beneficiaries.

How to Do It:

Step 1: Choose Your Trustees

• Must be over 18 and of sound mind.

• You (the life insured) can be a trustee.

• Spouse, trusted family, friends, or a professional can serve.

• Ideally, have at least 3 trustees to cover for any unforeseen circumstances.

Step 2: Name Your Beneficiaries

• Primary beneficiaries: e.g., your spouse.

• Secondary beneficiaries: e.g., your children.

• You can specify the percentage split for each.

Pros:

• Avoids probate and estate taxes.

• Provides legal clarity and control.

• Ensures fast payout—typically within days or weeks.

• Allows greater control over who gets what

• Protects minors (with trust oversight)

Cons:

• Loss of control over the policy.

• Irrevocable (hard to change once set up).

• Trustees carry legal responsibility

• Not ideal for certain policy types (investment linked or policies with certain riders) or jurisdictions (those with civil law systems)

• May involve legal or set up costs

Important Note: Once a policy is placed into a trust, you can't remove it. So, make sure you’re comfortable with the decision before proceeding.

Summary: The Best Life Insurance Policy Setup

Let’s recap your options:

If You’re Setting Up a New Policy:

• Use the "Life of Another" method, OR

• Write the policy into trust

If You Already Have a Policy:

• Write it into trust (your best and only option now)

Either of these methods ensures:

• 100% of the life insurance benefit goes to your loved ones

• Fast payout, with no probate

• No estate/inheritance tax liability on the benefit

Bonus: Help With Trust Setup

We’ve created a free Trust Application Guide to walk you through filling out the trust form with ease.

👉 Subscribe to our newsletter and we’ll send it straight to your inbox.

This bonus will make your life insurance policy setup quick, stress-free, and bulletproof.

Final Thoughts

Don’t let your life insurance get tangled in legal delays or tax issues. With a little planning today, you can protect your loved ones from unnecessary hardship tomorrow.

Get your life insurance policy setup right—because peace of mind is priceless.

If you found this guide helpful, please share it and comment below. And if you have questions, reach out—we’re here to help.