What is the impact on the gross estate if the insured can borrow against their life insurance policy?

When an insured individual takes out a loan against their life insurance policy, the proceeds from that policy are treated as part of the gross estate for estate tax purposes. This means that the death benefit amount, which is typically paid out to beneficiaries upon the insured's death, will be included in the total value of the gross estate, even if a loan has been taken against the policy.

Loans taken against the policy do not reduce the death benefit that will be payable; instead, any outstanding loan balance will be deducted from the death benefit at payout. Therefore, while the policy's cash value can be borrowed against, the full death benefit remains part of the gross estate. This could have tax implications for the heirs, as a larger estate may lead to higher estate taxes, depending on the total value of the estate and current estate tax laws.

By understanding that the mere act of borrowing against the life insurance does not exclude the policy's face value from the gross estate, one can see why this choice highlights the need for careful estate planning. This inclusion can affect the financial strategy surrounding the estate, potentially requiring adjustments to account for the estate tax obligations that may arise.