235 / What are the types of life insurance policies that can be used to fund an ILIT?

When funding an ILIT, various forms of life insurance can be used that will minimize both income taxation and estate taxation at death. The first type of life insurance is term life insurance. This can be in the form of annual renewable term, decreasing term or level premium term, but the primary distinguishing feature of term life insurance is that it will only last for a designated amount of time. It is rare to fund an ILIT with this type of insurance because of the short duration of the policies, which makes it possible that the grantor will outlive the funding mechanism of the trust.

Whole life insurance is more commonly used to fund an ILIT. Whole life insurance can be in the form of single premium whole life insurance (in which a lump sum payment is paid upfront) or a policy on which premiums are paid on a permanent basis until the policy is “paid up.” There is a buildup of cash value in the policy which varies by insurance carrier and by year. Depending upon the chosen policy, universal life insurance and indexed universal life insurance have a unique feature which allows the premiums to be paid on a level (equal) basis, or the premiums can be adjustable. This type of policy always carries a cash value that is built up within the account, and this cash value is typically linked to a particular fixed rate or index option(s).

Variable life insurance is another type of insurance that can be used to fund an ILIT. Variable life insurance premium structures are similar to the universal and indexed universal life policies, but variable life insurance policies are distinguished by the cash build-up, which is dependent upon the performance of the investment portfolio of the insurance company.¹