What is the main reason for using third-party ownership in life insurance for estate planning?

The primary reason for utilizing third-party ownership in life insurance for estate planning is to remove life insurance proceeds from the insured's estate. When an individual owns a life insurance policy on their life, the death benefit is generally included in their taxable estate upon their death. By shifting ownership of the policy to another individual or entity—which could be a trust, for instance—the proceeds from the policy can be excluded from the insured's estate, thereby potentially reducing estate taxes and other financial liabilities.

This strategy not only aids in tax planning but also can help ensure that the benefits are available for specific purposes, such as settling estate-related expenses, without increasing the value of the estate subject to taxation. Additionally, this move can also facilitate the management and distribution of the death benefit according to the wishes of the policyholder without the complications that may arise if the individual had retained ownership.

Other options, while they may relate to life insurance in some way, do not accurately address the fundamental purpose of third-party ownership in the context of estate planning. For example, ensuring higher premiums or utilizing cheaper insurance options do not align with the overarching goal of managing estate tax liabilities. Providing immediate liquidity for estate expenses is a benefit of having life insurance but does not specifically relate to the ownership structure and