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Should Lottery Winners Buy Whole Life Insurance?

A skeptical guide for big winners: when permanent life insurance makes sense in 2026 (estate tax over $15M, ILITs), what it costs, and what to ask an agent.

Jackpot Dreaming EditorialUpdated 7 min read

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Win a big jackpot and, within weeks, someone will probably pitch you whole life insurance: "guaranteed," "tax-free," "what the wealthy do." Some of that is true. Much of it is a sales script.

Why you probably don't need it for the usual reason

Life insurance usually replaces the income your family would lose if you died. Say you take the cash option on a jackpot like the current Powerball and keep something like $96 million to $126 million after tax, depending on your state (see our lump sum vs. annuity breakdown). That need is gone; your family would be wealthy either way.

So the question isn't "do I need life insurance?" It's narrower: is there a specific problem that insurance solves more cheaply than anything else? For very wealthy people, that problem is usually estate tax.

The estate tax problem, with 2026 numbers

The IRS confirms that for people who die in 2026, the federal basic exclusion amount is $15,000,000 per person, set by the July 2025 tax law (Public Law 119-21). A married couple can effectively shelter $30 million using portability. The law made the higher exemption permanent, with inflation adjustments starting in 2027, though Congress can always change it. Above the exemption, the top federal estate tax rate is 40%.

A rough illustration: a single winner who dies with a $120 million estate is about $105 million over the exemption. At 40%, that's an estate tax bill of around $42 million, generally due nine months after death.

Then there are the states. In 2026, a dozen states and Washington, D.C., have their own estate tax, and several states have inheritance taxes. Some state exemptions are far lower than the federal one; Oregon's is $1 million. Living in Washington or New York can look very different from living in Arizona or Florida.

Where liquidity gets tricky

If your estate is mostly cash and index funds, your heirs can just write the check. The trouble starts when the wealth is illiquid: a family business, a ranch, real estate, private investments, or the remaining payments on a lottery annuity. The value of future annuity payments can count toward your estate even though the money arrives slowly over the years. That mismatch is when heirs get forced to sell at a bad time, and when a life insurance payout can actually help.

How an ILIT fits in

If you own a policy on your own life, the death benefit is generally included in your taxable estate. A $40 million policy meant to pay estate tax could then trigger roughly $16 million more of it.

The standard fix is an irrevocable life insurance trust (ILIT):

  • The trust, not you, applies for, owns and is the beneficiary of the policy.
  • You give the trust money each year to pay the premiums. Those gifts can use your $19,000-per-recipient annual gift exclusion for 2026, often through "Crummey" withdrawal notices, and anything above that uses part of your lifetime exemption.
  • When you die, the trust collects the payout outside your estate and can lend money to your estate or buy assets from it, giving your heirs cash to pay the tax.

There are traps. If you transfer an existing policy into an ILIT and die within three years, Internal Revenue Code Section 2035 generally pulls the proceeds back into your estate. That's why advisors usually have the trust buy a new policy from the start. "Irrevocable" also means what it says: once the trust is set up, you give up control. This is work for an experienced estate attorney, not just an insurance agent.

(Using trusts for privacy when you claim a prize is a separate topic, covered in our trusts and LLCs guide.)

What whole life actually costs

Whole life combines lifelong coverage with a cash-value savings component, and you pay for both. Fidelity, citing NerdWallet data from June 2026, shows a healthy 40-year-old man paying about $321 a year for a 20-year, $500,000 term policy versus about $3,200 a year for a $500,000 whole life policy, roughly 10 times as much. At jackpot-sized coverage amounts, those premiums can reach hundreds of thousands of dollars or more each year.

Costs that are easy to miss:

  • Commissions. Industry sources commonly put whole life agent commissions at about 50% to 100% or more of the first-year base premium, plus smaller renewal commissions after that. That explains some of the enthusiasm.
  • Slow early cash value. In the first years, much of what you pay goes to commissions, insurance costs and expenses. Surrendering early can mean getting back much less than you put in.
  • Opportunity cost. Money locked in a policy's cash value usually grows more conservatively than a diversified investment portfolio.

The alternatives worth comparing

Buy term and invest the difference. If you need coverage for a set period, say while children are young or while a business deal is underway, term is far cheaper. You invest the premium savings yourself. For a mega-winner, the invested jackpot is often the safety net itself.

Guaranteed universal life (GUL). When the goal is simply a permanent death benefit at the lowest cost, with little cash value, GUL is worth pricing side by side with whole life.

Survivorship ("second-to-die") policies. For married couples, the unlimited marital deduction often defers estate tax until the second death. A policy that pays out then matches that timing and is often cheaper.

No insurance at all. A liquid estate can simply pay the tax, or be reduced during your lifetime through gifts and charitable giving.

When permanent insurance genuinely makes sense

It's worth a serious look when your projected estate is well above the federal (and possibly state) exemption, a meaningful share of it is illiquid, you want to pass those assets on intact, the policy will sit in a properly drafted ILIT, and you've compared the cost against GUL, term and self-funding the tax. If your windfall is all in liquid investments, the case gets much weaker.

Questions to ask any agent

  • "What exact problem does this policy solve for me, and what's the cheapest way to solve it?"
  • "How much do you earn on this policy in year one and in later years?"
  • "Show me the guaranteed and non-guaranteed illustrations. What if dividends come in lower?"
  • "What's the surrender value in years 1, 5 and 10?"
  • "Have you priced guaranteed universal life and survivorship coverage for comparison?"
  • "Who will own the policy? Is my estate attorney drafting the ILIT?"
  • "How long is the free-look period, and how do I cancel?" The NAIC's Life Insurance Buyer's Guide explains how this usually works.

Before you sign, have a fee-only fiduciary advisor or your estate attorney review the illustration. They should be paid by you, not by commissions on the sale.

FAQ

Do lottery winners need life insurance?

Usually not to replace income, because the winnings already provide for the family. Where it can make sense is covering estate taxes on large or illiquid estates.

What is the federal estate tax exemption in 2026?

$15 million per person, according to the IRS. A married couple can effectively shelter $30 million with portability. The top estate tax rate above the exemption is 40%.

What is an ILIT?

An irrevocable life insurance trust owns a life insurance policy on your life, so the death benefit is generally kept out of your taxable estate and can give your heirs cash to pay estate taxes.

Is whole life better than term for a jackpot winner?

It depends on the goal. For temporary needs, term is far cheaper. For a permanent estate-tax payout, compare whole life with guaranteed universal life and survivorship policies, and with simply self-funding the tax.

Sources

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