Life insurance has two separate tax questions, and people often blend them. The first is whether your beneficiary pays income tax on the death benefit. Generally, no. The second is whether the death benefit counts toward the size of your estate when it's tallied for estate tax. That one depends on who owns the policy.
If you own the policy on your own life, the death benefit is generally added to your estate. Naming a beneficiary doesn't change that. The beneficiary form decides who gets the money, and ownership decides whether it's counted. Here's why it matters in Oregon. The state starts taxing estates at $1 million, as laid out in Oregon starts taxing estates at $1 million. Say you have a home and savings totaling $800,000, and you own a $500,000 policy. Your estate is $1.3 million for tax purposes, even though the policy money goes straight to your family. Federal estate tax is a different matter. The federal exemption is roughly $15 million per person right now, and it has changed several times, so most families won't see that tax.
The usual fix is an irrevocable life insurance trust, called an ILIT. A trust is a legal arrangement where one party holds property for another. The trust, not you, owns the policy, so the death benefit isn't part of your estate. Families with larger estates commonly use one. We covered the idea in a LIFE Pod episode on IUL taxes, loans, and flexibility.
The word irrevocable is the catch. You generally can't change your mind, take the policy back, or rewrite the terms on your own. If you plan to borrow against the cash value during your life, putting the policy in a trust can make that harder, because the trust is the owner and has to be the one asking. That's why I tell people to decide what the policy is for before deciding who should own it. A policy built to be borrowed from and a policy built to pass wealth on may need different ownership.
There's also a timing rule. If you transfer an existing policy into a trust and die within three years, the death benefit can be pulled back into your estate. A new policy bought by the trust from the start avoids that problem, but then the trust needs the money to pay the premiums, which usually means gifts from you.
Estate tax and probate are separate too. A death benefit with a named beneficiary skips probate, which is explained in why life insurance money skips probate, but that doesn't take it out of the estate-tax math.
I'm a licensed insurance broker, not an attorney or a CPA, and a trust is a legal document that needs an estate attorney to draft. To see whether this applies to you, add up your home, accounts, and the death benefit of any policy you own, and compare the total with $1 million.