Is a life insurance policy considered part of an estate in determining the estate tax?

Whether or not life insurance proceeds are included in the taxable estate depends on who owns the policy when the insured dies. If the deceased person owned the policy, the full amount of the proceeds are included in the federal taxable estate; if someone else owned the policy, the proceeds are not included.  Therefore, if you want your life insurance proceeds to avoid federal estate tax, you may wish to transfer ownership of your life insurance policy to another person or entity. 

There are 2 ways to do it: you can transfer ownership of your policy to any other adult, including the policy beneficiary; or, you can create an irrevocable life insurance trust, and transfer ownership to it.

Note:  Some group policies, which many people participate in through work, don't allow you to transfer ownership at all.

Since these matters can get technical, you should consult with an estate planning/tax attorney or an accountant.