For couples who wanted to help their children avoid federal estate taxes, 2010 was a good year to kick the bucket. But you don’t have to die to reap the benefits of survivorship life insurance.
Survivorship life insurance is also called “second-to-die” life insurance, and it pays out benefits once a second spouse dies.
The basic premise is that those proceeds can be used to provide for children who might inherit Mom and Dad’s business, property or stocks. It can also be used as an immediate source of cash to pay off estate taxes. Estate planning experts like Brian Ashe of Brian Ashe and Associates and The Business Strategies Group of Illinois, say getting the most out of the policies requires that you stay up to date on changes to the estate tax developments on the horizon.
Ashe, who helps business owners implement strategies to protect, preserve, and pursue more value from their business, more tax-efficiently, also specializes in business continuity, transition, and succession planning, executive benefits and estate and legacy planning.
“If you have a financial – or estate – plan that includes survivorship life insurance, you shouldn’t tear up that plan. The Estate Tax has been around since the Spanish-American War and our government needs the money,” Ashe said.
We’re going to answer some common questions about survivorship or “second-to-die” policies, such as:
What is joint and survivor life insurance?
What is a second to die life insurance policy?
What is a joint life insurance policy?
What is an adjustable life insurance policy?
According to Mike Boot, a spokesperson from the Society of Actuaries, if you’re taking a seat at the table with financial planners, and you have with estate valued from between $1 million and $4 million, you need to know where federal lawmakers have set what’s known as the exemption value. If your estate is valued at more than $10 million, stay with your planning.
“Estates that large will definitely be subject to any kind of estate tax Congress creates,” says Boot.
In the recent past, the tax exemption limit was $1 million and amounts after $1 million were taxed on a sliding scale which gave 45 percent of a larger estate’s value straight to the government in taxes.
As a result, Ashe and Boot both say rates for survivorship life insurance are cheaper, and the age and health requirements make it simpler, to buy than traditional life insurance.
“Depending on the age and health status of a couple, a $2 million survivorship life insurance policy could be substantially cheaper than a traditional $1 million policy for each person,” Boot said.
While life insurance companies won’t pay out until the second spouse dies, they say underwriting requirements are more liberal and allow the health and age of both spouses to be considered.
Another advantage of survivorship policies is that they can routinely be converted to traditional, single life insurance policies for couples who divorce.
Those with large estates generally take out survivorship life insurance. One attractive factor is that it can be ideal for parents who must consider the future of their special needs children. Proceeds from the insurance can be used to establish a trust which can guarantee a child receives adequate care once the last parent dies.
Parents who wish to pass on their family business will also find that survivorship insurance is an ideal choice as such policies can help ease the transition of business ownership from one generation to the next. Should the children have no interest in continuing in a family business, a survivorship policy can be used to provide ready cash to equalize their inheritance.
Is Survivorship (Second-to-die) Life Insurance Right for You?
First, consider survivorship life insurance if you’re married or have what are known as common ‘insurable interests.’
The policies work best if you wish to ensure that your heirs won’t have to sacrifice their inheritance to pay out a large estate tax bill, to help in planning for continuation of a family business, to provide necessary funds to continue the care of a special needs child, grandchild or dependent adult or to support a favored charitable organization.