It’s a good time for couples who want to help their children avoid federal estate taxes. There’s survivorship life insurance for the rest of you who aren’t making a date with the Grim Reaper this year. Survivorship life insurance, also called second-to-die life insurance, pays off when the second spouse dies. Ideally, it is used to provide children who will inherit Mom and Dad’s business, property or stocks with an immediate source of cash to pay off estate taxes says estate planning expert Brian Ashe of the Lisle, Ill.-based Brian Ashe and Associates.
“If you have a financial or estate plan that includes survivorship life insurance, you shouldn’t tear up that plan,” says Ashe, who also serves as treasurer for the Life and Health Foundation for Education, a non-profit organization dedicated to helping consumers make smart insurance decisions. “The Estate Tax has been around since the Spanish-American War and our government needs the money.”
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Those who are now sitting down with financial planners with estates that are valued between $1 million and $4 million may want to wait and see where federal lawmakers set the exemption value, says Mike Boot, a spokesperson from the Society of Actuaries. However, those with larger estates valued at $10 million or more should continue with their planning.
“Estates that large will definitely be subject to any kind of estate tax Congress creates,” Boot says.
Previously, the tax exemption limit was $1 million. Amounts after $1 million were taxed based on a sliding scale that gave 45 percent of a larger estate’s value to Uncle Sam.
Ashe and Boot agree that rates for survivorship life insurance are cheaper and the age and health requirements make it easier to buy than traditional life insurance.
“A $2 million survivorship life insurance policy – depending on age and health of the couple—is substantially cheaper than a traditional $1 million policy for each person,” Boot says.
Because life insurance companies won’t pay out until the second spouse dies, underwriting requirements are more liberal, allowing the health and age of both spouses to be considered, Boot added.
Survivorship policies can routinely be converted to single, traditional life insurance policies for couples that divorce, Ashe says.
Although people with large estates generally use survivorship life insurance, Chris Anderson, a spokeswoman for insurer Country Financial, says it is an attractive product for parents with special needs children.
The proceeds from the insurance can be used to establish a trust to guarantee the child gets adequate care once the last parent dies, she says.
Parents who want to see the family business continue also use survivorship insurance.
“This helps ease the transition of business ownership from one generation to the next,” Anderson says.
And for the other children who have no interest in continuing in the family business, a survivorship policy could be used to provide some cash to equalize the inheritance.