Gregory S. Dupont
Survivorship Life: A Win-Win Proposal
If you are looking for a flexible and creative life insurance product, you may want to consider survivorship life insurance. Often referred to as last-to-die or second-to-die life insurance, this coverage insures two individuals, but provides only one death benefit payable at the death of the second insured. In some instances, especially when the insured individuals are nearing retirement, it may be less expensive than a single life insurance policy on one individual.
Cost savings are possible because the insurance risk is spread over the life expectancy of two lives rather than one. In fact, two individuals can be insured even if one is medically “uninsurable,” therefore providing added planning potential for otherwise difficult situations.
Benefits for Estate Planning
Survivorship life insurance is often used as a vehicle to fund estate taxes. Even with the appropriate wills, trusts, and property-ownership designations, married individuals who properly balance their estates are still subject to estate tax on assets exceeding the applicable exclusion amount of $5.34 million per person for 2014. In this type of situation, a survivorship life insurance policy can be an integral part of an estate plan.
For example, consider the hypothetical case of Adam and Julie. Adam and Julie are both 60 years of age and have three adult children. They have updated and signed the appropriate legal documents (wills, trusts, and so forth) and repositioned their asset ownership to maximize their individual applicable exclusion amounts. For a married couple in 2014, $10.68 million can potentially pass to their heirs free of estate taxes. However, the remainder of their assets may incur as much as a 40% Federal estate tax in 2014.
One solution to this problem would be to create an irrevocable trust to purchase a survivorship life insurance policy on their lives. The trust would own and be the beneficiary of the policy and, thus, would allow the policy proceeds to pass to the trust beneficiaries (the couple’s children) free of estate taxes. Adam and Julie could also gift the policy premiums to the trust using their annual gift tax exclusions of $14,000 (indexed for inflation) per person per donee for 2014. In order to qualify for the annual exclusion, the trust would need to contain a provision called a Crummey withdrawal power.
Enhancing Charitable Gifting
Even if an individual does not foresee any estate tax problems, survivorship life insurance can be a dynamic method to enhance any gifting program. Suppose Adam and Julie’s net assets total $600,000 and they have little concern about estate taxes. However, they make an annual gift of $5,000 to a favorite local charity. Rather than gifting $5,000 in cash to the charity every year, they may choose to leverage their gift and pay the premium on a survivorship life insurance policy. This insurance gifting program can be arranged so that the charity would be the owner and beneficiary of the new survivorship life policy. Adam and Julie would then receive an annual charitable deduction for their gift, and the charity would ultimately receive a life insurance death benefit.
Maintaining Business Continuity
In a more advanced use, survivorship life insurance can be effective in helping to ensure continuity in a closely held business. For instance, passing a family-owned business of substantial value to heirs may be hindered by potentially high estate taxes that, in some instances, may require a forced sale of the business in order to raise the necessary cash to pay the taxes. A survivorship life insurance policy can be purchased on the lives of the owner and his or her spouse, with the death benefit providing cash to help meet estate tax obligations and keep the business in the family.
Whether you have concerns about potential estate taxes or wish to leverage the value of a gift to your favorite charity, a survivorship policy can help provide a relatively high benefit for a minimal cost. Be sure to consult your team of professional advisors, including tax and legal professionals, for specific advice about your unique circumstances.