Five Uses For Survivorship Life Insurance
By Robert D. Cavanaugh, CLU
Survivorship life insurance is a life insurance policy that insures two people and
pays at the second death. Also referred to as second-to-die life insurance, common
abbreviations are SWL for survivor whole life and SUL for survivor universal life.
Since the insurance company does not have to pay until the second person dies, the
premium is lower.
The insurance company could issue a standard policy, even if one person has health
issues. In extreme cases where one person is entirely uninsurable, a policy with
an acceptable premium is possible.
There are many uses for a survivorship life insurance policy. Let’s look at five.
Life insurance is the least expensive method of providing cash for the payment of
estate taxes. Since 1981, the law allows one spouse to transfer all their property
to the other spouse at death tax free. This is the “unlimited marital deduction.”
If there is an estate tax due, it is not due until the second spouse dies.
In response, life insurance companies designed the survivorship life insurance contract.
Since the premium is lower, it is even a better solution than a policy insuring
only one person.
Replacing an Asset Given Away
Charitable remainder trusts (CRTs) allow a person to sell a highly appreciated asset
(stock, land, a business etc.) without paying a capital gain tax, receive an income
tax deduction and convert the asset to an income. At their death, the asset passes
to the charity, not to their heirs.
An easy way to circumvent the children’s disinheritance is to insure mom and dad
with a survivorship life insurance policy for the value of the asset given to charity.
Sometimes premiums can be entirely paid from the income from the charitable remainder
trust, which is often found money if the original asset was illiquid. The income
tax deduction can be spread over six years if the asset contributed to the CRT is
large enough. This is another premium source.
Even Out an Inheritance
A couple has three children and a family business. One of the children is active
in the business and the other two have careers of their own. If the bulk of the
estate is the business and the plan is to leave the business to the active child,
the other two children come up short.
A second-to-die policy on mom and dad can even things out. For example, let’s say
the total estate is 6 million and the business represents 4 million. If the parents
leave the business to the active child and the remaining 2 million to the other
two children and name these children the beneficiary of a 6 million dollar survivorship
life policy, everything is equal.
The child active in the business gets the business worth 4 million. The other two
children inherit 1 million apiece from the balance of the estate and 3 million apiece
from the survivorship life insurance policy.
Post Phone a Buy Sell
If Joe and Bill were equal partners in a business, good planning would have them
meet with their attorney and accountant, put a value on the business that each are
happy with and have a buy-sell agreement drawn. Fund the agreement with life insurance
and the funds are assured for the buy-out.
However, what if Joe’s wife, Ann, is also active in the business? If Joe dies, Ann
would inherit Joe’s interest and continue to work in the business as usual. In this
case, it would make sense to use a survivorship life insurance policy to insure
both Joe and Ann. The buy-sell agreement would be worded to trigger the buy-out
at the second of their deaths.
To Pay the Income Tax on an Inherited Qualified Plan
This is the day of mega 401(k) plans. When a 401(k), IRA or other qualified plan
is passed, for example, to the children, income tax is required upon a distribution.
Most people do not realize the large potential tax on what may be their largest
asset. Let’s look at the worst case. If the qualified plan money is subject to the
top estate tax bracket, which is currently 45% and the child is also in the top
income tax bracket, currently 35%, the amount left to the child is only a fraction
of the total amount. Note there is a deduction against income for estate taxes paid.
A good estimate of the net total percentage paid in taxes at the top brackets is
Use a survivorship life insurance policy to offset the income tax on the distributions,
the estate tax or both.
There are many other uses of survivorship life insurance policies. If your situation
includes any of these examples, I would recommend looking at the use of a second-to-die
Robert D. Cavanaugh, CLU is a 36-year financial and estate planning veteran and
author of the free newsletter, “The Estate Preservation Advisor”.