Insurance for Two Could Benefit Your Heirs

Since the federal estate tax was established in 1916, the amount exempted from the tax has been raised substantially over time. The $5 million exemption for 2011 and 2012 is the highest in history, and the 35% top estate tax rate is the lowest in 70 years.¹

However, these generous provisions may not last. After 2012, the federal estate tax is currently scheduled to revert to a $1 million exemption and a 55% top tax rate. Many families with a home and large retirement accounts could easily have estates worth $1 million or more. A survivorship life insurance policy is one way to help heirs pay estate taxes, probate costs, and other final expenses.

Preserving a Legacy

Also called second-to-die insurance, a survivorship life insurance policy insures two people and pays a benefit after the death of the second person. The premiums are usually less expensive than premiums for a single life insurance policy, because they are based on the life expectancies of both insured individuals.

The unlimited marital deduction allows assets to pass to a surviving spouse free of federal estate taxes, so estate taxes typically do not become an issue until estate assets pass to nonspouse heirs. Thus, a survivorship life insurance policy could pay a benefit at the time it may be needed most.

Moreover, by purchasing the survivorship policy in an irrevocable life insurance trust, the proceeds may not be considered part of your taxable estate. The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional and your legal and tax advisors before implementing such strategies.

Even if you are not concerned about the estate tax, a survivorship life policy could be a relatively inexpensive way to leave a legacy, especially considering that an individual life insurance policy may be more expensive or difficult to obtain later in life. Survivorship life might also be used to insure business partners.

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications.

With the uncertain future of the estate tax, now may be a good time to consider a survivorship life insurance policy. Even if the estate tax doesn’t apply to your estate, the insurance proceeds could benefit your heirs or a favorite charity.

1) Internal Revenue Service

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2012 Emerald Connect, Inc.